Life sciences sector: resilient return profile for real estate investors
Comment by: Julian Campbell-Wood, Portfolio Manager of Nedgroup Investments Global Property Fund
The Covid pandemic had a massive effect on the global commercial real estate market.
The preliminary success of return to work continues to decline as new COVID-19 variants emerge, making a mass return to work more unlikely, while the retail industry is taking big hits from e-commerce and the expansion of home delivery services.
Despite the outlook, a number of real estate sectors give reason for optimism, one of those is life sciences real estate.
With the market already seeing strong demand conditions attributed to an ageing population, rising healthcare spending, and enthusiastic venture capital investments, the start of the pandemic has only accelerated this growth. The rapid development of several effective COVID-19 vaccines led to a significant increase in capital focusing on the life science office sector. Research and development of vital medicines, as well as increased testing and treatments to tackle COVID-19, have also boosted occupancy levels.
As the task of tackling unsolved complex human diseases has a long runway, investors are convinced that the growth momentum of the life sciences sector is set to continue in a post COVID-19 world.
Scientific innovation is increasingly being addressed using talent from both technology and medical science, often found clustered in knowledge-based markets such as Boston, San Francisco, San Diego and Seattle. Furthermore, ongoing demand from crucial cancer, gene therapy, and immunology research continues to provide sustained demand amid expansion efforts from sector-focused real estate investment trusts (REITs).
Portfolio example: Alexandria
One of the pioneers in this space is U.S.-listed Alexandria – a leading owner and developer and the only pure-play listed REIT focused on this sector. Alexandria provides office, lab, and workspace for high-quality and diversified tenants such as Pfizer, Moderna, and Merck, and with the gradation of COVID-19, these businesses have seen exceptionally favourable conditions.
Alexandria represents a perfect example of an attractive investment opportunity in a diversified subsector within the global listed market. Given the current backdrop of low leverage, access to capital and strong balance sheets, Alexandria provides investors with liquidity and a resilient return profile. Consequently, it has achieved the three outputs that define a great company: superior results, distinctive Impact, and lasting endurance.
As a mission-driven company dedicated to making a positive and lasting impact on the world, ESG is core to Alexandria’s DNA. Its longstanding ESG efforts have benefited their tenants, employees, and communities, as well as preserved and enhanced value for stockholders over the long term.
Alexandria’s core business involves creating sustainable, collaborative life sciences, agtech, and technology campuses that enable the translation of scientific discoveries into new treatments and cures for patients. In addition, it invests in promising companies that are pursuing the development of novel therapies and technologies that will meaningfully improve human health, as well as supports and revitalizes the communities in which it builds and operates.
The future of life sciences
The institutional life science real estate universe is estimated to double in size over the next decade, from $73 billion (2020) to $165 billion by 2030. As a result, investors will have ample opportunity to expand allocations to the industry, particularly in the development space.
The industry thrives on strong demand, and while the present market environment facilitates its expansion, there are a variety of factors that must be considered.
One of the most significant elements is market rent increase inside research clusters, which is a relative value component that should be understood. Often life science capitalisation rates are equivalent or somewhat tighter than comparable-quality office cap rates therefore indicating higher contractual rent increases as well as forecasts for greater market rent growth.
However, higher rent growth is to be expected as occupiers of life science space rely on the growing significance of life science developments which has ensured a co-location in close proximity to research and health institutes where companies gain access to patients as well as partners. This will create the reverberation of surrounding markets, leading to increased rent in and around high-profile development areas.
Life sciences real estate gives investors a competitive edge through funding, innovation and access to talent which makes it more than an operational choice for life science companies. Thanks to a demand tailwind, life sciences industry can be a viable alternative property type for investors and with the allocation of capital to the sector alongside an experienced life science operator, has a potential to offer positive risk-adjusted returns.