Lenders need to study the life sciences sector before experimenting in it

Understanding the various sub-sectors and how different tenants use their space is critical for debt providers as they underwrite properties in this in-demand sector.

According to Real Estate Capital’s debt advisory sources, when sponsors need finance for life sciences properties, a wide array of lenders are keen to provide it.

Life sciences real estate is a prime example of a niche sector increasingly viewed by debt providers as a strong long-term prospect. As one advisor told us, the number of lenders willing to provide quotes for loans against such properties is growing, and includes investment banks, commercial banks, insurers and debt funds. Another said some mainstream lenders are now making formal lending allocations to the sector within their annual budgets.

Covid-19 has put the sector under the spotlight, but equity investors’ interest has been growing for several years, on the back of impressive tenant demand and favourable long-term demographic tailwinds. Data from consultancy JLL show the volume of life sciences real estate transactions increased 166 percent in the past three years in the UK alone.

Where equity investors have led, lenders have followed. One told us the sector’s resilience during the pandemic strengthened his organisation’s resolve to provide finance. In an insight piece to be published on recapitalnews.com on 22 February and in our spring print edition on 1 March, we explore what lenders need to know to navigate the life sciences sector effectively. Here are four factors for them to consider.

There are several types of end-user:

The ‘life sciences’ tag covers a broad range of company types, with different growth characteristics and real estate needs. Health tech and pharma tech companies use artificial intelligence and machine learning to develop new treatments or deliver healthcare, using offices with high energy and data capacity. Medical technology companies, which develop products such as pacemakers, operate like engineering businesses, with workshop and ‘dry lab’ space. Then there are biotech companies, which need ‘wet labs’ to undertake chemistry-based research. When underwriting life sciences real estate, it is essential for lenders to understand how the occupier uses it.

The mix of uses is crucial:

Depending on the use of the property, life sciences buildings typically feature a mix of office, lab and specialist space. It is paramount that lenders understand how the asset is divided between uses. As Aaron Knight, director in JLL’s debt and structured finance division explained, those assets with a higher proportion of traditional office space versus specialist space are considered more liquid assets. Specialist space, he explained, is more difficult for lenders to underwrite, given it can be subject to shorter lease structures because the use of the space is linked to a specific research project.

Covenant strength varies:

Life sciences companies range from pharmaceutical giants to start-ups. Some companies want the space to foster innovation, research or incubation – purposes which can often run counter to what the lending market is keen to finance, according to Knight. Unsurprisingly, lenders tend to be more willing to underwrite properties that feature longer-term leases to established entities, rather than shorter-term leases to start-ups. However, lenders willing to do thorough diligence on the users of their prospective collateral may find opportunities to back the industry’s rising stars.

The industry tends to cluster:

Another key consideration is asset location. According to Knight, life sciences clusters arise for a variety of reasons, including companies locating close to key universities, due to national strategies or to be close to a particular audience. Debt providers should look for opportunities in identified nodes.

Overall, lenders seeking to capitalise on the financing opportunities this booming sector is offering will need to thoroughly study its peculiarities. It might prove to be a successful experiment.