The Bisnow webinar Life Sciences: The Birth Of A New Real Estate Titan gave a fascinating insight into the rapidly expanding real estate asset class of life sciences (and more broadly science focused estates) in the UK.
What is the spark behind this sector?
- Supply: The UK is home to many highly qualified scientists working at the UK’s top universities who are creating successful life science companies.
- Demand: As identified by Paul Bashir of Harrison Street, in the UK, there is still a relatively low supply of fit for purpose premises for life science companies making it an area of growth attracting new investors.
- Government support for the industry: The UK government (among several initiatives) has a life sciences industrial strategy, which is providing funding to the sector helping to encourage growth.
- Premium rent: The capital investment required to address the complexity of the premises required for life science companies allow landlords to charge premium rents. For example Douglass Cuff from IQHQ noted that a life sciences building may require three times the amount of Mechanical and Electrical (M&E) that an office building would require.
Unique aspects of the sector
The speakers at the webinar, such as Kath Mackay of Bruntwood SciTech and Angus Horner of Harwell, explained what makes the sector unique:
- Variety: The variety and the needs of the occupiers is much greater than in other sectors; for example a digital health company may just need an office with very fast internet whereas a heavy chemistry company will need a fully operating laboratory.
- Understanding the sector: The value in these businesses is derived from innovation (in particular IP creation) and that relies on attracting the right talent, while their output requires complex equipment in their premises.
- Talent and innovation: Attracting that talent and encouraging the innovation requires an active role from landlords, such as at Harwell, where Angus Horner mentioned that they go beyond basic marketing and networking events:
- Structured organisation between the different sectors on site: for example Harwell has HealthTec, Space and EnergyTec.
- Specific science industry led events: holding proof of concept calls, which fosters interdisciplinary collaboration between sectors on the site (as held at Harwell with the Science and Technologies Facilities Council in 2019).
Real estate legal considerations
- Due diligence: The tenant’s covenant strength is not as easy to assess as in standard office tenants. Life science companies are often start-ups with angel investors. Landlords instead of relying on accounts need to assess:
- Who are the investors in the company? Are they established science investors who are known for setting up successful start-ups?
- What is the value of the IP they already own or are in the process of creating?
If a landlord is bank finance, lenders may also want to better understand the tenants on site and how their covenant strength was assessed.
- Flexibility in leasing: Shorter terms for leases may be preferred as the companies are often small with limited investment. A more simplified agreement would reflect the shorter term nature of the arrangements and will facilitate a smoother negotiation with a tenant that is not familiar with taking leases.
- Dilapidations detail: Instead, the detail can be focused on the fit out plans for the premises and possibly any bespoke agreement on the requirements for vacating the premises if the Landlord thinks the lab equipment could be adapted for the next occupier rather than stripped out as in office premises.
- Operating agreements: Owing to the structured management of science sites, often the operator of the site is very important to maintaining and creating value (akin to a hotel operator for a hotel property), so ensuring the agreement with such an operator is properly negotiated is crucial.
What’s next for this sector?
- Potentially there may in time be a life sciences UK REIT, these have already been launched in the US where the sector is more mature.
- Serviced lab space, similar to serviced office space, is a concept in its nascent stages in the US and so depending on how the sector develops here, could be another part of the sector in years to come.
Above all, there will be growth and a maturing of the sector as more investors become familiar with the complexities of the industry and its specific and varied real estate requirements.