This article is sponsored by DNE Group
Late last year, Chinese real estate investment managers D&J and New Ease merged to form a new economy infrastructure developer and operator for the domestic market. This entity is DNE Group, led by Sun Dongping, founder of both D&J and New Ease.
Since its creation, DNE has focused its efforts on four major pillars: logistics and cold chains, modern manufacturing and life sciences parks, urban redevelopment and internet data centers (IDC). The company has quickly become one of the largest third-party independent operators of facilities and business parks in the life sciences market.
DNE currently has around $15 billion in assets under management and a gross floor area in excess of 12 million square meters across multiple verticals. Sun and Keaton Yu, DNE’s senior vice-president for capital and fund management, spoke with PERE about the growing life sciences market in China and how the company strives to add value for its investors.
The life sciences sector in China has been growing faster than the economy as a whole recently. What is driving this growth?
Sun Dongping: In the life sciences market there are currently a few main growth drivers. On a fundamental level, the economic growth experienced over the past decades coupled with significant population size results in substantial growth in consumer spending power – particularly from the middle class. And this is taking place at a higher scale than in other countries around the world. The growth in middle-class spending power is driving an emphasis on improving health and well-being, which in turn drives the advancement of the health sector’s goods and services in the country.
Another undeniable factor is the covid-19 pandemic. The global impact of the virus’s spread has caused countries all over the world to heighten their focus on protecting personal health. For China, given its population density, this has translated to an even greater level of awareness and importance.
Historically, the scope of service in China’s health sector concentrated on primary and acute services. While other offerings such as rehabilitation and research and development have lagged developed nations, these segments have seen significant investment and development over the past 10 years, bridging the gap to the international level. This provides a serious opportunity for investors exploring this space.
Keaton Yu: Looking at the specific segments within life sciences that are generating the most investor attention, a number of areas stand out. The first is research into vaccination and its related medical equipment. This is a trend we are seeing across the globe, and one that has both upstream and downstream effects in terms of research, equipment, services and deployment.
The second focus area – which was important even prior to covid-19 – concerns intelligent medical services. This includes medical data management, remote treatment technologies and health monitoring devices. This is a major segment within life sciences where we have seen a lot of investment recently.
Another important area is rehabilitation treatment and associated technologies. New innovative treatment methodologies, medications and equipment are all segments that are witnessing growing investor appetite.
What opportunities do life sciences parks in China present to investors?
SDP: Life sciences parks in China are providing attractive returns to investors. From the demand side, R&D expenditure in China is growing and has been for the past 10 years, which results in greater demand for spaces like life sciences parks. The sector is also transitioning away from legacy, low-quality product offerings to a higher standard of international product requirements.
On the supply side, there is a high barrier to entry due to limited land supply in premium locations and very strict government regulations around Environmental Impact Assessments. For our investors, once they have gained exposure to this sector, these high barriers to entry combined with the strong growth in demand will deliver attractive returns.
KY: These opportunities are presenting themselves in most cities across China, but Tier 1, high-population cities are the life sciences hotspots. In these larger cities, you generally see higher levels of consumer spending and education, and a larger pool of skilled talents. For life sciences companies, you need to be able to source and retain top talent. We are seeing investment and operations coalesce around life sciences parks in major cities like Beijing, Shanghai, Guangzhou and Suzhou.
How does the investment landscape surrounding the life sciences sector in China compare with global developments?
KY: Looking specifically at the life sciences sector in China, investment predominantly has a domestic origin, whether that be government entities or local pharmaceutical companies. However, there is a large array of international players in the Chinese market including both MNCs and capital investors. In terms of supporting infrastructure such as life sciences business parks, the investment opportunities are actively pursued by both domestic and international investors.
SDP: No discussion of the global life sciences market would be complete without looking at the impact that covid has had on investment. It is clear that the pandemic has had a major effect on the healthcare industry globally – and this is certainly the case in China, too. This has driven rapid growth in healthcare investment, and in the life sciences sector in particular, to develop aspects including vaccination, innovative treatments, new equipment and service delivery.
Looking just at vaccination, the scale of immunization required to get the domestic population to, say, a 60 or 70 percent vaccination rate is much greater than for any other country in the world. When you consider that each individual will generally have two or three injections, with subsequent booster vaccines, the supply chain management for manufacturing and research alone are enormous. This has driven investment throughout the entire vaccination supply chain.
Innovation in life sciences can be seen elsewhere, too, and is a tangible driver of new value creation. If you look at self-testing kits for covid-19, for example, the ability to miniaturize this technology and make it accessible to such a large populace is just one recent example of the sort of growth that has been visible recently in China and elsewhere.
How does DNE deliver investment value creation around China’s life sciences parks?
KY: As an early mover in the life sciences market in China, DNE is in a unique position to provide investment opportunities to our investors. Traditionally, the operators looking after this segment have been state-owned enterprises (SOEs) and local operators; institutional investors had a limited channel to access this segment.
DNE broke the mold by becoming one of the first independent investors and operators of life sciences parks in the country, differentiating itself by innovating real estate solutions, building connectivity with customers and building a strategy to help enterprises optimize operating cost. Our first-mover advantage with proven track record is very important for investors looking to enter this market.
And life sciences parks are not just real estate, but operating businesses. DNE offers investors the rare benefits that come with being a third-party independent operator veteran. We deliver value through operational excellence and development ecosystem. We provide turnkey solutions including site selection, land sourcing and an in-house design team to meet the wide variance of requirements as necessitated by tenants. The construction team ensures on-time and within-budget delivery, while our leasing team anchor and retain top-tier tenants, growing the overall return profile.
DNE has also established a private equity investment platform with a focus on life sciences investment to create value and bring synergies for life sciences enterprises.
Finally, we have an end-to-end capital management cycle that allows us to exit a project on behalf of our investors to realize optimal value. Our global institutional investors that have invested with us trust in our ability to deliver results.
What do you think the future holds for the life sciences sector in China – particularly for investors?
SDP: From a macro perspective, we believe that the growth of life sciences in China will be substantial over the next 10 years. Currently, consumer spending per capita on health-related services is significantly behind developed countries. The trend is increasing expenditure in this segment driven by growing demand for improved personal health.
For life sciences parks, we think this will be one of the fastest-growing, if not the fastest-growing, segment in China real estate. Demand is strong but supply is scarce, providing a solid thesis for investment in this segment.
Science in the city
Shanghai is fast becoming a hub for the industry
Shanghai, China’s biggest city, is becoming well known as a hotspot for biomedical innovation in the country. According to CBRE, it is already home to almost 100,000 enterprises in the life sciences and pharmaceutical sectors, with many choosing to base themselves in the city’s Zhangjiang district, which has established a reputation as a focal point for cutting-edge research in software, semiconductors, information technology and life sciences.
DNE Group has recently formed a joint venture with a global institutional investor to pursue opportunities in life sciences parks located in top-tier cities throughout China, with the seed project including a high-spec core life sciences park located in Shanghai Zhangjiang Science City. In particular, the proximity of Zhangjiang Science City to major universities like ShanghaiTech University and Donghua University is helping companies acquire the kind of R&D talent that delivers significant growth for pharmaceutical firms – and sizable returns for their investors.