Why Life Sciences Are Presenting an Opportunity for Real Estate

Article by Jaspreet Bassi

Following the pandemic, global real estate deal value reached a record high in 2021, when prices of industrial and residential properties surged. However, the tightening of global financial conditions in 2022, such as the rise in interest rates, has impacted the activity occurring in the real estate sector. For example, industrial and residential property prices have decreased alongside the further depreciation of retail and office property prices.

High interest rates impact commercial real estate because it makes it more expensive for investors to finance new deals or refinance existing loans, lowering investment in the sector. This, in turn, reduces demand for commercial property such as shops, restaurants, and industrial buildings.

However, real estate investors are seeing life sciences as a hot ticket for real estate. The pandemic has heightened interest from real estate participants for buildings such as offices and labs designed to meet the needs of life science businesses. This is due to many factors, which include the sustained demand to produce vital medicines. Investors are attracted to the life sciences sector because the specialised nature of the space and service required for the buildings means that tenants are prepared to pay a premium. Additionally, such buildings are critical facilities to the operations of life science businesses, so there is a lower occupancy risk. In light of this, the Canary Wharf Group is planning to build a 23-floor tower in London for the life sciences industry, which will contain laboratories.

Despite the opportunities present in this area, there are also challenges to overcome. For example, there is a strong preference for life science businesses to be in the Cambridge- Oxford-London Golden Triangle as it is one of the world’s leading concentrations of biotechnology and life sciences. Also, the initial costs of developing these buildings are very high due to their specialised nature. Savills has noted that, on average, there can be a time delay of 12 to 18 months between capital raised for the sector and real estate demand. But, these challenges can be overcome to help facilitate growth in this sector. For example, the UK government will invest £100 million in new ‘Innovation Accelerators’ in the West Midlands, Greater Manchester and Glasgow City Region. As a result, emerging life sciences real estate clusters are appearing in regional cities, which should gradually reduce the demand for life science businesses choosing to be located in the Golden Triangle.

The life sciences real estate sector is expected to remain strong as the benefits of such properties designed and occupied by life science businesses are clear. An ageing population and the rise in healthcare spending are fuelling the industry, which in turn means we can expect to see more capital being added to this sector so investors and developers can capitalise on the growing demand present in life sciences real estate.