Big Life Sciences Investors Get Creative To Find Value In Heated-Up Market
In a flash, the chance to get in early has disappeared.
The UK life sciences real estate sector has exploded in the past three years, and prices have acted accordingly. A record amount of capital is targeting the sector, investment volumes doubled last year and values have shot up.
That means those hoping to find big value growth in a market that has quickly gone from a tiny niche of UK real estate to one of its most desirable asset classes will have to get creative in terms of sourcing and structuring deals.
“Yields on some deals have come in 300-400 basis points in the last couple of years, and we’ve struggled to underwrite some of those super-prime UK yields,” Harrison Street Managing Director and Europe chief executive Paul Bashir told Bisnow ahead of the UK Life Sciences Real Estate Summer Cocktail Event.
“The only way that works is if you underwrite 20%-30% rental growth over the next two to three years. Some markets can support that, but we would rather not pay for it. We want to generate that alpha ourselves.”
Harrison Street was an early mover in the UK life sciences real estate sector and owns a portfolio totalling 2.6M SF across the UK. Bashir talked through the kinds of deals where the company is still seeing value and where it is likely to head next.
A few facts and figures highlight the rapid repricing that has gone on in life sciences real estate in the UK since the beginning of the pandemic. There is £20B of capital targeting the market, a report from JLL and We Are Pioneer Group said earlier this year, all in a market where the investment volume was £4.5B in 2021 — a huge oversubscription. That £4.5B represents a big leap from the £2.4B invested in 2020.
As Bashir pointed out, this has driven values up and yields down. Earlier this year, British Land bought a life sciences asset in Cambridge at a 4.15% yield, whereas yields of 6.5% or more were common a few years ago.
There are good reasons for this growth, Bashir pointed out. The balance between demand from occupiers and supply of life sciences real estate in the UK is out of kilter, with growing tenants, driven by public and private sector investment, short of space.
Meanwhile, investors are allocating capital out of sectors like offices and retail and into life sciences and other sectors with a clearer demographic impetus.
Harrison Street has a joint venture with life sciences specialist asset manager We Are Pioneer Group, with the private equity firm owning the assets and WAPG operating them. Together, they own and operate 10 life sciences schemes across the UK totalling 2.6M SF and valued at more than £450M. Of that portfolio, 2.1M SF are operational and 500K SF are under development.
A source of deals the venture is pursuing includes situations in which an educational institution, public body or big occupier might own and manage a life sciences cluster of buildings or accelerator asset. Harrison Street would buy and own the property asset and We Are Pioneer would operate it in conjunction with existing management, in an arrangement similar to a sale-and-leaseback transaction.
Such deals are typically made off-market, Bashir said, and the complexity of creating a structure with a property company and an operating company means there is not the same weight of capital chasing these opportunities.
The benefit for existing owners is the deal provides capital to scale and expand the operation, or a way to take a profit on an investment already made.
“We’re seeing a lot of these assets being created by spin-outs from educational bodies or accelerators,” he said. “That’s reflective of where this market is in the UK and Europe, where a lot of these assets are owned by public sector bodies. There are also deals coming out of big pharmaceutical companies that have in the past owned their real estate and had a large property portfolio and facilities management team but want to release capital.”
Harrison Street is looking to expand that portfolio but is also looking to Europe, with markets like Ireland, France and the Netherlands on the horizon — countries with strong universities and science industries, where the life sciences real estate market is even more nascent and the growth is still to come.