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£1B Deal Spate Marks Birth Of UK Life Sciences Real Estate Sector

People have been talking about the emergence of the UK life sciences real estate sector for a few years now. But a spate of transactions shows life sciences property is moving toward becoming a genuine asset class, rather than just a few isolated development schemes scattered across the country.

Last month Harrison Street completed a deal to buy a portfolio of five science-led parks across the UK from private equity firm Angelo Gordon. It paid £185M for the portfolio, and teamed up with specialist operator Trinity Investment Management, which will manage the portfolio. The portfolio totals 1.5M SF and comprises sites in Kent, Colworth, Manchester, Newcastle and Edinburgh, with tenants including GW Pharmaceuticals and Unilever.

Hot on the heels of that deal are two major sales that will test appetite among investors for life sciences real estate.

The Diamond Light Source synchrotron at Harwell Campus

One is the sale of a 50% stake in the Harwell Science and Innovation Campus in Oxford. The campus is a 700-acre site that houses 500K SF of real estate focusing on science and innovation.

There is the opportunity to add another 845K SF of office and industrial space focusing on the sector by 2023. In the longer term there is a 5M SF master plan that would see the creation of a small town with 1,000 homes on the site. Commercial tenants include companies like DNA sequencing firm Oxford Nanopore. It is not part of the sale, but the site also houses the UK’s national synchrotron, known as the Diamond Light Source, which essentially works as a massive microscope.

The site is owned by a 50/50 joint venture, with a group of public sector bodies and landowners on one side, and U+I and operating partner Harwell Oxford Partners on the other. Eastdil Secured has been appointed to find a long-term partner that would buy the 50% private sector stake; React News reports the JV is seeking £240M.

Also being marketed as a life sciences play is the sale of the 930K SF White City Place office scheme in west London, where Eastdil is again advising on the sale for the owners, Mitsui Fudosan, AIMCo and Stanhope, and a leasehold for the 12-acre site with a reversion to freehold in 2035 is up for sale for as much as £300M.

The scheme is close to Imperial College’s west London campus, which totals about 1M SF, and has plans to expand by another 2.5M SF in the coming years; and Hammersmith Hospital, which is the medical research centre of the London Institute of Medical Sciences.

There are a mix of tenants at the scheme, including pharmaceutical firm Novartis and life sciences firm GammDelta Therapeutics, both of which said the proximity to Imperial was a big draw.

Prior to this trio, at the end of 2018 Legal & General invested £360M in Bruntwood’s science and technology business, which totals 1.3M SF today, and has plans to expand to as much as 6.2M SF by 2028, when it could be valued at £1.8B. L&G took a 50% stake.

The universe of investors for life sciences property is a complete mixed bag. Institutional investors like Legal & General rub shoulders with private equity investors like Angelo Gordon and Harrison Street.

Development has boomed at White City in recent years, with science-led property at the forefront.

Also on the lookout are specialist U.S. investors seeking to get in on the ground floor of a small but growing market, as was the case in nascent sectors like build to rent and student accommodation.

Creative Science Properties is a U.S. investor managed by former executives of major players in the American life sciences real estate sector like BioMed Realty Trust and Alexandria REIT. Late last year it raised $500M of equity for an unlisted REIT that will invest in the U.S. but also look to break into the UK.

BioMed itself is also a player here. It was bought by Blackstone for $8B in January 2016, and has a presence in the UK through its ownership of Babraham, part of Cambridge Science Park and Granta Park in Cambridge.

BioMed had been weighing whether to set up a facility in the King’s Cross area of London, according to Estates Gazette. The area is predicted to be a life sciences hot spot, given it is near scientific research centres like the Crick Institute, Wellcome Trust and the London Biosciences Innovation Centre.

Stanhope and Mitsui Fudosan are developing a £1B, 1M SF extension to the British Library, which is adjacent to the Crick Institute, which will also include commercial space targeting the life sciences sector.

It is only one market, and data for the space is lumpy because of the relatively small number of deals, but Savills said that in the Cambridge market deals for laboratory space jumped tenfold from 17K SF in 2018 to more than 214K SF.

“It is a nascent sector, but the conditions exist for it to follow a similar pattern to what has happened in the U.S., in places like Stanford, California, and Cambridge, Massachusetts,” Eastdil Director Peter Coates said. “Life science assets trade at a premium in these markets as lab cap rates are inside office cap rates and rents for lab space are also at a premium to traditional office rents due to very low vacancy rates.”

The Francis Crick Institute in King's Cross is a magnet for companies wanting to be close to a major research centre.

The key element in life sciences real estate is the convergence of top end educational facilities, government research and development spending, venture capital investment and commercial real estate. Commercial life sciences companies are desperate to locate as close as possible to top universities and research facilities, and will pay good money to be near them. 

On their part, UK universities are now more open to partnerships with the commercial world than in previous decades, aware as they are of the need to commercialise their research discoveries. In that way, Oxford, Cambridge and London, known as the golden triangle in UK life sciences, offer the perfect conditions to create a life sciences real estate sector.

“Tenants are sticky and rent level is less important than proximity to demand drivers and appropriate accommodation, leading to outperformance,” Coates said.

It will not all be plain sailing, of course. In a sector where the occupiers are running experiments, the investors and developers are experimenting as well. There is very little data about rents or value growth, and the number of specialist operators for these assets is limited. Building lab space is complicated, and high land prices in London make it especially tricky.

But on the whole, the sector seems set fair. Especially at this stage of the property cycle, investors are keen to invest in assets backed by large demographic and social trends, and life sciences fits the bill. UK government R&D spending is set to rise from the current level of 1.7% of the UK budget to 2.4% over the next five years, Coates pointed out.

“As developed economies rebalance, the knowledge economy is seeing accelerated growth and investors naturally are seeking opportunities to allocate capital to the sector.”