CBC: Demographics drive China life sciences

This article is sponsored by CBC Healthcare Infrastructure Platform.

China’s life sciences industry is growing as the nation – like many developed economies – deals with a rapidly aging population. This demographic change spurred Asia’s largest dedicated healthcare investment group, CBC Group, to set up CBC Healthcare Infrastructure Platform in 2020, which is now the largest independent and specialized life sciences real asset platform in China with 56 professionals providing integrated real estate solutions for life sciences tenants.

Hans Kang, chief executive of CBC Healthcare Infrastructure Platform, explains what is driving the growth of the life sciences real estate market in China, its unique characteristics and the cities where the sector is most likely to thrive in the future.

How is life sciences real estate defined in China and what are its characteristics?

There are stringent standards for life sciences real estate. For land to be used for life sciences real estate it must be zoned for industrial or R&D use and buildings must have an environmental impact assessment (EIA) permit for life sciences work to be carried out there. This requires higher ceilings, greater floor loads and increased power supply than standard industrial parks.

The tenants are very similar in type to those in life sciences real estate around the world. For example, around half our tenants are biotech and pharmaceutical companies, then 30 to 35 percent are developing medical devices and technologies and the remaining 10 to 15 percent will be on the healthcare services side. There is a mix of domestic and international tenants but I think domestic companies will grow in importance in the future.

There is a mix of listed, pre-IPO and early-stage companies in the market. We are mainly targeting more mature companies but will also allocate some incubator space for early-stage companies as these can be our future large tenants.

What factors are driving the life sciences real estate market in China?

Although the pandemic brought a lot of attention to the sector, growth in the life sciences industry is driven by global mega-trends, the most fundamental of which is the aging population. China today has around 250 million people aged over 60 and in 10 years’ time that number is set to rise to 400 million, more than the entire population of the US.
People are living longer but requiring more care as most of them get older with chronic diseases. That is why we decided to focus on the sector, because this demand from an aging population is certain.

There is also a strong and growing capital market in the life sciences industry, thanks to the confluence of private and public market capital flows in the past eight to nine years, and supportive government policies.

Our research shows a current undersupply of life sciences real estate in key markets and we also expect demand from tenants to outstrip supply over the next few years, particularly quality life sciences real estate.

How keen are investors on this sector, what returns does it offer them?

Life sciences real estate is a way for real asset investors to participate in the growing healthcare market in China, which is the second largest at the moment, and will be the largest in the world in a decade or so. Otherwise, you need to invest in traditional private equity or venture capital funds to gain exposure to this sector.

We were pleased to get support from APG as our first investor; it has already invested in the US life sciences real estate market for some time and is one of the largest investors globally, so had been looking for a platform in Asia.

While there is some caution due to the “noise” of geopolitics, we are seeing keen interest from other overseas investors in Asia and the Middle East, because they understand the underlying drivers of the market and are looking for long-term thematic and programmatic investments.

“Growth in the life sciences industry is driven by global mega-trends, the most fundamental of which is the aging population”

We are now in the process of setting up an RMB core fund for income-generating assets, which we believe will appeal to domestic insurance companies, because they actually understand the life sciences industry pretty well, given their main business is insurance. As in the logistics real estate sector a few years back, we have seen a lot of domestic investors showing strong interest in this sector.

In terms of return profile, because the sector is at an early stage, there are decent returns available. It is like when people started investing in logistics in China, more than 10 years ago. We are looking at a high single-digit percent yield on cost for developments and typically underwrite a deal at over 20 percent IRR after leverage.

How does the occupational market differ from conventional industrial or office space?

Life sciences tenants tend to want to have the best possible space to work in for high productivity and are not too sensitive about rents, as occupational costs are such a small part of their overall business expenses, with the exception of some early-stage companies. Lease lengths are around three to five years for R&D companies and eight to 10 years for manufacturers.

Tenants also tend to be sticky as they typically invest a lot of money into the fit out of their spaces. We had one tenant that invested 700 million yuan ($98 million; €88 million) into the fit out of 269,000 square feet of life sciences space, for example. We only provide the core and shell of the building, but we do also offer one-stop advisory services for fit out, including engineering design, clean room design, GMP validation and so on, to help to improve the operation efficiency for our tenants.

Which cities and regions are most attractive and are life sciences clusters developing?

We spent about five months, together with a healthcare specialist consultant, doing a market study to determine where the leading life sciences industry cities in China will be. The top three markets were Shanghai, Beijing and Suzhou, because these are the cities where you have most and best quality life sciences companies.

These three cities have good universities providing the talent the industry needs. They have a dynamic private equity and venture capital business and also have a lot of good hospitals, which are resources for clinical trials. They also have regulatory authorities that can approve the new drugs or medical devices.

Finally, these cities offer a good lifestyle, which is important for attracting and retaining talented staff. That is why our first four projects are in these three cities.

We are seeing clusters developing in these cities in a similar way to how they developed in Boston, San Francisco and San Diego in the US. It is not happening everywhere, although a number of cities are allocating zoning for future life sciences development.

In the future, we also see potential in Guangzhou and Hangzhou and in the big western and central China cities of Chengdu and Wuhan. A growing life sciences company in Shanghai, for example, will look to Chengdu as a base for expanding its business into western China. Similarly, Wuhan is a base to serve around 200 million people in central China.

What strategies are best suited to investing in life sciences real estate?

For the time being our main focus will be greenfield development projects, sale and leaseback and build-to-suit. We are very cautious about converting existing industrial buildings into life sciences assets, because getting an EIA permit is not straightforward.

It is not impossible and we certainly do not rule out the opportunity, but you need to have solid reasons for converting a building into life sciences use. For example, you would have to prove that you can bring in life sciences companies to the area. And also there is a limited number of industrial buildings which meet the correct specification or which can be converted easily.

What trends in the life sciences sector in China and Asia are important for real estate investors?

We are very passionate about this sector because we see it as the next big thematic real estate opportunity in China, after logistics and data centers. The fundamental reason is the underlying industry is growing and its potential is big due to the increasing aging population.

We are cautiously optimistic about the growth of the life sciences industry elsewhere in Asia because there are other nations – such as Japan and South Korea – with large aging populations. Our private equity and private credit businesses have already invested in a number of other markets in the region so these would be the natural opportunity for us to build a scalable and sustainable businesses across the region.

What is the role of the government in the market and how does this affect real estate investors?

For the Chinese government, life sciences is one of the top three favorite industries, so there are tailwinds from supportive policy at the national and local level. There is an opportunity to work closely with the government to help it develop the life sciences industry. Supportive government policies will nurture sustainable growth of domestic and international life science companies.

Good relationships with life sciences companies will help in securing land with local government. Sites can be obtained at a lower cost if the government believes you can help to build a life sciences ecosystem and bring high-quality companies to the city, that can potentially generate positive long-term economic and social impacts, such as job creation and tax contributions.