Talking Property | A New Era of Life Sciences Growth

Featuring Henry Chin, Mark Coster & David Keenan
Thursday 12 August 2021

HC 
Hello and welcome to Talking Property with CBRE. A podcast in which our teams of experts share their commercial real estate insight.  

My name is Henry Chin, Global Head of Investor Thought Leadership and Head of Research for Asia Pacific and I’m your host for today’s episode.   

Over the next 20 to 30 minutes, we will be putting the spotlight on Asia Pacific Life Sciences, real estate, focusing on key trends, demand drivers, corporate real estate strategies and investment opportunities in major life sciences hubs across the region.  

I am delighted to be joined by Mark Coster, Head of Capital Markets for Pacific, and David Keenan, National Director of Science and Research in Australia, to explore the latest trends in the Pacific region.  

Gents, thank you both for joining me. 

MC 
You’re welcome Henry.  

DK 
Thank you very much, Henry. Very much looking forward to this. 

HC 
Excellent. I think before we dive in, I would like to provide the snapshot of demand drivers and occupier strategies we are seeing in this sector.  

According to CBRE’s new research report, ‘The New Era of Life Science Growth’, the life sciences industry in our region holds massive growth potential due to the regions large ageing populations, low health expenditures and lagging pharmaceutical productions. Supportive government policies are fuelling the growth of domestic pharmaceutical companies and enabling the expansion of international companies seeking to establish a headquarters in our region. This increase in support is also helping the region to catching up with the US and Europe, particularly to R&D capabilities.  

So what are we seeing on the ground in terms of corporate real estate strategies? Life sciences real estate portfolios typically have four major categories, which I will briefly walk you through now.  

First, we have corporate offices where occupiers are trying to optimise their portfolios to capturing the current leasing market weakness. The second important components is R&D labs. Many homegrown companies are expanding their R&D capacities by leveraging governments supportive policies in these sectors. Next, we have logistic and cold storage facilities where the main focus for occupiers is to enhance their network and the last mile distribution. Lastly, manufacturing plant. The key occupier strategy here is to scale up productivity and new facilities, especially in mainland China, Japan, Australia and Korea. So, David, let me turn to you for the Pacific perspective. 

We understand both Melbourne and Sydney are home to over 15 million square footage of life sciences facilities. Parkville and Macquarie Park are examples where many global leading companies are located, such as Novatis and Johnson and Johnson. What do you see on the ground regarding to Pacific occupier strategies and activities within the life sciences sector?  

DK 
Thank you, Henry. I think for some of our listeners, I should also acknowledge it isn't just Sydney and Melbourne where we're seeing this growth. It is Australia wide but definitely Sydney and Melbourne are powerhouses right now, they have very strong movements nationally when it comes to life sciences. As you touched on, there's been a significant push from government to be more self-sufficient to reduce reliance on international supply chains so accordingly that's proven to be a great catalyst on the ground and we're seeing the market react to that. We're seeing a range of interests from across manufacturing and industrial for the largest scale manufacturing sites and distribution centres, which you noted, plus the R&D end of the spectrum, particularly with a focus on vaccine development and therapeutics and certainly that's an area of keen interest for me. We should note that Australia is well positioned with regards to top tier research through our amazing university and research sector, which locally does create an opportunity for the commercialisation novel discovery development. There's certainly a lot of growth in this area to harness.  

HC: 
Yeah, interesting. Thank you so much, David. Definitely we're talking about Australia, well beyond Sydney and well beyond Melbourne and there’s quite a lot of classes are forming up in Australia, but also we have heard that there's a huge occupier demand across the region.  

So the next burning question is that how does this list of translate into opportunities for investment? I think first of all, let's talk about globally. I think globally life science, investment account for around 4% of global commercial transaction volume last year. The US has been leading the way, with Boston and San Francisco emerging as a major market, and the U. S cap rate is currently trading around 4 to 4.5% and Asia Pacific is lagging behind. In 2020 life sciences investment across the region was only 700 million, which is less than 1% of the Asia Pacific total but Australia is leading. However, with a spray of a second wave of COVID-19 Delta variant governments are focusing on the R&D capabilities, especially on the vaccine development and productions. We have seen many public private partnerships form to create more life sciences of facilities across the region, and many investors are looking for life sciences investment. We expect to see a considerable growth and the projection from CBRE is a growth from the $700 million to around $3 billion in the medium term.  

So Mark, can you talk to us? What key trends you are saying in Australia, particularly on the logistic sectors? How has the COVID impacted life sciences related investment? Australia is really one of leading markets in the region.  

MC 
Yeah, thanks, Henry. I think life sciences was always a real interest even before COVID so leading into the end of 2019, there was a huge amount of interest in that life sciences sector and you know, as we were entering into 2020 many of our clients were really looking closely at their strategies around life sciences and then obviously with COVID hitting, that becomes an even more interesting space to get into as demand from Pharma increases both from an R&D sector as you rightly pointed out but also the logistics sector and an ability to shift product around the country. So logistics being one of the most popular assets or the most popular asset class globally and certainly in Australia as well, there's a huge amount of capital for it, and it's playing out that way as our clients look food, deploy more and more capital specifically in logistics for Pharma based activity or life sciences activity. The other part, that's quite interesting is that impact on demand for cold storage and how that plays out from a lifestyle perspective. And again, that's an asset class that's become increasingly accepted and highly sought after from our clients from an investment perspective and increased again in terms of how cold storage plays an increasingly important, part in logistics surrounding life sciences and pharmaceuticals in particular, especially as we sit here looking at vaccines around COVID and the importance of cold storage and that supply chain. 

HC 
Excellent Mark, funnily enough when I was talking to the client that everyone's talking about logistic and the cold storages for sure, Australia and Pacific is really, really high on the investments radar. Then, you know, within Asia Pacific, we do believe we are still in the initial stage of development as investment asset classes for life sciences. However, we do expect more assets come into the market in the coming years in the form of a sale & leaseback deals as a pharmaceutical companies to recycle capital for R&D deals. So what investment opportunities are you seeing in Australia? Particularly Sydney, Melbourne also those major hubs, Mark? 

MC 
Yeah, it's a good point, Henry. There is an increasing amount of sale and lease back activity, particularly in Australia. So we've seen some of the largest life sciences companies, GSK being example looking at disposing of property. Not so much in a sale and leaseback scenario there. But, interestingly, demand from tenants looking to enter that real estate post the purchase from institutional clients in Australia was really strong sale and lease back activity because of the nature of the way in which assets are held in Australian transparency in the market is a really good way for occupiers to realise value in those assets.  

We're seeing more and more occupiers choose to go down that path. We expect to see continued amounts of private equity play in that life sciences space which we think will encourage further sale and lease back activity as well. I think the other interesting part about that sale and lease back activity is that as the market matures and we start to see increasing amounts of activity in less traditional ways of realising value, so I'm thinking things like creditor leases or synthetic leases, which we've seen a lot of in America and increasingly in Europe and into the future in Australia as well. So it's a really, really exciting part of the market, and one that we have a number of our team now looking to specialise in because our clients, from an occupier perspective and from an investment perspective, are really asking that all of us. 

HC 
Yeah, this is so much interesting to looking into this life sciences related product, and then will you be able to tell us a little bit more? Why is there so much capital to look for the life sciences? What makes it such an attractive investment mark? 

MC 
The first thing is, it's such a an important part of what we're talking about on a daily basis and there is so much, you know, you pointed out before that government support David did as well around the industry and the R&D. So you've got, on one hand genuine, almost global government support around life sciences and investment in R&D, and not just in COVID that so many areas of health then you've got the need for physical investment into the assets, which ultimately often tends to develop longer leases. So you've got core assets with high tenant credit ratings, often high quality assets built for long term occupation of the tenant or the occupier, creating this sort of perfect storm around core income, core investment opportunities, which is a lot of what the investment community is sort of targeting in Australia at the moment, in fact, globally. So it's that perfect storm of high quality occupier high quality tenant, high quality real estate, often in government backed environments or government backed locations, industries that investors, both GP’s and LP’s are really looking closely at and wanting to get set in and deploy capital. 

HC 
So Mark, when I was looking at a transacted cap rates in the US in Boston and San Francisco two major life sciences hub. The assets are trading around 4 to 4.5% cap. So you know what’s the cap rate in Australia? 

MC 
We would be at that level or below that level. So the US market at the moment I mean in many cases, say proper logistics is trading it on long leases, at least at a slightly off the right to Australia and if you get a long lease and you know Sydney and Melbourne being the markets were sort of focusing on in this discussion. But even beyond that in the other markets assuming borders are open and sort of free flow of capital, I'd expect life sciences assets on longer leases to have a three in front of it in terms of a cap rate. Very, very popular investment class at the moment. 

HC 
Wow, It's interesting, Mark. Earlier, we're just talking about the trends in logistic and how much capital are tracing for life sciences related products in Pacific. I'd like to get your thoughts on some of the overseas trends you have seen, which could potentially be relevant to Pacific. What does it mean for portfolio construction moving forward if you want to look into life sciences? 

MC 
I think that definitely and as you rightly pointed out, is that trend and our expectation as a research house and an investment firm, more and more capital is going to go towards life sciences. So by virtue of that, there is going to be an increased level of focus from investors to sort of get deployed in that market. The difficulty is that you need the product to be able to do that. What we've seen overseas is a lot of investment groups looking at sort of adaptive reuse of existing assets. So looking at you know, some are looking at retail, for example, as sort of that as a potential reuse, and often that's happening in America. There's a far more oversupply of retail there than say, in Australia. The other one is office space, and there's been a lot of sort of opportunistic core plus style investors looking at reuse of office buildings as potential R&D facilities, and it's actually harder than it seems, sort of getting the physical asset to actually be capable of being redeveloped, refurbished into a life sciences asset. But it's certainly a trend and one that I expect we will see in Australia. But for the most part, what we see is ‘build to suit’ outcomes. So tenants partnering with developers and investors to create a ‘build to suit’ purpose designed asset and I think that's where the bulk of the opportunity is going to come from and you know, we see that overseas in terms of a trend. 

HC 
Yeah, excellent. Mark. I want to have a deeper dive again when we're talking about the build to suit. In the US, we do see quite a lot of conversions of traditional office assets into the light research lab facilities. Do you see that potentially could happen in Australia? 

MC 
For lighter research? Certainly. But not for that really intense research use and you know, David, this is certainly an area of your expertise, sort of different grades of specialisation and requirements around research that traditional office building just can't sustain but build to suit can. So you know, you do see it from time to time, and we already see there's some assets in say Parkville, for example, in Melbourne, where you've seen the reuse of an office building into a research facility. So we do expect to see that the only other asset classes, obviously the office accommodation around life sciences and again in Parkville with CSL committing substantial amount of square meterage to that particular market where they're going to be headquarters for a very long time. 

HC 
Wow, excellent so that's the investment focus. Now let's come back to the occupier site, I think. Last year, the total leasing volume for other commercial office asset was down by 25% in 2020. However, there is a 17% year on year growth under Life Sciences corporate office leading recorded last year across the region, where occupiers are trying to capture the current weakness in the leasing market to optimise their portfolios ahead of full recovery. In the meantime, we have seen those companies are also leveraging government's incentive to enhance their R&D footprint. So, David, now turning to you, can you talk to us how you see the life sciences sector adapting to the changing market and the drivers? 

DK 
Sure Henry. Um, I think it's fair to say there's been an awful lot of talk over the years on how people, governments, universities can capture the economic benefits and the commercialisation of Australia's IP and never has been in more stark a need than today. So those novel discoveries truly critical when it comes to R&D, COVID has at least accelerated that need to see the action now. So what we are witnessing in real time on the back of COVID is a clear identification of both the market potential and the demand for local research and increased manufacturing capability, which is very exciting.  

There's also a lot of interest in how companies might scale up, what incubator spaces might look like how they might be located with production capability, the challenges and opportunities of both new build and refurbishment, which we've just touched on. That is a fascinating opportunity. What buildings can be converted should they? Can they? I think there's an awful lot of opportunity there, untapped opportunity at the moment and certainly we can see a point where life sciences are being considered alongside traditional health assets at anchoring developments. Of course, there's an awful lot of keen investors which Mark talked to. So there's certainly the market is adapting and certainly the hunger is there. It's very exciting.  

HC 
Yeah, definitely. I do believe beyond build to suit. We do have a lot of opportunity to convert the older assets into more life sciences suited products going forward. Now let's talking about manufacturing spaces. Production of a vaccine production of medicines is crucially important. We also understand there are new plants coming to the market in Melbourne in 2026 and this plant will handle a AstraZeneca’s production in Australia with a huge sponsorship from Victoria government. So, David, give us some ideas about where this is coming. 

DK 
You’re certainly quite right, Henry. The development in Victoria is significant and a perfect example of the push to increase local production. It certainly helps having a local powerhouse in CSL to work with when it comes to the speed in which that opportunity has proceeded and that opportunity to scale up. I think we're also witnessing the push to create equivalent production in mRNA products right now, which is obviously very news and topical with the federal government looking to support the growth in that field. I think it's again important to note that Australia has some fantastic researchers in that space, so the appetite to capture that, harness it and produce locally. All the ingredients are there and of course we have an investment market that wants to capitalise on that as well. 

HC 
And do you think those occupier companies also want to focus on the increasing speed into the market? Is that the key agenda from those companies?  

DK 
I think so. I think the urgency to respond to the market drivers is real, and that urgency is here and now and again it's a perfect storm which Mark used that term earlier, which was great. It's exactly where we are. All the raw ingredients are here in Australia, with the IP and R&D of our universities and research sector. The appetite for the supply chain, the risk that we found during COVID to that supply chain. So, yes, there's a perfect storm and a haste to react, which is fantastic.  

HC 
Excellent. I am conscious of time so perhaps one last question for you, David. At the start of the pandemic there were concerns over supply and availability of many, many items, particularly around medicines and the PPE and then many items in Australia, which you guys are importing from overseas. What do you think about the future dynamics and the future changes in this space?  

DK 
That's a great question. We definitely had an incredible test of our contingency planning across the health sector, in particular at the start of the pandemic, when there were so many unknowns. We absolutely saw the gaps in our supply chains and the limitations of relying on an international supply chain. So many of our essential products as medicines, medical devices and ventilators, PPE, etc. The vast majority came from overseas. As we're seeing with the development in Victoria, we just talked about of large-scale vaccine production. There's certainly a real desire from the government to invest in technologies locally and become a bit more self-sufficient. We've hopefully learnt from the lessons learned of late that we needed to and we're implementing appropriate solutions. I think it's fair to say we've learned an awful lot through the pandemic and we're seeing through government and private sector investment in life sciences that lessons have been learned, but there's also a great opportunity for continued growth. 

HC 
Excellent David. One more question beyond Melbourne and Sydney, who are the emerging hubs in Australia? 

DK 
I think we're seeing a lot of response from the state capitals nationally certainly Adelaide, Brisbane. The significant investments in health and the supporting infrastructure around them in the life sciences space, same with Perth. So to be honest, Sydney and Melbourne might be going gangbusters, but the other state capitals aren't that far behind.  

HC 
Excellent. Thank you, Mark and David for joining me today. We are still in the midst of COVID across Asia Pacific. The development of life sciences in Asia Pacific is crucially important is about to start, which is underpinned by strong demand and policy support. We do expect to see investors to evaluate this asset class more closely in the future. 

Female Voiceover 
Thanks for listening to Talking Property with CBRE. If you liked the show and want to check out more, visit cbre.com.au/talking-property or subscribe through Spotify or Apple Podcasts. To read the full report discussed in this episode, remember to click on the link in our show notes.  

If you want to hear more from our experts on the life sciences sector, then tune in next month for another episode of Talking Property when Sass Baleh CBRE’s Head of Industrial and Logistics research in the Pacific, sits down with industry experts to continue the conversation on this dynamic sector. 

Until next time.