The vast majority of the UK’s life sciences real estate market is owned and built by private companies, making public information about how the sector is faring hard to come by.
But the struggles of the one life sciences REIT in the UK provide an insight into the tough time the sector has faced in the last year even as its longer-term prospects look bright. And those struggles could prompt a corporate deal that would be one of the biggest in the UK sector to date.
In half-year results published Thursday, Life Science REIT Chair Claire Boyle pointed to a challenging leasing market created by rising interest rates and the chilling effect that has had on the company’s share price.
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“The board is cognisant of the challenges facing the group, with significant headwinds faced since IPO, in common with the wider REIT sector, including higher inflation and elevated interest rates which have driven a fundamental slowdown in leasing activity,” Boyle said in a statement alongside results for the six months to 30 June.
The company’s shares trade at a discount to its net asset value of more than 50%, implying stock market investors do not think the company’s assets are worth as much as the company and its valuers do.
Boyle said the discount means the company is looking at options to maximise value for shareholders.
“While the board remains confident that as the improvement in underlying demand gains momentum, and leasing activity drives occupancy across our assets, we will see a narrowing of the discount over time,” she said. “We continue to evaluate a variety of options which best position us to maximise value for shareholders and we remain alert to all potential opportunities available to achieve this.”
While stopping short of announcing that advisers had been appointed to undertake a strategic review, a sale is one of those potential options, as an investor might put a higher value on the company’s assets than shareholders have.
Life Science REIT has a portfolio of assets in London, Oxford and Cambridge valued at £383M, down 4% on a like-for-like basis compared to December last year. Its rent roll is £15M, up by £1M since the end of December.
The crux of the issue regarding its valuation is the current rent versus the company’s estimated rental value, which it says is £28M. The REIT says this figure will be reached by capturing embedded reversion of 22.2% on let space, equating to £3.3M of additional rent, with £3.9M to come from completed developments and repurposing activities. Another £3.1M in ERV would come from development assets and £1.8M in ERV from development land.
But the rise in inflation in 2022 and 2023 spurred a rise in interest rates, which in turn slowed venture capital investment in life sciences companies and slowed leasing. As a consequence, that rental reversion is coming through more slowly.
The company pointed to an increase in VC investment in UK life sciences in the second quarter, plus a brighter macroeconomic picture, as cause for optimism. It also cited a long-term imbalance between supply and demand in UK life sciences real estate.
The company’s investment portfolio is 82.5% occupied, up 3.5 percentage points in the first six months of the year, with a weighted average unexpired lease term to first break of 3.6 years. The portfolio is valued at a 5.6% net initial yield.
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