Shaun Stevens, strategist in the real estate securities team, at BNP Paribas Asset Management, suggest three drivers are supporting optimistic outlook:
- Demand for lab space is rising inexorably;
- Global health spending and venture capital funding is mushrooming; and
- Real estate companies that can offer specialist properties should prosper.
“Life sciences have taken off since Crick and Watson unravelled the double helix structure of DNA and cleared the way for genetic research, opening up the field to tackling an ever wider range of medical issues, attracting a broad spectrum of scientists and turning lab, manufacturing, testing and research-and-development space into a multi-billion real estate market for developers and investors.
“The field of life sciences has now broadened out to biotechnology, pharmaceuticals and medical devices. The top clusters are typically in the US and characteristically involve concentrations of life sciences researchers, adding in specialists in related fields, all using a stock of suitable lab space, and importantly – with access to venture capital funding.
“With impressive amounts currently being spent on life sciences, the prospects for the real estate end of the industry look favourable, including from an investor perspective. As global health spending grows inexorably, demand for lab space should continue to benefit. (As an offshoot, the broader local real estate market stands to prosper too, for example, as highly paid scientists look for homes, retail and leisure.)
“And while a limited set of public real estate companies are exposed to this segment, a significant number of US real estate investment trusts (REITs) are trying to increase their presence in lab space or office segments linked to lab space.”
The combination of population aging driving healthcare spending and more pharmaceutical research provides a solid platform for the continued growth in demand for life science and lab office space over coming decade, argues BNP Paribas. Global pharmaceutical spending should outpace overall healthcare spending, according to the Deloitte 2019 outlook.
More than $66 billion in venture capital was invested in bioscience companies between 2014 and 2017, benefiting commercial real estate demand.
“Life science start-ups and established companies prefer to cluster in specialist office campuses so they can access talent and share ideas. This favours real estate companies that can offer specialist property in the main life science markets.
“Clearly, this is a niche space to invest in with only a handful of companies providing meaningful exposure. But it is an example of an opportunity that the smarter real estate managers in the REIT segment identified correctly. They spotted an innovation at an early stage and took significant steps to exploit it.
“It also reminds us that technological advances may harm businesses. Just think of the effect of e-commerce on physical shopping centres. However, progress need not always have a negative impact on property. E-commerce boosted warehousing and datacentres. Similarly, rapid advances in science can open up meaningful investment opportunities. That includes the listed real estate sector.”