Despite all the hype about the new asset class of life science real estate investment invading Europe, the reality is a long way behind the talk, although there are signs of a mini-industry developing around the concept. The reasons for the lag in continental Europe, compared to the US and, to a certain extent, the UK, are varied. There is also an issue of definition - what qualifies as Life Sclence real estate, as against healthcare, or even pharmaceutical as an industrial sub-category.
The latest Catella Market Tracker attempts to shed light on any notable movement in the sector. The report suggest that, as a by-product of the Coronavirus, demand is beginning to grow in Germany, driven by vaccine development and production, as well as the increasing demand for medical care in the wake of demographic change or other 'civilisational' diseases, such as high blood pressure or diabetes.
In recent years, total spending on European pharmaceutical research and development has steadily increased, with expenditures of €200 billion projected for 2021, with the sum expected to rise to €230 billion euros over the next five years. Given this trend, life science real estate is increasingly coming into the focus of investors.
Typically, life science real estate would include pharmaceutical logistics, research and development space (including laboratories), corporate locations (office space) and production space.
Definition is tricky - the sector is very differentiated, especially since there are a large number of different research focal points, ranging from biotechnology to medical technology and the pharmaceutical sector. This broad field also requires a wide range of different property types to meet the often special spatial requirements. For example, laboratory areas usually need their own ventilation and waste disposal systems, while larger storage areas are important for pharmaceutical logistics, while compliance with cold chains must be guaranteed.
The Catella Tracker points to geographical settlements in clusters with proximity to research locations such as universities or colleges, and weight given to the synergy effects that may result from this. The study shows clusters in Sweden, the Netherlands, Great Britain, France, but now also in Germany and other European countries.
According to Catella's head of research Dr. Thomas Beyerle, "All the indicators in the life science market point to a dynamic development in the future, particularly in mainland Europe. That's because of positive 'location' effects in already existing clusters, which are likely to present the best investment opportunities. Networks between companies and players along the research and production chain enable rapid exchange - and proximity to colleges and universities also opens up a suitable pool of talent.
The most important life science clusters in Germany are currently located in the Berlin-Brandenburg region (healthcare industry), in the Rhine-Neckar region (BioRN), where the cities of Frankfurt am Main, Mainz, Wiesbaden, Darmstadt, Heidelberg, Mannheim, Ludwigshafen, Karlsruhe and Stuttgart are leading, and in Bavaria in and around Munich (BioM).
In Beyerle's view, we could be just at the start. "Venture capital financing of European life science companies could exceed the 10 billion euro mark for the first time in 2021. The market is entering the boom phase."
Catella has identified demographic change in particular as a driver. "With an ageing population, the demands on healthcare are increasing, enabling new growth opportunities for companies in the life science sector through innovations and target group-oriented offerings," the report states.
Catella sees other trend accelerators in the increasing importance of Digital Health (digitalisation of health technologies), the emergence of various civilisational diseases of (such as high blood pressure or diabetes) and exogenous shocks such as the outbreak of the global Covid 19 pandemic.
Germany can be a major beneficiary of the emerging asset class Life Sciences, given its standing in Europe. 31 % of European spending on research and development is done in Germany. "Germany is one of the most important life science research and development locations in Europe. Among other factors, the high number of university graduates from the natural sciences and engineering is decisive for this," says Matthias Pink, Head of Research at Savills Germany.
"Berlin and Munich are exemplary for Germany as a life sciences location. With their high concentration of science parks and investments in this segment, both cities are in focus." Berlin and Munich also represent two of the largest leasing examples in the life sciences sector in Germany: pharmaceutical group Sanofi, which signed a contract for 5,520 sqm in Berlin's City West in 2020, and Wacker Chemie, which secured around 17,800 sqm of office space in Munich's Werksviertel in June 2021. The World Health Organization (WHO) also opened a new pandemic early warning centre in Berlin in early September 2021.
There are also growing opportunities to convert existing - and perhaps unwanted - office space into Life Science properties, given a certain technical adaption. From an investor perspective, life sciences companies in turn form an important user group, as their lease terms are usually longer than those of traditional office tenants, in some measure also due to the cost-intensive nature of their equipment.
"In the increasingly competitive market environment, investors are using the option of sale-and-leaseback transactions to secure attractive returns in the life sciences sector. In turn, it provides an opportunity for companies in the sector, as well as institutions such as universities, to generate capital for their primary businesses," said George Coleman, regional investment adviser for the EMEA region at Savills.
"Venture capital accounts for only a portion of the industry's investments and lettings - government initiatives, private equity and M&A activity primarily drive large-scale lettings. As the space requirements of the life sciences industry depend significantly on the success of the research and development department, potential space needs to be flexible and expandable."
