Life sciences real estate investment in Asia is shifting focus

Private equity real estate’s pivot to R&D has been a much more recent trend in the region compared with the West, as two high-profile investments show.

Life sciences is fast becoming one of the hottest property sectors in Asia-Pacific. A rapidly expanding middle class and vast population has prompted governments in the region to introduce policies driving the expansion of both domestic and international pharmaceutical firms. Asia-Pacific-based companies accounted for 28 percent of listed life sciences firms’ global revenue as of last year, according to a 2021 CBRE report.

Unlike the West, life science investment in the region has traditionally prioritized office properties for sales and industrial assets for the manufacturing of vaccines and other pharmaceutical products, rather than research and development facilities used for innovation. Case in point: six out of 11 life sciences real estate investment transactions in Asia-Pacific between Q3 2019 and Q1 2021 had an office component, compared with just three for R&D.

This dynamic is starting to change. The region has seen two high-profile allocations to R&D-oriented life science real estate in the past two weeks. This week, UK private equity firm Actis unveiled plans to invest over $700 million to develop life sciences realty assets in India with a focus on R&D labs and associated facilities. This follows Dutch pension fund manager PGGM’s launch of a $720 million joint venture last week with Australian real estate group Lendlease to invest in innovation and life sciences properties across Australia, Japan and Singapore.

These changing appetites are underpinned by a growing desire among Asia-Pacific governments to catch up with their Western peers by supporting the development of R&D facilities in the region – a trend accelerated by the pandemic. Such support includes not only funding for life sciences companies but also helping to provide facilities for these firms, such as those at Biopolis in Singapore and the Science Park in Hong Kong.

Indeed, innovation-oriented properties in Asia-Pacific have proliferated in recent years. CBRE data shows that the total leasable area suitable for accommodating R&D and life sciences related facilities in Asia-Pacific amounted to over 100 million square feet at the end of 2020, with mainland China, India and Singapore possessing the largest quantum of space.

Meanwhile, although domestic life science companies continue to show a strong appetite for corporate office expansion, many of their international counterparts, particularly those involved in recent M&A activity, are consolidating sales offices for efficiency and cost reasons.

Challenges, however, remain in Asia-Pacific’s comparatively nascent life sciences markets. Life sciences properties are not always commercially viable, since government subsidies for the sector can result in facilities leased or lands sold at below market value. Investors might also find limited buying opportunities as many of the R&D facilities in the region are purpose-built and owned by universities, government institutes or end users. Concerns over the covenant strength of smaller life science companies may also hinder dealflow.

Despite these obstacles, there are still ways to access the sector, including through sale leasebacks, conversions of older industrial properties and partnerships with local authorities. And investment activity in R&D facilities is picking up, as recent deals demonstrate. Evidently, the significant growth potential in Asia-Pacific life sciences real estate is keeping investors bullish on the regional sector.