The Covid-19 pandemic may prove detrimental for several of London’s property sectors, with the acceleration of trends such as online shopping and working from home, but it has put life sciences firmly under the microscope for investors.
This year, life science-related firms headquartered in London raised £2.89bn of capital by September, 7% ahead of the £2.7bn raised over the entirety of 2019, research from Savills shows.
By mid-September the sector had acquired more than 64,000 sq ft of space across London, around 37,000 sq ft below the 100,980 sq ft total take-up for 2019, with the largest deal being done by DNA sequencing firm DNAe for more than 30,000 sq ft in White City.
“Covid has given [life sciences] an extra rocket boost,” says Sven Bunn, life sciences programme director at Barts Health NHS Trust.
“Demand for life sciences space has dramatically increased over the past eight months because of all the work into not just a vaccine but other potential treatments as well.”
This demand for space in London from life science businesses and the money piling into them endorses the view that it may prove to be one of the more resilient sectors and that the capital’s investors and developers should be studying it closely.
London calling
London has four life science-focused clusters emerging, with each forming around a research-focused university, hospital or institute (see map).
This is due to the new discoveries being made within London’s institutions, which are “leading to an upsurge in new start-up companies”, says Stanhope director Charles Walford.
In fact, 42% of the UK’s life science companies have been spun out from these academic institutions, according to an update on the government’s life science industrial strategy published earlier this year by Professor Sir John Bell, regius chair of medicine at the University of Oxford.
These companies, once established, tend to want to stay near to the institutions from which they have emerged. For example, DNAe was spun out of Imperial College London by Chris Toumazou, regius professor of engineering, and has chosen to remain close to it in White City.
Staying in London and close by their institutions enables these firms to be in the best position to recruit the top talent, as well as allowing access to London’s vast financial sector for funding.
Stephen Brindle, chief operating officer at Engitix, which in September agreed to move into 8,000 sq ft at Stanhope, Mitsui Fudosan and AIMCo’s White City Place development, explains: “The university network [in London] clearly makes a huge difference, and one of the things I really like about White City Place is its proximity to Imperial’s campus.
“London is all about access to an extraordinary network of people, with it being one of perhaps three truly global cities. It’s all about recruitment and accessing the very finest young minds.
“Young people in particular want to move to London because there’s a lot going on.”
The average age of Engitix’s employees is around 30 years old, and this also influenced the firm’s decision to locate in White City as the area provides access to the social scene required by its young workforce, Brindle says.
He adds that being in London also means having access to the city’s large teaching hospitals: “This is clearly also a competitive advantage. They are an invaluable source of brains and patients for clinical trials.”
Catching the eye of big pharma
London’s life science clusters have become so prominent that they are attracting the big pharmaceutical firms such as Novartis, which has relocated from Surrey to White City and also chose the capital for its UK Biome hub. The hub looks to support entrepreneurs and start-ups to help turn innovations into real solutions.
“By moving our UK headquarters to White City, which was already home to several pioneering life sciences companies at the forefront of innovation, we positioned ourselves closer to the digital healthcare community and many of our customers and stakeholders, including discovery partners like Imperial College London,” a spokesperson for Novartis UK explains.
“It’s not surprising that other pharmaceutical companies are making similar moves, as a thriving life sciences ecosystem is developing in London, providing opportunity like never before for everyone to work more closely together.
“This flourishing ecosystem allows access to a growing talent pool and is also seeing fast-growing numbers of new life sciences start-ups.”
However, London is not without its challenges for the sector. Brindle admits it took Engitix a long time to find itself a new base in the capital because of the limited options available, particularly for companies needing laboratories.
There is a potential pipeline of life science-dedicated space in emerging clusters in Whitechapel and the South Bank, but a lot of it is still years away from being built, and much of it still without planning consent.
Greater costs
Bunn believes the lack of purpose-built life science space in London is a result of the high upfront costs involved in creating it, which has meant the property market has previously been “a little bit sceptical” about developing specifically for the sector.
He adds that the short-term nature of life science tenancies, with many firms unprofitable for long periods and then upscaling quickly, is also off-putting for developers and investors.
However, he notes that if investors are willing to take a 10- or 15-year view then the viability of life science developments increases, as has been proven in the US.
Walford adds that in Boston in the US, which has one of the most sophisticated knowledge clusters in the world at Kendall Square, “there is evidence of a premium to office rents, reflecting the increased costs”.
But the immaturity of the London market for life sciences – with no open transactional evidence of rental return or risk – is a challenge, particularly with competition for land from other sectors, he admits.
Repurposing office buildings is also not necessarily an option, Walford says, as life science buildings generally need increased floor-to-ceiling heights to accommodate additional infrastructure such as ventilation and an increased power need, making adaptation complicated.
As Matt Soules, director in the building and project consultancy team and head of Savills’ life science group, warns, “Thorough initial appraisals are needed to understand the viability of potential lab conversion projects.”
And getting such a refurbishment wrong can prove costly. One person associated with development in the sector explained how a company in the US which was converting an office building to a life science-enabled property saw its budget balloon to more than $500 (£385) per sq ft.
According to Savills, the average rent for White City is around £48 per sq ft in new buildings, while in SW1 it is £57.50 per sq ft, although in W1 one pharma company agreed to pay £100 per sq ft last year.
Even so, a lot of investors and developers are now considering getting involved in the sector in London, Bunn says.
Oliver Fursdon, head of London commercial development at Savills, agrees. “London has enormous potential to show significant growth in the delivery of life science real estate,” he says. “There is a lot of current investor and landlord focus on how best to unlock this from a technical and occupier demand profile perspective.”
Dr Glenn Crocker, head of life sciences at JLL, adds: “There has been a significant uptick in investors looking at this sector, initially commissioning work to obtain a greater understanding but then starting to actively pursue opportunities.
“This interest started well before Covid, but the pandemic has accelerated it as the profile of the life science sector has been raised and companies have proved to be very resilient to the economic downturn.
“Interest is coming from UK, European, US and Asian investors, who are all interested in the UK life science market because it is probably the most developed outside the US.”
What [life sciences] has got over other sectors is that it requires physical facilities. From a property point of view, it’s going to be quite resilient to the changes being brought about by Covid
Sven Bunn, Barts Health NHS Trust
London’s future as a life science hub
This interest from investors in developing life science property in London includes US-based life science developers such as IQHQ, which is actively looking to enter the London market, and Blackstone-owned BioMed Realty, which was last year exploring a possible move into the capital, having already established itself in Cambridge.
Last year, Colleen O’Connor, then senior director of east coast and UK markets (now vice president of leasing, east coast and UK markets) at BioMed Realty, told EG: “We are currently the largest life science provider in the UK, and having London as a base would be a natural progression; it is just a matter of finding a site. We always love to find opportunities to convert spaces.”
The business declined to provide an update on its plans.
Both Bunn and Brindle believe that, although London’s life sciences sector will grow to be a meaningful component of the capital’s economy, it is unlikely to rival the capital’s vast financial services sector any time soon.
“But what it has got over other sectors is that it requires physical facilities,” Bunn says. “It needs labs and for people to come in. From a property point of view, it’s going to be quite resilient to the changes being brought about by Covid.”
He adds that London’s emerging life sciences sector has a way to go before it rivals market-leading cities such as Boston.
“In London we don’t have the manufacturing and wider infrastructure. That’s probably a longer way off,” he says. “If you look at Boston, it has taken 20 to 25 years to get to where they are in terms of life sciences, and we’ve probably got another 25 years to go until we get to that kind of scale.”
London lagging behind places such as Boston stems partly from stigma around the commercialisation of new discoveries and innovation within the life sciences sector in the UK.
But as universities, research institutes and hospitals have faced funding shortfalls and face further financial uncertainties they are opening up more and more to engage with new sources of funding.
“Obviously, capitalising on the innovation that is being created is a good way of doing that,” Bunn says.
“Universities will be doing more of that, and certainly we’re looking at trying to support that process and our academics to be able to do that more easily.”
The future, he hopes, may see “some coming together” between London’s life science clusters.
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