Illustrations by Kouzou Sakai, Folio Art
Arguably no global event since the Second World War has propelled rapid technological change like the coronavirus pandemic. Trends that were already gaining a foothold in remote working, e-commerce and biotech have accelerated, with consequences for many economic sectors – not least real estate.
Big global institutional investors have taken note. While traditional property asset classes like retail and offices have been blighted by coronavirus-era uncertainty, investors have flocked to emerging sectors where technological macro-trends have created growth and bolstered resilience.
The urgent search for a COVID-19 vaccine has drawn the gaze of the world upon life sciences – a broad category that incorporates fields including biotechnology, pharmaceuticals and environmental sciences. Investment has flowed in; according to the PitchBook database, global venture capital investment into life science totalled around $86bn in the year to 6 August 2021. That’s $23bn more than the total for 2019, and on track to surpass 2020’s record high of $96bn.
R&D funding has led to demand for lab, office and drug manufacturing space, which in turn has caught the attention of the property industry. “Over the past 18 months it has been incredible how much appetite there has been from real estate investors to get into the sector,” says Chris Walters MRICS, head of UK life sciences at JLL. “New entrants keep coming into the market, a lot of them big global capital sources that want to allocate large sums. The competition for assets coming to market is high.”
The US is the world’s most mature life science real estate market, with renowned clusters in San Francisco, San Diego, and Boston. Properties at Boston’s Kendall Square research district, sometimes called “the smartest square mile on the planet”, command premium rents and prices. The UK’s leading life sciences locations, Cambridge, Oxford and London, are starting to demonstrate similar performance, says Walters. “And because the UK is so competitive you will see a lot of investors looking to both established and emerging clusters in Europe as well.”
Finding property in which to invest is challenging, however. Clusters invariably form around large research institutes, universities and hospitals, where land is scarce and expensive. Meanwhile investors need to take a long-term view of the prospects of tenants, many of which are small firms that grow very quickly and lack the creditworthiness of established office occupiers. “As a landlord you need to be prepared to construct speculative multi-let buildings for lots of smaller requirements,” says Michael Aston MRICS, head of UK life sciences at Cushman & Wakefield.
Creating a new cluster also requires patient capital. When biotech company Merck Serono moved its operations to Germany in 2012, a group of private investors took control of its former HQ in Geneva. Since then, all the existing space has been let to life sciences tenants and academic researchers, and construction of 12,000m2 of new development is planned to begin in 2022.
“It took Kendall Square 30 years to reach where they are today. We are not starting from scratch, but we are at the beginning of the story,” admits Yves Perriraz MRICS, head of real estate at Campus Biotech. “To develop a successful ecosystem around life science research the key issues are building critical mass and creating the right balance between academics, start-ups and private firms. Sometimes you need to be less aggressive in your rental demands to attract an organisation which cannot pay huge rent, but will bring value to that ecosystem.”
“Over the past 18 months it has been incredible how much appetite there has been from real estate investors to get into the sector.” Chris Walters MRICS
All over the world, lockdowns have driven people indoors and onto their internet-connected devices, with a consequent explosion in the need for data centre server capacity. Meanwhile the advent of public cloud technology in recent years has meant that much online traffic has migrated from dedicated on-premises IT architectures to huge data centres operated by the ‘hyperscalers,’ foremost among which are tech giants
“We are one of three or four sectors that have hugely benefited from COVID-19 in business terms,” says Stephen Beard MRICS, head of EMEA and APAC data centres at Knight Frank. “The cloud providers have been triggering the options on back-up space that they take in the major tier-one markets in case of a spike in demand, so we have seen a rapid rise in take-up.”
As in life sciences, the US leads the way in data centres, with Europe lagging slightly behind. In established markets where power capacity is running low, the few viable sites that become available are commanding record prices, says Beard. And in future, Asia will provide an enormous opportunity for data centre investors: “If you look at the populations of the second-tier markets, the likes of Bangkok, Seoul and New Taipei have huge populations that will consume online services. They are also highly cash-free societies with all those transactions going through their phones, which creates a need for more data centres.” He also notes that ever-increasing connectivity is creating booming demand in Africa.
With sustainability rising to the top of the agenda for many investors, data centres’ insatiable thirst for power, principally for cooling, will present the biggest challenge for the industry over the next two decades, suggests Marcus de Minckwitz MRICS, head of EMEA industrial and logistics and leader of the data centre team at Savills. “There will be greater development in cooler climates, more renewable energy and offsetting, and new ways of storing and managing data like immersive cooling,” he predicts.
“There will be greater development in cooler climates, more renewable energy and offsetting, and new ways of storing and managing data like immersive cooling.” Marcus de Minckwitz MRICS
The increase in online activity provoked by stay-at-home policies also provided the rapidly expanding e-commerce sector with further impetus. United Nations Conference on Trade and Development (UNCTAD) figures indicate that more shoppers going digital increased e-commerce’s share of global retail trade from 14% in 2019 to about 17% in 2020.
Online retailers are processing more orders, while consumers are demanding shorter delivery times. However, in many locations close to big urban centres the supply of labour is finite and running short. Increasingly, for big e-commerce companies, the solution to that dilemma is to invest in robotics and automation. In 2018, Chinese online retailer JD.com announced that it had created a “zero labour” warehouse in Shanghai that processes 200,000 orders a day and employs just four human beings to tend the robots.
“In India and China there are a lot of top automation and robotics companies, and their own back yard is a natural test bed,” says Dr Michael de Jong-Douglas MRICS, senior managing director at Asian logistics platform ESR. “Labour is a factor, but there is not a complete correlation. Everyone is looking to make their operations that little bit extra-efficient to gain an edge. Health and safety is also a factor. Because of COVID-19, companies want fewer interactions between people and a healthier, more sanitised environment.”
Fully automated warehouses are still comparatively rare outside China, but technology is increasingly utilised to perform routine tasks such as bringing goods to pickers and packers. In Europe and the US, leading e-commerce retailers like Amazon and Zalando have shown themselves willing to invest large sums in giant buildings with automation arranged over multiple structural mezzanine floors.
For property investors all over the world, the growth of e-commerce has provided a rationale for expanding their logistics portfolios, and such properties have a strong appeal, notes Jonathan Compton MRICS, senior director, industrial and logistics intelligence at CBRE. “An occupier who invests in a lot of expensive automation will be taking a 20-year lease. From a valuation perspective, the security of a long lease – typically to a very high-quality covenant, probably with index-linked rental reviews – is highly attractive.”
Many global property managers now describe themselves as investors in ‘real assets’, a category that encompasses both infrastructure and real estate. Having become indispensable to our lives in the wake of the pandemic, life sciences property, data centres, and highly automated warehouses can be regarded as a hybrid of the two. The long-term, low risk returns they offer look set to propel them from nascent alternative asset classes to the centre of many institutional property portfolios.
“Because of COVID-19, companies want fewer interactions between people and a healthier, more sanitised environment” Dr Michael de Jong-Douglas MRICS