‘Shy Beasts’ And Where To Find Them: Attracting Life Sciences Tenants In A Tougher Financing Market
UK life sciences real estate had a historic year in 2022. But no sector can fully escape the chill wind of higher interest rates and the possibility of a recession.
The balance between demand for life sciences space and supply remains favourable for owners and developers even as venture capital funding for science companies drops, life sciences occupiers and venture capital firms told attendees at Bisnow’s UK Life Science Real Estate Annual Conference.
Yet the pace of expansion will not be as bustling going forward, development costs are rising and asset values are lower than this time a year ago. And in this most specialist of sectors, getting a new scheme wrong means it is unlikely to find a tenant at the rent needed to make a profit.
To attract what one speaker called the “shy beasts” of science, real estate firms need the right location, buildings that put labs and offices in the right order — and pubs with low lighting and well-priced booze.
Take-up in the life sciences sector jumped dramatically last year, more than doubling from 887K SF in 2021 to 2M SF, according to data from Savills revealed exclusively at the event.
But the conditions for take-up growth are not quite as conducive in light of rising inflation and interest rates.
“Life science companies are feeling the pressure,” Syncona Investment Management Investment Partner Michael Kyriakides told the audience of more than 600 at the conference, held at Imperial College London’s I-HUB building, part of the White City Innovation District that includes Stanhope and Cadillac Fairview among its investors.
“Inflation is leading to higher costs, and that affects your cash runway, which means you are running out of money quicker,” Kyriakides said. “A few years ago, money was readily available and each year was better than the last. But now, that money is not so available and not on such good terms.”
About £1.8B was raised by UK biotech companies in 2022, less than half the £4.5B raised in 2021, according to the UK BioIndustry Association. While companies are generally still in growth mode, Kyriakides said that growth is now far slower and the emphasis is changing when it comes to real estate strategy.
“Companies are being a bit less ambitious, and when it comes to real estate, they may not take the new facility they were thinking of, they might wait a year instead,” he said.
Katie Nelson, Kadans senior asset manager for the UK and Ireland, said it would be at least three or four years before supply came anywhere near exceeding demand, given the amount of demand for space even in this new market environment and the known pipeline of space coming through.
That said, developers were still being prudent, citing wider macroeconomic concerns.
“The cost of debt finance has increased and the cost of construction has increased as well,” Nelson said. “We always try and be pessimistic when we’re underwriting a deal, whereas last year, a lot of people were factoring in strong rental growth and lower inflation. AXA [the majority owner of Kadans] was predicting a 20-30% decline in asset values nine months ago.”
Life sciences real estate investment in the UK's golden triangle was pretty much flat at £1.95B, up just slightly on the £1.85B invested in 2021.
The change in financial markets is also having an impact on developments already in progress.
“Developers are wanting to incorporate as much flexibility as possible into schemes,” said Sally Lee, HDR associate education and science principal. “They want to be able to convert from residential to life sciences, or convert a scheme to life sciences and a mix of uses, depending on where they’re seeing demand.”
Kyriakides said that in the current environment, VC investors are channeling money to more established companies to minimize risk, as opposed to startups with great ideas but no track record.
In real estate terms, that would appear to be a good strategy, too. One such established company said it was continuing to look for opportunities to expand, including growing its real estate footprint.
“We continue to be in growth mode,” Gilead Head of Real Estate and Leases James Hicks said. “Cost is still a factor, but less of a factor for us when it comes to real estate decisions.”
Hicks said Gilead, which has a market capitalisation of $100B, was in the process of making a significant investment into sensor technology to gather data on how and when staff use its spaces and how best to optimise them.
In terms of what occupiers really value in a scheme, the life sciences perennials haven't changed: proximity to top level academic and research institutions, a cluster of like-minded companies creating an ecosystem and good connectivity.
The layout of building is also crucial. While real estate companies are fast learning the difference between wet and dry labs, and how to meet the technical needs of life sciences occupiers, they don’t always put things in the right order.
“You often see buildings which alternate the labs on one floor and the offices on the next,” Weatherden CEO Emma Tinsley said. “You need to put the offices next to the labs so the two can be easily accessible.”
There is a softer side to good design as well.
“I cannot tell you the amount of times I’ve been asked whether scientists like restaurants,” Tinsley said, echoing other panellists who stressed that amenities that provide fun are as important in life sciences as in any part of the built environment.
“Scientists are shy beasts,” MedCity Head of Clusters Ivana Poparic said. “We need pubs with low lighting and plenty of alcohol to get us to come out of our shells.”