Pandemic prompts European life sciences real estate rush

Computer-generated images of the planned Life and Mind Building at Oxford University can be seen in this undated flyer photo. Courtesy of Arqui9 / NBBJ / Handout via REUTERS

The Francis Crick Institute in London has already been a magnet for investors in the capital’s so-called Knowledge Quarter, but the coronavirus pandemic has taken interest in life science offices and laboratories to a new level.

Investors have been drawn into European life sciences real estate spanning sectors such as biomedical devices and pharmaceuticals by an aging population and strong academic research in the region.

But the COVID-19 pandemic has fast-forwarded the script.

“The life sciences have never been in the limelight because of what we’ve all endured,” Peter Ferrari, managing director of real estate investor AshbyCapital, told Reuters.

In January, AshbyCapital partnered with Montrose Land to purchase an Edwardian building near the Crick Biomedical Research Center in the heart of the Knowledge Quarter’s life science center.

The building, due to be ready for rent to life science tenants in 2024, was AshbyCapital’s first investment in the sector, and Ferrari hopes it will be a starting point for taking on “one or two more” similar projects.

Investors say there is a demand for an industry in both urban centers and out-of-town science parks in the UK and other parts of Europe that tends to be recession-proof.

Real estate money is looking for new avenues as retail properties and offices face the challenge of people increasingly shopping and working from home, analysts and investors say.

Commercial real estate investment in Europe totaled 277 billion euros ($ 333 billion) in 2020, a 17% year-over-year decrease due to the coronavirus pandemic, according to real estate agent CBRE.

Although less than 1% of European real estate investment is in life sciences, a recent report from the Urban Land Institute shows that strong government and venture capital investments in the sector are encouraging piggyback support to real estate investors.

And real estate agent JLL estimates that up to £ 15 billion ($ 21 billion) has been allocated to UK life science real estate, less than 10% of which has so far been used.

Glenn Crocker, head of UK life sciences at JLL, said 20 real estate developers and investors reached out to life sciences in January after 100 conversations in 2020 to reflect the strength of interest.

Not every area is suitable for a life science center, as the infrastructure of the nearby universities, large hospitals and good housing or cultural activities are also required.

“I’m a little skeptical of the sudden interest,” said Zachary Gauge, European real estate analyst at UBS, at a recent press conference, adding that the special nature of life science buildings can make them difficult to trade.

GOLDEN TRIANGLE

Although Britain’s so-called Golden Triangle of Life Science Centers in London, Oxford and Cambridge leads the way in Europe, areas like Bio Science Park in the Dutch city of Leiden, where vaccine maker Johnson & Johnson (JNJ.N) is based, are one of several great european.

Private equity giant Blackstone’s UK real estate investment, through $ 20 billion BioMed Realty, includes buildings in a Cambridge science park.

“The pandemic has brought the industry and its researchers to the fore … there is an exceptional demand for talent and space,” Bill Kane, president of BioMed for East Coast and UK markets, told Reuters.

British insurance and investment group Legal & General (LGEN.L) invested £ 200 million in the Life and Mind Building at Oxford University last year.

“The life sciences are currently being hurt by the huge interest in this sector,” said Eleanor Jukes, senior investment manager at L&G, adding that property valuations have increased due to the “enormous weight of capital” wanted to buy .

L&G recently sold five buildings in a Cambridge science park for a total of £ 97 million, 59% above valuation, following a fierce bidding war.

In addition to US investors and Canadian pension funds, Middle Eastern money is also showing interest, said Ghada Sousou, CEO of real estate broker Sousou Partners.

Demand for real estate exceeds supply. Cambridge has lab requirements of more than 400,000 square feet and less than 100,000 offering, said Sue Foxley, research director at Bidwells real estate consultancy.

BUILDING HAZARDS

But the sector is not for the faint of heart.

Life science buildings range from traditional offices and laboratories to “dry laboratories” – research offices with additional technology requirements.

The buildings may have special requirements such as additional power supplies, precautions for the safe elimination of hazards and higher than average ceilings.

“There is an additional cost to this,” said Carl Potter, managing director of real estate advisor Avison Young.

“These costs have to be reflected in the rents.”

The top rents for offices in King’s Cross within the Knowledge Quarter are £ 83 per square foot per year, compared to the City of London at £ 81 and the Canary Wharf District at £ 51.50, according to the ULI report.

Investors and developers need to equip buildings without necessarily knowing who their future tenants will be and whether there will be one or more.

Richard Fagg, Head of Development at VINCI UK Developments, said this raised the question of whether to secure value and added that “strong conviction is required”.

Developers need to be flexible so that buildings can be changed with relative ease. According to industry sources, it can be difficult to market bespoke buildings to new tenants.

“Every commercial developer is interested in the life sciences,” said Steven Charlton, chief executive of Perkins & Will Architects, adding that the practicalities can be daunting.

But UBS’s Gauge said there is a risk that the life sciences craze for real estate will be short-lived: “I’m concerned COVID is on its knees.”

($ 1 = 0.7233 pounds)

($ 1 = 0.8317 euros)

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