With the "Life Science & Tech" segment, a young asset class has recently emerged that has so far been at best marginally noticed by institutional investors. With the Covid pandemic, however, the healthcare industry has suddenly moved into the public eye and has also sharpened the focus on the real estate required for this.
What distinguishes real estate in the life sciences and tech sector, what structural factors are driving growth, what risks need to be considered and why can it be worthwhile for investors to get involved?
Shortage of space limits the market
The sector is characterised by the cooperation of different specialists. The properties must therefore combine different functions, ranging from office use to space for research and development to production. In our understanding, the laboratory portion must account for at least one third of the total area in order for it to be considered "Life Science".
The dynamic growth of the life science industry is visible in many places. Companies from the biotechnology, medical technology, digital health, pharmaceutical and chemical sectors are expanding at their traditional locations or are looking for new quarters. This often happens as owner-occupiers, as large companies in particular traditionally want to own the properties themselves. But here, too, there is a change: in order to be able to provide more financial resources for the core business, renting space or sell-and-leaseback is now being considered. Regardless of the ownership structure, the scarcity of adequate land is currently an obstacle.
Cooperation is essential
In the USA, the market development is already much further along. There are two decisive points in particular that become visible as critical success factors when looking across the pond. On the one hand, lucrative business models for the operation of laboratory real estate have been established there, which are shaping the development of the entire industry. Full-service providers of so-called "shared labs" rent out fully equipped laboratory workstations and thus offer young research companies in particular the flexible framework they need. Ideally, the start-ups can continue to grow in the building or at least on site as they enter their next phase of business development. Initial approaches to this concept are also being made in Germany, e.g. with the BioLabs in Heidelberg or the GO:IN in the Potsdam Science Park.
The latter is a good example of the second success factor, clustering. For LifeScience & Tech to work, it needs the interaction of the users: a university campus with strong science faculties, high-class basic research by Max Planck Institutes, an incubator for start-ups and, ideally, a whole range of companies in different development phases. As a lighthouse, a global player is very helpful, but not absolutely necessary for the success of a cluster. A uniform location management, which forms the strategic bracket of the cluster as an association or municipal company, has proven to be beneficial. In this way, interests can be better represented and all stakeholders can be brought together. Support is provided, for example, in industrial cooperation, company settlements or international location tenders. Networking and cooperation are (also) the be-all and end-all in this industry. The clusters are often very specific. In Vienna, for example, the "Vienna BioCenter" cluster has emerged as one of the leading international locations for molecular biology.
The demand for land will inevitably increase in an increasingly knowledge-based economy
Life Science & Tech Requires Expert Knowledge
From planning to construction and leasing to portfolio management, the asset class differs from the "classic" types of use. You have to understand the requirements of the users even more precisely. The construction of a laboratory property is much more complex than logistics halls and, as already described, the requirements for the location are significantly higher. From the perspective of a real estate investor, the following scenario is realistic: the shortage of space and de facto full occupancy will lead to rental price dynamics in this segment. In an increasingly knowledge-based economy, the demand for land will inevitably continue to rise and the supply will also grow. As a result, the market is becoming larger and more liquid, which is also changing the risk perception of the science and tech asset class and making it more attractive for many investors. Nevertheless, "small but nice" will remain the motto.
