IQ recently spoke to John O’Driscoll, European Head of Transactions at AXA IM Alts about life sciences real estate, a sector that is gaining increasing favour among investors.
John began by explaining that life sciences can mean different things to different people. ‘Some have quite a broad definition encompassing anything from office buildings anchored by a large pharmaceutical company, to knowledge-based and tech property - and there is no standard definition. What we are seeing is increasing levels of colocation between medically oriented, knowledge and tech occupiers and also cross collaboration particularly in the areas of data analysis and AI.'
AXA IM Alts’ interest in the sector was realised through its first acquisition in 2020. ‘There’s a temptation to think that interest in the sector was a reaction to the COVID-19 pandemic ,’ he says, given the influx of public and private capital into the industry to develop a vaccine, ‘but that’s not really true. We started thinking about the sector in earnest long before the pandemic, observing that it had become an established and growing industry in the US and that, while still in its infancy in Europe, the drivers for growth were clear.'
Some have quite a broad definition encompassing anything from office buildings anchored by a large pharmaceutical company, to knowledge-based and tech property - and there is no standard definition
‘The most attractive aspect of the segment is the relatively limited supply of high-quality lab-enabled space in the locations where it’s most needed ,’ John continues. 'Just as the US clusters have grown out of the major knowledge institutes in places like Boston and San Diego, so too across Europe we are seeing clusters form in close proximity to established academic and research based institutions. At present the demand is most mature around Oxford and Cambridge in the UK, as well as in London, which has the dual attraction of benefiting from the strong talent pool and premier hospitals associated with a capital city. And while the UK is at the forefront, life science demand is also growing across continental Europe, for instance around Utrecht, Amsterdam and Leiden in the Netherlands, with other hotspots emerging in France, Germany, Spain and the Nordics region.’
At present the demand is most mature around Oxford and Cambridge in the UK, as well as in London, which has the dual attraction of benefiting from the strong talent pool and premier hospitals associated with a capital city
John emphasises that this isn’t the easiest sector to enter – not just because of the tight supply of space but also because of the rising competition of capital for a small pool of assets, meaning that operational expertise and active property management is critical. ‘As the life sciences occupiers are constantly evolving and scaling, it’s essential to actively manage these buildings so that we can grow with them and continue to meet their needs.’ Development is also often constrained in many of the areas where life sciences want to be - with the required specifications creating higher build costs - however, returns can prove rewarding due to the rental premiums that these types of asset attract.
In AXA IM Alts’ experience, tenant retention rates in the sector tend to be relatively high, partly due to the significant costs of finding a suitable premises and fitting out a new property, but predominantly because of the value occupiers get from working in close proximity to other stakeholders within their existing ecosystem. ‘There’s a lot of value in being part of the maturing eco-system that links together all the different players in the market, from public bodies and universities through to corporates. As such, using an integrated model is essential for the industry, as it helps us understand and exploit the significant opportunities in such a complex and fast-evolving space.’
Clearly this part of the real estate market is in its early stages of evolution, making it difficult to predict exactly how big it could get. ‘But if we take the US as an example,’ says John,’ we are seeing some players in that market grow to a value of $20-30 billion. Although we’re nowhere near that scale in Europe as yet, the potential future tenant demand and significant capital willing and waiting to invest in the sector makes us optimistic. This should be further encouraged by the growing number of partnerships between commercial firms and public institutions in Europe.’
We believe this growth will happen across the continent and expect to see a number of prominent clusters emerging across a range of diversified locations
While the sector’s relative infancy in Europe could raise concerns that opportunities for diversification across the continent are limited, John concludes by dismissing this idea. ‘We believe this growth will happen across the continent and expect to see a number of prominent clusters emerging across a range of diversified locations. It’s been much more about being involved with a niche sector at the outset and growing our exposure as the sector itself grows.'
We discussed Life Sciences at the 2021 Young Professionals Seminar as part of the Sector Picks session – Catch up with the recording