The Subplot | Is there life in life sciences property?

This month’s long read

• The spark of life: is there as much life in life sciences property as the real estate sector hoped?
• Elevator pitch: your regular guide to what’s going up, and what’s heading the other way

Listen to the podcast edition

BREATHING LIFE INTO LIFE SCIENCES PROPERTY

Beware: chemical reactions

Is the life sciences experiment going as well as landlords, investors and politicians hoped? With optimism pinned on big deals, is it time to give the test tube a shake? Put your safety goggles on now…

There are just a handful of one-way bets in the property business: supermarkets, petrol stations, funeral parlours and GPs surgeries. These are as close as it gets. Then along came the pandemic and – miracle of miracles – it looked like there was another one: life sciences. So long as people wanted pills and jabs, life sciences would be paying the rent. Build the labs, the R&D hubs and the associated logistics space, and they will come. So the theory went.

Tricky maths

Four years on, is the North’s property market as shiny and lab-shaped as hoped? Or did expectation management get out of control? For example, last week Life Science REIT, created to ride the investor wave, reported half year results to 30 June. It’s portfolio has taken a smallish hit – down 4% to £383m, and rent grew by £1m to £15m, but shares are trading at a 50% discount to net asset value. Brutally, the market doesn’t think those labs are worth the valuations, and it thinks the valuations are wrong because the rent isn’t anything like everyone hoped.

Fish in a barrel

This ought to be easy shooting-fish-in-a-barrel territory, if oft quoted supply-demand numbers are correct. So, for instance, in London Knight Frank calculated as 2024 opened that demand for lab space in the capital was 793,000 sq ft, while availability was just 179,295 sq ft. It’s easy to get bowled over by numbers like this. But that would be a mistake, says Jamie Bottomley, director at Track Real Estate.

Beware headlines

“You see headlines saying things like there’s 2m sq ft of demand around Oxford-Cambridge, and just one 10,000 sq ft lab, and you imagine that means there’s masses of competition. But there won’t be. That unit will have one or two interested parties. So you have to look at the right data, you have to analyse it properly. This is a niche asset but in the right areas it’s a dominant asset.”

Dry powder

Meanwhile, investors have piled in – something like £1.7bn is said to be available for UK opportunities right now – with the result that more lab space, lots more lab space, is about to come onto the market. According to CBRE something like 2m sq ft lands this year, while take-up is expected to be not far off the 700,000 sq ft seen in each of the past two years. That’s a bit awkward, and is going to push rents down.

Mergers and acquisitions

The dynamics may get worse, because the number of big life science players is small, and getting smaller. Savills calculates that globally there are 260 companies that are spending at least €100m a year on R&D; there are 34 companies spending over €1bn a year. It’s hard to grow a business on the strength of new ideas, and a tonne of big patents are about to expire. Buying growth is easier. Result: a string of defensive mergers and acquisitions will take the number of players down even further. Yes, there are signs of more small and mid-size contractors but they aren’t such solid propositions.

See below

It’s worth noting how relatively little lab investment lands in the North: see Savills table four. A little shy of £5bn has been invested since 2021, and a shade over £300m landed outside London, Cambridge and Oxford. That’s all. Peanuts.

Stroll down Oxford Road

None of which is to deny the reality of the extended Northern life sciences scene, a stretched ellipse of locations – less banana, more suppository – extending from Chester to Newcastle. Big things are happening, most of the biggest in Manchester. For instance, work is well underway on Citylabs 4.0, adding another 125,000 sq ft to the city’s Oxford Road life science corridor thanks to Bruntwood SciTech.

Real investment

At the other end of the corridor, the firm has a new Life Science Accelerator programme at Alderley Park, funded by the UK Government through the UK Shared Prosperity Fund. Alderley Park has scored £50m of private sector R&D investment, too. This includes £19.3m raised by biotech firm CellCentric from Pfizer for development of their first-in-class inhibitor for multiple myeloma, a slow and nasty blood cancer that’s almost always diagnosed too late.

Jump aboard

There are others hitching their wagon to the Oxford Road corridor’s undoubted success. This summer the 60-acre Airport City site at Manchester Airport was reborn as Mix Manchester, a 2m sq ft project to deliver advanced manufacturing and science space. Shovel ready, says the publicity, as it has been for (clears throat) quite a long time. Partners Columbia Threadneedle Real Estate, Manchester Airports Group, Beijing Construction Engineering Group International, and Greater Manchester Pension Fund, must be hoping this is the final push.

Maths, again

There’s certainly logic to the Mix Manchester proposal. But making it pay will be the challenge. It’s going to be classy stuff, not just a load of crinkly tin sheds, and premium rents are in the air. Why not? If you want any kind of pharma footprint close to the Oxford Road corridor, this is where you’ll have to come.

Expectations

“The maths isn’t easy and the life science sector is not immune to the rest of the market – it’s more expensive to build and to borrow these days, and it has the same conditions as the rest of the property market. It’s a niche sector,” says Track Real Estates’ Jamie Bottomley, whose job (along with JLL) is to get the scheme moving. He says it’s a question of expectations management.

Same old story?

Of course we’ve been here before. The 1980s and ’90s saw a similar pivot, and a rash of science parks as property (and the economy) prepared for a shiny future. A few survived, one or two thrived, but most no longer exist. Almost all had to abandon the original focus on science occupiers in order to make financial sense: tenants were not turned away, whatever their business. Mix Manchester hopes to hook itself on the end of the Oxford Road corridor – the dot on the end of the Eureka! explanation mark. Whether it can or not depends on some big assumptions being right.

Join the conversation at Place North’s Life Sciences Update, 7 November, Manchester

ELEVATOR PITCH

What’s going up

An excellent week to pick up a super-green South Yorkshire shed, and a good moment to ponder whether rental flats, or rental houses, are the future. Doors closing, going up.

Flats or houses?

The Leeds build-to-rent sector was slow to get going, but is now gathering pace. Glenbrook topped out the 500-unit scheme at Whitehall Riverside in recent days. The two towers are part of the wider £280m project delivered by Town Centre Securities.

The city – along with Manchester – is tipped by Savills as the focus for much of the next wave of growth. It comes as confidence picks up speed, albeit from a tiny base. The total stock of UK build-to-rent homes is just 115,000, up 24% on this time last year, but still microscopic. There’s more money sloshing about: the second quarter of 2024 saw £1.2bn invested, although three-quarters went to single family housing, not flats. A sign of the times and one to keep an eye on.

Doncaster super shed

South Yorkshire Pension Fund has made a big splash in Doncaster. The fund has lent £54m to support a 700,000 sq ft super-green warehouse at Panattoni Park Central A1(M). It’s the fund’s largest loan to a single project since it set up shop in 2019.

The fund has made a few other timely investments, allocating £46m to develop a 496-bed purpose-built student accommodation scheme in central Sheffield, and £33m to support the development of a 367,000 sq ft industrial unit in Shepcote.

Chances are the Doncaster shed could be a big winner. Cushman & Wakefield’s recent Sustainable Logistics – Navigating Change in European Logistics Real Estate report claims that sustainable warehouses command a 19% price premium, rising to 24% outside super-prime areas. There are attractive pay-backs on offer, too, for investors prepared to get back into sheds. One to watch.

Get in touch with David Thame: [email protected]