Navigating The New Normal: Life Sciences Real Estate in Europe — A Maturing Asset Class

Demand for life sciences real estate

There are many factors driving record levels of investment in the life sciences sector: an aging population, the convergence of scientific breakthroughs across different disciplines, national and regional government support and now, a global pandemic. In addition, the use of artificial intelligence and data is accelerating outcomes in this sector, which has witnessed many life sciences companies investing heavily in the recruitment and retention of “tech and data talent” across all levels (from graduates to senior executives), and often in competition with “Big Tech” firms. In turn, this growth is fueling demand for specialised real estate to meet the sector’s needs in key global locations.

Real estate participants are taking note, with life sciences seen as an industry with strong fundamentals that continue to strengthen in a post-pandemic world. Although life sciences real estate is more costly to develop and operate compared to many other asset classes, the specialised nature of the space and service means that tenants are prepared to pay a premium. Many high profile institutional real estate investors have recently announced the launch of specialty life sciences platforms to capitalise on the opportunity. For example, commercial real estate firm Tishman Speyer and Bellco Capital, an investment firm founded by biotech entrepreneurs, recently formed Breakthrough Properties to develop and operate life sciences properties in the U.S., with plans to expand to Europe. Meanwhile, AXA IM – Real Assets acquired Kadans, a European developer, owner, and operator of science parks and lab offices, from funds advised by Oaktree Capital; and Legal & General Capital has partnered with Bruntwood with a goal to invest in £1.8 billion worth of real estate focused on supporting life sciences businesses. Other institutional investors, like Harrison Street, are starting to incorporate life sciences real estate into their broader portfolio of alternative assets as well, viewing the asset class as being at the early stage of a longer term growth trend, similar to logistics or student accommodation in previous cycles. 

European life sciences clusters

Location in or near a geographic concentration of interconnected life sciences companies and institutions, or “clusters,” is key when it comes to life sciences real estate. We discussed the importance of clusters in our earlier Global Trends and Opportunities in Life Sciences Real Estate article. In all geographies, life sciences clusters share similar characteristics for success: proximity to research universities with good reputations, high levels of private investment and access to governmental grants, a deep talent pool to draw from, and mature infrastructure and transport links. For this reason, life sciences clusters in the UK, Germany, France, and the Netherlands are well-positioned to continue to grow due to their base of well-regarded universities, excellent transport links between cities, a big investor and talent base, a mature regulatory environment, and generous government support for the industry. 

Taking a look at each of the jurisdictions in more detail:

• In the UK, the “golden triangle” of London, Cambridge, Oxford and surrounding areas are the most advanced of the life sciences clusters, where around 80% of all UK life sciences investments happen. However, emerging life sciences real estate clusters are appearing in many regional cities, including Edinburgh, Glasgow, Manchester, and Nottingham, where there are significant amounts of concentrated activity, as well as Liverpool, Leeds, Birmingham, and Newcastle, which have seen sustained growth over the past few years. It is worth noting that while established European life sciences real estate participants are comfortable investing outside the golden triangle, new entrants to the UK market tend to focus on the more established London/Cambridge/Oxford region.
• In Germany, Berlin is the key city for life sciences, followed by the Heidelberg and Bavaria regions (including around Munich).
• In France, the greatest share of life sciences investment is centered around Paris and its nearby surrounding suburbs.
• In the Netherlands, Bio Science Park in the city of Leiden, which is home to Johnson & Johnson vaccine producer Janssen, is one of several major European life sciences centers.

Following the footsteps of tech

The drive for innovation in life sciences is fueling the growth of venture capital funded start-ups, with over GBP 1 billion a year being spent on venture capital investment in life sciences in the UK alone. In response to this, and following in the footsteps of other sectors like tech, the development of large scale science parks, containing self-contained ecosystems for life sciences businesses at all stages is providing a home to start-ups and scale-ups that prefer to work in a specialised space with communal infrastructure and services. These environments also contain space for “computer-based” personnel, which is important as data analytics becomes increasingly important to the operations of life sciences companies. 

To cater to start-ups and scale-ups, landlords (both within and outside science parks) are also increasingly offering month-to-month term leases that are terminable by either landlord or tenant on short notice (eg, 30 days). These so-called “incubator,” “accelerator” or “WeWork” type flexible leases also often allow for shared amenities between tenants in a building, giving startups a chance to network with fellow entrepreneurs and venture capital providers in shared spaces and events. However, as discussed in our earlier Underwriting Life Sciences Company article, this can provide unique challenges as part of the tenant underwriting process.

Predictions

Demand for high quality life sciences real estate is forecasted to remain strong across key European clusters, as life sciences companies continue to focus on the built space, its location and the surrounding ecosystem as key ingredients to success. In particular, there is now a recognition amongst life sciences companies that strategic real estate decisions can facilitate growth and collaboration opportunities, and can provide access to talent, funding, innovation, and shared resources. This trend will see existing and emerging life sciences clusters expand, as well as the potential for more ground-up development of larger scale life sciences communities, in each case catering to businesses at all stages. Unsurprisingly, we anticipate more capital allocators, investors and developers to look to add life sciences real estate investments to their portfolios in the next few years to capitalise on the growing demand.