UK investors and developers are betting on a new influx of venture capital and a breakdown in the barriers between science and tech companies to boost a life sciences real estate sector that has been in the doldrums for the past few years.

Convergence is beginning to change life sciences real estate requirements, with a broadening beyond traditional wet labs into artificial intelligence-driven drug discovery, quantum technology, advanced materials and synthetic biology.

That means more flexible research and development environments will be needed, combining laboratories, engineering space and offices rather than large blocks of wet-lab accommodation.

Developers and owners will need to adapt quickly — no easy task given real estate is a slow-moving sector that typically lags its occupiers.

But new types of occupiers are being funded by a renewed wave of VC money, and bring something that the sector has lacked since its post-pandemic explosion: growth.

“The term life sciences real estate in the context of the way the UK works is a complete misnomer," Mission Street founder and CEO Artem Korolev told Bisnow in an interview.

"If you look at somewhere like Oxford, you've got biotech, AI, quantum, defence, deep tech activity, clean tech, green tech. If you're building in the right location, you are targeting all of the above.”

After a couple of years of decline, the metrics are starting to look positive again in the key Golden Triangle markets of Oxford, Cambridge and London.

Takeup across those key markets reached 175K SF in the second quarter, 8% below the five-year quarterly average but with a substantial amount of space being negotiated, according to Cushman & Wakefield. It estimated that 779K SF was under offer at the end of Q2, including 300K SF at Discovery Drive on Cambridge Biomedical Campus, where GSK is expected to take space for a new global R&D centre on a site owned by Prologis.

London accounted for 98K SF, Cambridge 49K SF and Oxford 28K SF, the adviser said, also recording just over £2B of UK life sciences venture capital funding in Q2, up 135% from Q1 and 102% above the five-year quarterly average.

One caveat to the VC figure: Isomorphic Labs, the DeepMind spinout focused on AI-driven drug discovery, raised nearly £1.6B during the quarter, heavily influencing the picture.

Korolev said he believes the market is still in the hangover phase from a funding spike that happened in the wake of Covid. Following that, the market is going through an inevitable reset which will be beneficial in the medium to long term.

“What essentially happened is everybody and their uncle's dog piled into the sector at the time," he said. "It resulted in people buying off aggressive pricing and aggressive assumptions,” he said. “Now, I would say there are very few new entrants or new buyers. Instead, you have people who already have significant exposure.”

He said some investors ended up with unbuildable schemes because their entry price for land was too high, or the land is in the wrong location, meaning the real development pipeline is likely to be far smaller than the potential.

“You don't have oversupply, you have a lot of hypothetical land plots, but the amount of space that has actually been built has not been very significant," he said.

Leasing activity has slowed, but in the prime locations, the market is starting to see the occupational side turn the corner, he added.

Convergence of high-tech sectors is now perhaps the driving factor in space requirements, which are becoming more and more specific.

“There are plenty of tech companies, like Humanoid at [British Land-owned] Regent's Place, taking lab space or lab-enabled space, and there are examples of that in both Oxford and Cambridge as well,” Bidwells Research Director for Science and Technology Sue Foxley stressed.

Advances in a number of areas have opened up new technology but also the understanding within the financing community on what sectors are attractive, she said. As a result, a lot more money is going into sectors like clean tech and robotics, for example. Within the cyclical financing side of things, that has genuinely improved, she added.

She points to long-running data that Bidwells has collected for Cambridge, where the adviser can look at requirements and their relationships with funding over the long term. There is a 12- to 18-month lag as funding comes through, the data found.

"There is more caution now, but companies still get to a point where employee numbers force a tipping point, and the funding coming through is really important, and that has genuinely become more positive over the last six months or so,” Foxley said.

“It might not show itself in takeup at the moment, but it's looking more positive in terms of requirements.”

Inevitably, most of the development is focused on the Golden Triangle, and occupiers are getting very particular in terms of the prime locations they seek, which means that such options are starting to reduce a little, she stressed.

“In terms of larger corporate decisions, location and skills, being part of an ecosystem means there is a willingness to take a long-term view on locations that offer that depth of networks. It is increasingly important because of this convergence,” Foxley said.

As a result, rental levels remain high, particularly in London. Cushman & Wakefield put prime rents in Q2 at £140 per SF in London, £77 per SF in Cambridge and £70 per SF in Oxford.

In terms of development overhang, 2.9M SF of laboratory space remained under construction across the Golden Triangle at the end of Q2, and only 20% was pre-let or under offer. The question is now how fast the occupier market moves.

Some major occupiers continue to expand. GSK announced in July that it would invest £400M in UK life sciences over three years, including a 300K SF R&D centre at Cambridge Biomedical Campus.

AstraZeneca also revived a £300M investment in Cambridge in April, including completion of its Rosalind Franklin building, after previously putting the project on hold. Meanwhile, Cambridge Science Park, owned by Trinity College, launched a £3B, 30-year expansion plan in May that would increase its built area from 2.8M SF to about 8M SF.

British Land completed the £150M acquisition of the Life Sciences REIT portfolio in Q2. It comprises five properties totalling 694K SF. British Land Head of Innovation Leasing Amy Hockley said the evolution of the market in London is reflective of a changing sector.

“Looking at London specifically, real estate tends to react to market conditions, but, of course, there is always a slight lag, and we saw that four years ago when life sciences really expanded," she said.

"It’s a bit different this time, because the market feels more stable and the occupiers have broadened to much more of a science and technology sector. That’s been accelerated by AI and also the evolution of many life sciences companies into biotech."

She said the capital in particular is seeing much more of an industry focus on colocation.

“Adjacencies have become really important, and, at Regent’s Place, for example, many of the companies looking at our site are interested in who else is there," she said. "They see advantages in terms of the companies they are alongside, and for those headquartered in Oxford and Cambridge, they also see a London location as important for talent acquisition and retention."

She added that what is encouraging is that there are also more new players, which means “it’s not the same old names,” she said. “We’re feeling far more positive than even six months ago about absorption of existing space and the widening demand from new businesses.”

Korolev echoed her optimism.

“It's not flying like it was, but I think it is turning the corner, and as that loops back to development, I think the current development will ultimately fill. But the forward pipeline has become massively constrained, so in a few years, we may run into another supply crunch,” he warned.