Life Science – a new asset class on the rise
Life science is still a new type of real estate for European investors. Most market participants have not yet developed their own idea of what this type of use involves. The life science industry combines a wide variety of scientific sub-disciplines, all of which relate to the topics of life and health. The scientific discipline of life science is the industry for improving life. The largest areas of research and development include biotechnology, the pharmaceutical industry, digital health and medical technology, in addition to molecular biology and environmental sciences. Since these disciplines deal with living organisms in the context of their research and product development, there are also increased demands on the personnel, as well as on the building structures, such as laboratory or production areas at these facilities.
In view of the increased life expectancy referred to at the beginning, increasing health awareness and an increase in diseases of civilization in an aging population, the need for life science real estate speaks for itself. The higher resilience against short-term fluctuations in demand means that the market for life science properties is also increasingly becoming the focus of real estate investors. The inclusion of life science real estate in your own portfolio can, therefore, lead to a higher return, while increasing diversification at the same time. The trend towards the home office and digitalization due to the COVID-19 pandemic is not fully affecting the life science industry, as many activities can only be carried out in the laboratory. However, definitive delimitation is still difficult, since in this case corporate real estate (office properties, mixed-use buildings), innovation and health campuses, pharmaceutical logistics (warehouses, physical and mail-order pharmacies), and light industrial real estate can be classified.
European life science real estate – the new core?
A look at the various market data shows an increasing investor-side interest in the "life science" asset class in Europe.
Since 2010 total expenditure on pharmaceutical research and development has been steadily increasing at global, European and national levels. In 2022, compared to 2010, expenditures of around 236 billion euros (+86.1%) are expected at global level, around 42.7 billion euros (+53.2%) at European level and around 7.4 billion euros (+32.6%) at a national level. This shows that steady growth in pharmaceutical research and development is also expected in the coming years (2028: approx. 283 billion euros in Europe).
The European life science market has increasingly become the focus of international investors in recent years. In particular, compared to US properties, corresponding properties can be purchased around 40% more cheaply. Similarly, the cost of running a biotech company in Europe is about 50% lower than in the US. In addition, the good infrastructural conditions, a uniform and secure legal system, as well as the relatively low wage costs for workers in the European life science sector, show up in international comparison.
European Life Science Investment Universe
Looking at the real estate transactions completed since 2015, it can be seen that investments in life science properties account for 0.5% of the total investment activity in real estate in 2020. In 2015 the corresponding share was still 1.4% (ULI, 2022). These results confirm the hypothesis mentioned at the outset that life science is still an unknown type of real estate for many investors in Europe. These properties are very resistant to crises, as they have a balanced mix of uses and are increasingly in demand due to demographic change. Due to all of these factors, increased interest on the market in this type of property is to be expected in the future.
The top three regions for LSRE (life science real estate) investments within the last 24 months have emerged as the UK (44.26%), Benelux (28.46%) and the German-speaking area (GSA) (11.92%). Measured by their gross domestic product (GDP), the Benelux countries and the GSA all have an R&D intensity of over 3.0% as measured by their GDP, which is well above the European average of 2.27% (World Bank, 2022). Although the UK's R&D intensity is around 1.17% (World Bank, 2022), it ranks second among medical technology workers in Europe and is home to one of the world's most important life science clusters (the Golden Triangle).
A more nuanced picture emerges when looking at investors in life science real estate. According to an analysis by ULI (2020) for the period from 2015 to 2020, it is fund managers that primarily invested in life science properties. However, this investor landscape has changed over the last 24 months, so that mainly project developers and investment managers have made corresponding investments (based on their own evaluation of RCA data as of December 31, 2022).
Setting up life science companies in clusters promotes productivity and knowledge exchange
Regional proximity of the various actors in the form of clusters can be seen in the life science industry. For such research-intensive sectors, which are based on a mutual transfer of knowledge, establishment in clusters is of existential importance. This is because cluster formation promotes cooperation between the individual companies within a region. Thus, a cluster formation of actors in a sector between the individual disciplines creates synergy effects and the basis for (closer) cooperation between the companies involved. This, in turn, ensures an increase in national and international competitiveness. Empirical studies show that regional clusters are on average 10-40% more productive than their isolated competitors.
The following figure illustrates the most important European life science clusters.