London Could Be A Property Hot Spot For The Booming Life Sciences Industry

In the past month, two of the biggest private companies in U.S. real estate, Tishman Speyer and Thor Equities, have launched new divisions to invest in property created for the fast-growing life sciences sector.

In the UK, Legal & General created a £1.8B science property partnership with Bruntwood earlier this year, with a big life sciences angle. Bruntwood has invested in the sector for years, but its portfolio has so far focused on the North West and Birmingham.

But London is a ghost town when it comes to commercial property companies looking to invest in life sciences property, even though it is an epicentre for the industry in Europe. Oxford and Cambridge grab all the life sciences headlines, but 1,900 clinical trials took place in London last year, compared to just 400 in Oxford.

It is a difficult sector to invest in, because of the specialised nature of the space companies typically need. But the critical mass of life science companies already in London, and the way that academia and venture capital are merging, make it a potential source of profit for the London property sector.

Earlier this year, Cushman & Wakefield hired James Sheppard to head a new UK life sciences property team. A pharmacologist and molecular geneticist by training, he has been involved in the two major life science property projects in London so far, the Francis Crick Institute and Imperial College’s new Translation & Innovation Hub at White City.

He told Bisnow about the opportunities for life sciences property in London, as well as the challenges. Here is what you need to know.

The critical mass is there

That figure on clinical trials is supported by other data which show London is a life sciences hub. In 2017 a report from MedCity showed that London life sciences companies had raised £2.8B in total funding, more than any other city in Europe. Sheppard said there are around 6,000 life sciences and biotech companies in the UK in total, most of them small and midsized enterprises, employing around 250,000 people.

The public sector infrastructure is in place

Property usually gets a boost when the public sector invests in infrastructure. And that infrastructure is in place when it comes to the life sciences sector.

The nearly 1M SF Francis Crick Institute in King's Cross, North London, opened in 2016. Its construction and initial funding have cost £650M and it houses close to 1,500 scientists on a daily basis. The cost was funded by six institutions, including the Wellcome Trust, the Medical Research Council and Cancer Research U.K.

And Imperial College is in the process of building a huge new campus at White City in West London, which will look to bring together the academic and commercial sectors (see below).

The nature of scientific research is changing

The way scientific research is undertaken is changing, and this is creating the need for commercial lab space, Sheppard said. Big pharmaceutical companies are no longer undertaking as much R&D in-house, preferring instead to let other companies do the research then buy the finished product. This has fuelled the biotech startup industry, and these smaller companies can’t necessarily afford to build their own lab space.

Venture capital firms and larger life sciences companies also want to be near universities and academic institutions, to be close to the next big idea. And universities are embracing this.

“Universities are increasingly interested in demonstrating a tangible and commercial benefit of their research,” Sheppard said.

This creates a need for commercial lab space where the two sectors can collaborate. Imperial College has done this successfully at White City.

Growing companies have nowhere to go

The abundance of startups in the life sciences and biotech sectors means there is the same issue as in other sectors of the tech world: fast-growing companies having nowhere to go.

“If you were a small company that was growing fast in any other sector, it would be obvious, you would just go to WeWork or a flexible office operator,” Sheppard said. “If you need a lab, you can’t do that.”

As these companies expand or contract, there is the need for commercial lab space to suit their needs and avoid having to build their own bespoke space again and again.

What is there already demonstrates the demand

The need for commercial space specifically targeting the life sciences sector is shown by the fact that schemes like that at White City are already at capacity. There are basically no other alternatives out there. And Sheppard said building lab space can create a virtuous circle, the “clustering” effect always sought by property owners, where companies want to be located alongside or nearby other similar, successful companies.

What could developers actually build?

“Big is bes;, with a 1M SF scheme like the Crick you get economies of scale,” Sheppard said.

But it doesn’t have to be mega schemes, he said, which would be difficult to build in London. Schemes would need to be a least 25K SF, he estimated, and once you get to 60K-80K SF you do start to benefit from scale.

‘Scientists are people too’

London has something else going for it: It is a really cool place to live.

“Scientists are people too, and they like to live in nice places,” Sheppard pointed out. “London is very well-connected internally and internationally and people want a good place to raise a family.”

VC and overseas money is starting to look at the sector

Sheppard said he was working with overseas investors looking at the potential of tapping into the potential for commercial lab space in London. Venture capital firms that fund biotech companies are also starting to look at the property angle, he said.

“They are writing big cheques for companies, then realising they have nowhere for them to go,” he said. “They are looking at investing in the real estate, too.”

The downside: It is very, very hard

“You can see why the sector is appealing; who doesn’t want to cure cancer?,” Sheppard said. But there is a reason why in places like the U.S., even as diversified companies like Thor or Tishman enter the sector, it remains dominated by specialists: Building commercial lab space is hard.

“Building speculative lab space is not the same as building speculative office space,” Sheppard pointed out with some understatement.

There are different types of labs: wet labs, where chemicals, drugs or other biological matter are tested and analysed using liquids, and dry labs where computational analysis takes place. And within wet labs, different companies would need different equipment and types of space, making it hard to build speculatively.

The buildings have high levels of complexity and technical specificity to allow experiments to take place. The Crick Institute, for example, has very high vibration resistance, close temperature control, minimisation of electromagnetic interference and high rates of air change, so that the results of experiments are not affected.

This is not insurmountable: To allow different researchers to use the facility, the Crick has developed plug-and-play lab kits that can be rotated out of different labs according to need. And Sheppard said there is a growing amount of specialist knowledge within architecture and construction firms, particularly those with international experience. But it remains that these are highly specialised buildings built for people with bespoke needs.

London land prices

Given these complexities, that makes these buildings expensive to build, which means it can be hard to make the economics work in places like London, where land prices are high: Other uses simply produce a higher internal rate of return.

A subsidy solution

Sheppard said this issue could be bypassed if governments or local authorities provided subsidies for developers building commercial lab space through tax breaks, as is the case in some major U.S. cities. Another method would be to build on public sector land. While subsidising developers is not always a popular solution, Sheppard pointed out that job creation in the sector is extremely strong, providing a benefit to the communities in which new facilities were built.