Preliminary return-to-work success continues to wane as new variants of Covid-19 emerge, making a massive return to work more unlikely, while the retail sector takes a heavy hit from e-commerce and… expansion of home delivery services.
Despite the outlook, a number of real estate sectors give cause for optimism, including life science real estate.
While the market is already experiencing strong demand conditions attributed to an aging population, increased healthcare spending and enthusiastic venture capital investments, the onset of the pandemic has only accelerated this growth.
The rapid development of several effective vaccines against Covid-19 led to a significant capital increase focusing on the life sciences office sector.
Research and development of life-saving drugs, as well as increased testing and treatment to fight Covid-19, have also pushed occupancy levels up.
As the task of tackling unresolved complex human diseases has a long track, investors are confident that the growth momentum of the life sciences sector is set to continue in a post COVID-19 world.
Scientific innovation is increasingly approached using talent from both technology and medical science, often clustered in knowledge-based markets such as Boston, San Francisco, San Diego and Seattle.
In addition, continued demand from crucial cancer, gene therapy and immunology research continues to provide sustained demand as part of industry-focused real estate investment trust (REIT) expansion efforts.
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One of the pioneers in this space is US-listed Alexandria – a leading owner and developer and the only pure listed REIT focused on this sector.
Alexandria provides office, lab and workspace to high quality and diverse tenants such as Pfizer, Moderna and Merck, and with the dimming of Covid-19 these businesses have experienced exceptionally favorable conditions.
Alexandria represents a prime example of an attractive investment opportunity in a diversified sub-sector within the global listed market.
Given the current environment of low debt, access to capital and strong balance sheets, Alexandria offers investors liquidity and a resilient return profile.
As a result, it has achieved the three outcomes that define a great company: superior results, distinctive impact, and enduring endurance.
As a mission-driven company dedicated to making a positive and lasting impact on the world, ESG is at the heart of Alexandria’s DNA.
Its longstanding ESG efforts have benefited their tenants, employees and communities, as well as preserving and enhancing shareholder value over the long term.
Alexandria’s core business is to create sustainable, collaborative campuses for life sciences, agtech and technology that enable the translation of scientific discoveries into new treatments and cures for patients.
In addition, it invests in promising companies that pursue the development of new therapies and technologies that will significantly improve human health, as well as supports and revitalizes the communities in which it builds and operates.
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The future of life sciences
The life sciences institutional real estate universe is expected to double in size over the next decade, from $73 billion (2020) to $165 billion by 2030.
As a result, investors will have ample opportunity to expand allocations to industry, particularly in the development area.
The industry thrives on strong demand, and while the current market environment is facilitating its expansion, there are a variety of factors that need to be considered.
One of the most significant elements is the increase in the market rent inside the research poles, which is a component of relative value that should be understood.
Often, life science cap rates are on par with or a little tighter than comparable quality office cap rates, indicating higher contracted rent increases as well as expectations of greater rent growth of the market.
However, higher rental growth is to be expected as occupants of life science spaces rely on the growing importance of life science developments, which has ensured co-location close to research institutes and healthcare where companies have access to patients and partners.
This will create reverberation from surrounding markets, leading to increased rents in and around high-level development areas.
Life sciences real estate gives investors a competitive advantage through financing, innovation and access to talent, making it more than an operational choice for life sciences companies.
With favorable demand, the life sciences industry can be a viable alternative property type for investors and, with the allocation of capital to the sector alongside an experienced life sciences operator, has the potential to deliver positive risk-adjusted returns.
Julian Campbell-Wood is portfolio manager of the Nedgroup Investments Global Property fund