Last week, a £200m scheme for a life sciences building developed by Legal & General and the University of Oxford received planning permission from Oxford City Council, paving the way for the city’s largest-ever development and underlining growing investor interest in the life sciences sector.
Pre-pandemic, the life sciences sector was already growing rapidly and momentum has picked up further since the outbreak of Covid-19, with £19.8bn of UK capital poured into the sector in 2020, according to the latest Savills report, 23% more than in 2019.
“Beforehand, the life sciences sector was a well-kept secret,” says Chris Walters, investor and developer lead for life sciences at JLL. “There were a small number of investors delivering space for occupiers. Over the past two years, that interest has skyrocketed.”
Experts say the sector is set to grow even further this year. The question is, by how much?
Public sector funding has reinforced confidence in the sector. In March, the UK government pledged £22bn for research and development by 2025, £200m of which will go towards life sciences.
However, it is not a case of full steam ahead. Although there is plenty of money looking to get into the sector, the supply pipeline is nowhere near sufficient to meet current demand.
Research by Bidwells shows that in prime life sciences locations like Cambridge office and laboratory supply reached 925,800 sq ft last December, with just 38% categorised as grade-A stock. The combined vacancy rate for offices and labs reached a low of 9.7% at the end of 2020, meaning that when new supply does come to the market, it is often snapped up straight away.
“The demand-supply imbalance has been like that for a while,” says Walters. “There is space being brought forward but as that space is being delivered, it is being taken up.
“If you’re an occupier, timing is imperative. For example, some smaller companies that are rapidly growing don’t have a long period of time to decide like bigger corporates when they need space; they need it in six months.”
Demand is only set to grow, adds Michael Aston, head of life sciences at Cushman & Wakefield, who also predicts a change in locational focus.
“This year, it’s likely we’ll see quite a lot of mergers and acquisitions,” he says. “In terms of real estate, for big pharma companies, that will mean juggling within portfolios. There’s also a long-term very gradual trend for big pharma companies to relocate to urban locations.”
To what extent London landlords might benefit remains to be seen. Tom Mellows, director for office and life science leasing at Savills, says that historically, because demand for other use classes in London has been so strong, “landlords haven’t really had to take risks or go into the life sciences market.”
However, adds his colleague Steve Lang, research director for offices and life sciences at Savills, the pressing need for lab and office space may encourage landlords to change their tune. “There are solutions to convert offices as well as retail assets into labs,” he says.
This is not to say repurposing space is straightforward. “In places such as White City, the bones of that building were much better a standard office building,” says Max Bryan, head of lab and office agency at Bidwells.
“[The White City Campus] was a former transmissions centre so it had high ceilings and great power. The ability to turn that into labs is a much easier proposition than it can be in a fairly conventional office building in high-density parts of London.”
However, the consensus is that such is the demand that more supply will have to be delivered. Outside the golden triangle of Oxford, Cambridge and London, the future also looks bright for the emerging life sciences markets in Birmingham, Newcastle and Edinburgh, where Legal & General Capital has backed a pipeline of 2m sq ft of life sciences real estate.
“It’s very polycentric in terms of how life sciences are growing throughout the UK. It’s a great story for the UK and is one of the post-Brexit protected industries,” says Lang.
It also looks set to be one of the post-Covid protected industries. The question now is whether the supply can be delivered to match the extraordinary growth in demand.