Real estate and life sciences: time to grow, but is there space?

Kate Corke, partner and Christina Tennant, senior counsel at Farrer & Co, provide an Expert View on real estate for the UK’s life sciences sector.

Life sciences and pharmaceuticals have never been more important. With the pandemic heralding increased interest in the sector along with a demand for ‘home grown’ vaccines post-Brexit, it is no surprise that a Knight Frank study revealed that 2020 saw the value of life sciences IPOs increase fourfold on 2019. Indeed, 2021 saw venture capitalists further increase their funding in UK life sciences.

While this capital is set to build greater capacity and drive growth, finding a space in which to grow can be challenging for UK life sciences businesses. The preference to be in knowledge clusters within the ‘golden triangle’ of London, Oxford and Cambridge, coupled with the highly technical specifications of the properties and their bespoke fit-outs, drastically increase initial costs, presenting challenges to investors and occupiers alike. Indeed, Savills notes there is, on average, a time delay of 12 to 18 months between capital raised for the sector and real estate demand.

With funding, growth and competition for new life sciences facilities set to rise in the coming years, how can companies in the sector ensure that real estate facilitates rather than hampers their growth?

Fit-outs and funds: the chicken and the egg

As readers will know, each property for a life sciences business is highly bespoke, so finding a home can be a more complex process than for other sectors. New real estate is unlikely to be readily available and it can take time to find the right property in terms of both location and asset size. We know this well from working with investors who are reluctant to invest in and develop a new property for a specific use without knowing the identity of the end user.

This means that life sciences companies must work proactively, rather than reactively, to secure real estate. For example, by engaging with local agents and specialist property finders to find out about investors looking to expand into this space.

The good news is that, as real estate investors and developers have seen capital flooding into life sciences over the past couple of years, they have responded by targeting the life sciences sector and looking for opportunities in this space. In September 2021, BioMed Realty, a real estate provider for the life sciences industry, announced that it intended to double its UK portfolio and acquired two sites in Cambridge for the purpose of investing an estimated ￡850 million ($1.16 billion) and delivering 800,000 square feet of purpose-built laboratory space. Among others, the global giant Brookfield Asset Management has also been investing heavily in the life sciences sector, with one of its private real estate funds acquiring a science, innovation and technology real estate platform for ￡714 million last year, resulting in Brookfield amassing a portfolio of over 1.4 million square feet of operating space and one million square feet of development potential.

Complex ecosystems: funding and location

Once investor and occupier are matched, another hurdle to expansion can also be the cost of acquiring and funding the development of new sites. The quality of the technical specifications often means large sums are required, and the competition for land within the limitations of the traditionally favored ‘golden triangle’ pushes the costs up further. However, clever debt financing can help to cover these costs, with lenders coming back into the real estate market in force in recent months and keen to gain exposure to the life sciences sector.

To date, the majority of research and innovation funding and activity for life sciences has been channelled into the ‘golden triangle’ area. However, the government’s agenda is to level up research and development across the UK with the intention of transforming the localities by increasing local research and development spending, and by promoting greater collaboration and networks between operators, investors, funders and local civic leaders.

In the recently published Levelling Up white paper, the government’s mission is to increase domestic public investment in research and development outside the Greater Southeast by at least 40% by 2030. The government will target ￡100 million of investment in three new ‘Innovation Accelerators’ in the West Midlands, Greater Manchester and Glasgow City Region. With more money being pumped into the regions, gradually the ‘Golden Triangle’ should cease to be so dominant as the preferred locality for life sciences in the UK. Where locations have an established mix of the necessary supporting components (tertiary education, food, retail, creche, hospitality and residential use), the life sciences talent should follow. In the longer term, we can expect to see secondary clusters establishing a flourishing life sciences ecosystem; in particular, the life sciences sectors in Birmingham, Manchester, Newcastle, Edinburgh and Glasgow are likely to grow. As well as these targeted regions for growth, areas with similar existing affinities to life sciences such as the Western Gateway (stretching from Bristol and Bath to Cardiff and previously known for marine innovation) are likely to grow more appealing for allocations of land for life sciences.

Property: a friend or foe?

For any sector to grow, it needs space. Happily, an increased appetite to redevelop older buildings and an ability to change their use as planning restrictions have eased, combined with the use of state-of-the-art technology, is broadening the type of space used in the market – for example, by converting more conventional office buildings or city center locations for use by the life sciences sector. We have also seen clients invest in new shared lab space schemes with the infrastructure to support bespoke fit outs, reminiscent of flexible workspace businesses.

Life sciences businesses should deploy clever thinking now to get on the front foot and ahead of the competition. In the coming months, the momentum in the life sciences industry is going to make it one of the most 'in demand' sectors within commercial real estate.