As institutional investor demand for life sciences real estate increases, debt providers are being presented with a growing number of financing opportunities.
Market sources say investors are attracted to life sciences because of the steady growth in tenant demand from an industry developing drugs and products for an aging population, and the sector’s resilience during the pandemic.
Worldwide research into covid-19 vaccines has also accelerated demand for a sector that was already on investors’ radar.
According to JLL, the volume of life sciences real estate transactions has increased by 166 percent over the past three years in the UK alone. Around £15 billion (€17 billion) is currently targeting the sector, the consultancy added.
Chicago-headquartered investment firm Harrison Street, which entered the US life sciences market 10 years ago, expanded into the UK just prior to the start of the pandemic early last year. In a partnership with Trinity Investment Management, it bought a 1.6 million square feet portfolio of five properties for around £250 million.
Funding for science
For Paul Bashir, chief executive of Harrison Street in Europe, the amount of investment that life sciences receives from the public and private sectors is a key driver for RE investors. In the UK, biotech companies raised a record £2.8 billion of equity finance in 2020 per the BioIndustry Association, while the government committed to invest £22 billion annually in research and development by 2024-25.
“The level of private and public funding made into the life sciences sector directly translates into increased demand by companies looking for real estate space,” Bashir says. “This is particularly the case in the UK, where demand is strong and supply of fit-for-purpose space is scarce, which in recent months has fuelled strong rental levels and high occupancy – two macro drivers we expect to prevail in the short to medium term.”
In January, Harrison Street is understood to have sourced a £110 million refinancing of its UK portfolio, with debt provided by UK bank Lloyds and US private equity group Oaktree Capital Management.
In another high-profile deal in the country, lenders RBC Real Estate Capital Partners and PIMCO provided US investor Blackstone’s BioMed Realty with a circa £300 million senior loan to finance three life sciences parks in Cambridge in October 2020.
Riaz Azadi, managing director at real estate advisory firm Eastdil Secured, has advised on recent life sciences financing deals. He says the covid-19 crisis has acted as a catalyst to debt providers: “The number of lenders willing to provide quotes every time we work on a life sciences deal is growing.”
He adds that a diverse group of lenders is willing to supply debt capital to the sector in Europe: “Between five to 10 bank lenders are interested in the sector, around five insurers, all the investment banks, and most debt funds.”
One real estate lender, speaking anonymously, says life sciences is an interesting proposition, because it has a diverse occupier base and its properties typically benefit from long-dated, quality income streams.
The lender says the sector’s resilience during the pandemic just added to its appeal: “The relative lack of workforce disruption seen in the sector during the pandemic has been a positive in such difficult times. Life science assets’ rents have continued to be paid, employees continued to show up, and work continued to be performed.”
Aaron Knight, a director in JLL’s EMEA debt and structured finance team, also believes covid has increased lenders’ appetite for life sciences. He says a recent deal on which he advised, involving a prime UK life sciences facility, received as much lender interest as he would have expected for an equivalent sized office deal. He says demand is greater than deal supply for both investment and debt.
Knight explains that lenders consider the same criteria in a life sciences debt deal as they would in an office financing. Pricing, he says, is heavily dependent on the asset’s specification, location, tenant profile and weighted average unexpired lease term. “Generally, an investment loan of 55 percent loan-to-value is achievable across Europe, with leverage of 60 percent available for prime assets with longer-term leases to credible tenants,” he explains.
Not all life sciences assets attract equal lender attention, he adds. “The most liquid life science deals are likely to have longer dated leases to established entities. Assets with a high proportion of traditional office space versus specialist space will also generate more liquidity.”
Life sciences companies have specialised space requirements. Providing their real estate, and financing it, is therefore a specialist business.
Azadi says it is paramount that lenders understand how the space is used: “Historically, laboratory or life sciences space was thought of as a building where most space was for lab use. But today, with computing power, this can be as little as 20-30 percent of space, with the rest being used as offices, where experimentation is done by computer science and algorithms.”
Lenders also need to distinguish between sub-sectors, while being aware of the tenant profile and needs. The sector is broadly split between start-ups and big pharma backed companies. Although both need similar space, start-ups need flexibility while larger companies need long-term leases. Additionally, companies often cluster, as they recognise that locating close to other market participants brings productivity benefits.
Azadi says: “Lenders should ask themselves: ‘What is the space composition? What is the tenant use and activity? What type of life science cluster is the subject property located in?’”
Equally important for lenders to consider is the tenant composition of these assets, adds Bashir. “Many life sciences real estate assets are multi-tenanted and have a wide cross section of tenant mix – requiring a specialist level of knowledge to underwrite,” he says.
“It is key therefore that lenders in this space understand the asset class and underwrite covenant exposure accordingly.”