The Growth Sector of the Moment – Life Science

Written By:

Darren Mansfield, Knight Frank

17 May 2023

7 minutes to read

Categories: Publication M25

What is life sciences anyway?

Life sciences is any science that deals with living organisms, their life processes, and their interrelationships. It encompasses a broad spectrum of sub-sectors, from biotech and pharma to medtech and digital health. It is most associated with human health. However, biotech, for example, has applications outside human health, including animal health, agrifood, bioprocess manufacturing, and biotech for sustainability. Furthermore, Life Science is rapidly converging with other sectors, such as technology and the broader innovation-led industries.

Why is the life sciences sector compelling to real estate investors?

Strong performance, lack of available lab product, accelerating demand, sticky tenants, and rental premiums are key drivers behind increasing investor focus on life sciences real estate. In addition, the sector has strong structural growth fundamentals, including substantial unmet needs, an ageing population, technological and scientific advancements happening at pace, and robust levels of public and private funding.

Life sciences activity in the South East

Established markets

The most established life science markets in the South East are Cambridge, Oxford, Stevenage, and West London. These markets are characterised by accelerating demand versus a critical shortage of lab space. Cambridge, for example, has over 1.2m sq ft of named lab requirements yet currently has only 24,000 sq ft of available lab space and just over 306,000 sq ft of additional space being delivered for the remainder of 2023. The market cannot meet the current demand for lab space before the end of 2025 earliest, and that is on the assumption that all planned schemes planned are brought to market to current delivery forecasts.

This market dynamic is spurring investor interest. Life sciences investment volumes in Oxfordshire and Cambridgeshire alone totalled £1.1bn in 2022. Notable transactions included Life Science REIT's acquisition of Oxford Technology Park for £120.3m and Longfellow Real Estate Partners and Canada's Public Sector Pension Investment Boards acquisition of Capital Park in Cambridge for £185m. The trend has continued with Q1 2023 life sciences investment volumes in Oxfordshire and Cambridgeshire totalling £106.57m – up a third on levels seen in the same quarter of 2022.

Oxford

In Q1, Moderna selected Harwell as the location for its Moderna Innovation and Technology Centre. This vaccine research and production facility totalling 145,000 sq ft., will be added to take-up when planning is achieved.

Cambridge

Emerging markets

Life Science clusters form around talent and knowledge and healthcare ecosystems. These usually stem from an anchor such as a university or research institute and an existing or emerging industry base. Tracking these factors via leading indicators is, therefore, a good measure of the potential strength of a market.

The most recent QS University rankings rated the University of Reading, University of Sussex (Brighton) and University of Surrey (Guildford) in the top 100 UK universities for life sciences and medicine. At the same time, the Office for Life Sciences shows the following locations as home to more than 25 life science companies: Reading, Guildford, Maidenhead, High Wycombe, Basingstoke, Slough, Uxbridge, and Milton Keynes.

Guildford has the most significant number of Life Science related research institutions in the South East, outside the prime Golden Triangle. Guildford, for example, is near the Pirbright Institute, a veterinary research institute that is part of the UK Biotechnology and Biological Sciences Research Council. It is set to be the home of a new £40m centre that will focus on accelerating the development of animal vaccines. Guildford also has an NIHR clinical research facility at the Royal Surrey Hospital, one of 28 strategically important purpose-built facilities where researchers can deliver early-phase and complex studies.

Finally, and with a focus on human health Brighton, Guildford, Basingstoke, and Reading have the greatest number of active clinical trials, according to clinicaltrials.gov.

Factors that are influencing future Life Sciences occupier decision making

At the end of 2022, the Government announced a contribution of £2.5m to catalyse a pan-regional partnership, driving policy locally to create opportunity in the OxCaMk Arc through public and private initiatives—a modest sum for a project with massive potential scale. The region has 11 Universities and a wealth of talent, but the focus on life sciences will remain in Oxford, Cambridge, and Stevenage as these are the ecosystems most attractive to occupiers. Centres in between are more likely to focus on innovation and tech associated with space, automotive, construction, and agritech activities,

The wider funding environment will also be influential. Shifting macroeconomic conditions are negatively impacting venture capital funding presently. However, more positively, drug discovery and advanced therapy companies continue to receive substantial capital investment. The region has strengths in these areas. It is also important to note that venture capital firms are sitting on significant amounts of dry powder and that venture capital isn't the only source of funding. Private equity investment is anticipated to pick up in 2023 while the Government has committed to record levels of R&D funding. With this, we can expect some M&A activity to follow, delivering the potential for the real estate sector.

At a company level, heightened competition for talent (the Science Industry Partnership projects the sector will need to fill 133,000 jobs by 2030, adding almost 50% to current employment levels) will result in a further movement towards workspaces close to talent pools, amenity, service, and infrastructure to aid in the attraction and retention of that talent. This creates potential demand for urban labs in connected city centres, close to younger science talent from academic facilities. Furthermore, there will be greater pressure on the supply side of real estate to actively play a part in easing talent shortages. Examples include the greater provision of affordable housing, training and development initiatives and linking up with local schools and communities to get people excited about a career in science while simultaneously fulfilling ESG values.

Outside of talent attraction and retention, a survey of over 600 life sciences and health industry leaders found that the top strategic objectives over the next two years are: M&A, industry collaborations, accelerating R&D, organic growth, digital transformation, and stabilising the business. Real estate that supports and facilitates this new corporate agenda will be in most demand.

GMP manufacturing will come to the fore in 2023 and beyond. Our latest industrial future-gazing report shows that Life Science is the top sector ranked by mentions of re-shoring in company reports and announcements. Elsewhere, there is an urgent need to increase cell and gene therapy manufacturing capacity.

Finally, new technologies, processes, and modalities will shape the sector's real estate requirements and create new and different forms of occupational demand. High-growth areas include AI-powered drug discovery, contract research and development, real-world evidence, bioprocessing and bioengineering, digital diagnostics and therapeutics, biotech for sustainability, agritech and advanced therapeutics.

Definitions

Biotech: Companies that derive products from extracting or manipulating living organisms.

Pharma: Companies that create treatments from chemicals and synthetic processes.

Medtech: Companies that develop and implement technologies aimed at bettering the efficiency and capabilities of the medical sector. Examples include digital diagnostics.

Digital health: Use of digital tools and platforms to improve health outcomes.

GMP manufacturing: Minimum manufacturing standard that a medicines manufacturer must meet in production processes. GMP stands for good manufacturing practice.

Bioprocessing: Production of a value-added material from a living source.

Bioengineering: Application of the principles of biology and the tools of engineering.

Genomics: The study of all a person's genes.

Real-world evidence: Evidence generated from the analysis of real-world data.

mRNA vaccines: A vaccine that uses a copy of a molecule to produce an immune response.

Advanced therapeutics: Medicines for human use that are based on genes, tissues, or cells.

Biotech for sustainability: Use of biotechnology to help achieve net zero. Examples include transforming waste into new uses and biodegradable plastics.

Contract research organisation: A company that supports the life sciences sector through research services outsourced on a contract basis.

GRID: Global research identifier database, an open database of research-related organisations.

QS University rankings: Annual rankings measured by criteria including academic reputation, research citations and student enrolment.

ClinicalTrials.gov: An open database of privately and publicly funded clinical studies conducted worldwide.