Is there as much life in the life sciences sector as people think?

It is arguably the hottest sector in real estate, but not everyone is convinced there is enough demand for life sciences space to justify the hype. BE News finds out why

The hype over the life sciences sector reached fever pitch during the pandemic and it is still seen by many as the hottest ticket in town – or more accurately on the outskirts of town in most cases.

At the BE News ‘Property Forecast 2023’ roundtable debate earlier this year, one prominent developer of prime assets in central London noted that “pretty much” every development site at the moment seems to be for life sciences. However, he added, “they can’t all win”. Was he right? Is there a danger that developers are bringing forward too many life sciences schemes? Or is the demand there to fill all the new space?

The current level of interest in the sector is unprecedented. In the recent British Property Federation Property Leader Sentiment Survey 2023, almost half (47%) of British property company leaders said that they believe life sciences will perform best of all real estate sectors in terms of financial returns in the next 12 months.

A few years ago, there was little competition. Today, everyone seems to want a piece of the action. Such is the level of interest that there is broad agreement that not everyone ploughing in will be successful. Peter Wyld, head of the Cambridge offices at TFT, says that, as in most sectors, there will be winners and losers. “There are definitely the premier league developers that are mature in the market,” he says. “But there are also those that are less experienced in the sector and they’ve probably got a lot to learn – and fast.”

Tom Mellows, head of UK science and director at Savills, agrees “there will be some winners and losers. But it’s not so much the quantum of space or the number of schemes; it’s that landlords are definitely having to trial or pioneer slightly new locations or fringe locations”.

Canary Wharf is a good example, adds Mellows. At the end of March last year, it was announced that Canary Wharf Group (CWG) and Kadans had formed a joint venture to develop a new 750,000 sq ft life-science focused, wet lab-enabled building on the 3.3-hectare North Quay site, next to the new Elizabeth line station. The development will be “the first phase in the creation of a world leading centre for health and life sciences,” according to CWG.

“Canary Wharf Group has been developing a vision for health and life sciences since 2019 and we are proud to be working with an exceptional partner in Kadans, the European leader in the development and management of life sciences buildings and ecosystems,” Shobi Khan, CEO at CWG said at the time.

“We are creating a world class building that will provide state of the art laboratory, office and innovation space for some of the most exciting and fast-growing businesses in the health and life sciences sector.”

Mellows doesn’t think the idea will fail, but he does believes it is ambitious. “They’re trying to create a new location for science-related companies, but today there is no academia, there is no teaching hospital, there is no science-related hub that typically forms the beginnings of a cluster location,” he says.

“So, they’ve got to try and create that from nothing. That’s okay. [Canary Wharf Group] has a track record of creating something from nothing. They’ve done it with the office market over many years, pioneering a completely new location for London. I’m not doing the scheme down.”

Congested marketplace

As well as having to pioneer new locations, developers are entering an increasingly congested marketplace. Indeed, such is the volume of supply coming through that some experts believe there is a real danger of the supply/demand balance flipping.

In London, Mellows says that Savills is tracking demand closely and thinks that there are probably requirements for around 800,000 sq ft of space from life sciences companies over the next two years. That isn’t a huge amount when you consider that the Canary Wharf scheme alone will deliver almost all the space required, although of course not all companies will want to move to the Docklands.

“In other asset classes, you get this mismatch between where occupational demand is and the stock that’s being provided,” says Mellows. “The history of laboratory space has been one of under provision of laboratory space, but I think the spotlight on the sector and the amount of investment into it by venture capital firms has encouraged developers to look at developing specific laboratory type spaces in lots of places.”

He adds: “You do quite often get this mismatch when lots of developers do it at the same time. They’re not necessarily going to let their buildings within the sort of timeframe that they will be anticipating. Not all of them will achieve their business plan.”

There is an important caveat, however. Mellows points out that demand stood at around 200,000 sq ft just two or three years ago and that big pharmaceutical companies are increasingly interested in being in central London.

“Demand has already grown pretty significantly in a short space of time and it’s on an upward trajectory,” he says. “It’s not just the VC-funded companies but also bigger pharma companies that are seeing the significance of what’s going on in London and wanting to be part of it. So actually, you could see demand increase significantly over the next two to three years.”

Another point worth noting is that not all of the developers that have announced life sciences plans will actually go ahead with their developments. “We’re seeing some significant headwinds like construction pricing, yields pushing out and so on,” says Mellows.

“So, is everyone going to do it? Some might be delayed in planning or they might pause for a period of time. The property market is a dynamic thing. Quite how much space comes through and when it comes through is always difficult to pin down.”

If more supply does come through, the hope is that it will nip in the bud some bad practice that has crept in. Market commentators point to the growing trend of cynically rebadging office or industrial developments as life sciences developments in the hope of boosting rents and capital values without changing the nature of the buildings.

“I’ve represented an occupier in the past who initially approached a bad building, a poorly specified building,” says Wyld. “If you ask my opinion, these buildings were developed as logistics buildings, but they were marketed by the agents as R&D space. When we got into the detail of them, the spec just wasn’t there. The infrastructure that the building needs to offer for these occupiers just wasn’t there. There are a lot of problems created from that basically rebranding.”

In the end, the occupier took the building after a “very complicated negotiation” based on the fact that it was in the right location and that there simply weren’t many alternatives.”

However, Wyld adds: “That will change in the next five years. There’s going to be a lot more supply on the market and then there’ll be a question mark about the legacy of those poorly specified buildings and how attractive they are to investors and occupiers.”

The well-specified buildings, however, will remain in strong demand. The question is with how many occupiers – and will supply outstrip it?