Featuring Julie Phillips, Jack Walters, Chris O'Brien & Sass J-Baleh
Thursday 9 September 2021
SB
The life science industry is expected to be a major growth sector in Australia over the coming years, contributing to occupier and investment activity growth within commercial property. Global pharmaceutical companies are expanding their production capabilities in Australia, including R&D manufacturing and distribution. This is being backed by the federal government to solidify Australia's sovereign capability, with the COVID-19 pandemic, prompting a greater focus on this sector. Australia is also a mature economy with a transparent business environment and has well established hubs for the biomedical industry.
Hello and welcome to Talking Property with CBRE a podcast in which our team of experts share their commercial real estate insights. My name is Sass Baleh, Head of Industrial and Logistics Research and I am your host for today's episode. Over the next 20 minutes, we're going to talk about the growing importance of the life science sector in Australia and how it impacts industrial and logistics property.
I'm delighted to be joined by Julie Phillips, who is the CEO of BioDiem and its subsidiary, Opal Biosciences, which is an Australian biopharmaceutical company that's focused on developing and commercialising vaccines and infectious disease therapies. Her technical background in clinical trials, regulatory affairs and Pharmaco Economic Assessment ‘Pricing of Therapeutics’ was gained in multinational pharmaceutical companies. From 2014 to 2020 she was Chair of AusBiotech, the Peak Biotechnology Industry Association in Australia. Julie is the director of MTP Connect, the MedTech and Pharma Industry Growth Centre and Chairs Innovation and Science, Australia's R&D Incentives Committee. She is a member of the University of Newcastle Council and sits on various government committees.
Also joining us is Jack Walters, who is the head of industrial logistics transactions at Charter Hall. He has worked on multi-billion-dollar transactions at Charter Hall that have funds under management of $52 billion diversified across the Australian real estate spectrum. Charter Hall are the largest industrial logistics fund manager in Australia, with $15.5 billion of assets under management and $3 billion in a development pipeline. Jack has been involved in a number of life science transactions and was integral in the GSK Baronia acquisition in the first half of this year. We have CBRE’s Chris O'Brien, the Executive Director of Asia Pacific Capital Markets, Industrial and Logistics specialising in investment transactions, sale and lease backs, portfolio transactions, development and forward funded structures. Chris jas facilitated exclusively some of the most significant life science transactions over the past year in Australia. Thank you all for joining me.
JP
Great to be here. Thank you.
COB
Thanks Sass, really looking forward to the discussion today.
JW
Happy be here Sass, thank you.
SB
So before we dive in, I would first like to provide a snapshot of the growth potential of the sector in Australia. According to our new research report, ‘A New Era of Growth in Life Sciences’ the life science industry is expected to be a major growth sector in Australia over the coming years, contributing to occupier and investment activity within commercial property. Key drivers include strong population growth;
One of the fastest growing of the developed world, forecasted to rise by 13% between now and 2031.
An ageing population with the share of the population aged over 65 expected to reach almost 50% in the next 40 years.
Growing health expenditure per capita, which is expected to reach Germany's level of US$7000 in the next decade as the federal government's forecast spend on the health sector is expected to rise from 19% to 26% by 2060
A strong push from government to create supply chain resilience on critical goods and sovereign capability with all things relating to pharmaceutical life sciences. This includes the modern manufacturing strategy, Manufacturing Collaboration Scheme, the Patent Box Scheme, Medical Research, Future Fund and R&D tax incentives.
So, Julie, what is pharmaceutical manufacturing and how would this activity grow in Australia?
JP
Pharmaceutical manufacturing broadly refers to advanced manufacturing of pharmaceuticals or vaccines, and it's an exciting time in our industry right now, it's grown about 16% since 2017 and we're one of the most innovative industries. We've got about 2000 organisations in the entire Australian ecosystem, about 55% of that’s industry, and it employs more than 240,000 people. But Australia is only 1% of the world market and you've spoken about some strong drivers that have affected the Australian market. So companies in Australia tend to aim for the world market and the biggest parts of that are the US and Europe not just here. It costs about $1-2 billion and takes a really long time about 15 years to take a medical science idea right through all the rigorous testing steps over years to an approved product that a doctor can give a patient and there's lots of specialist types of testing that needs to be done along that pathway to develop a medicine.
A lot of those specialists testing capabilities are not available in Australia. So we've had a history of unfortunately selling our ideas overseas very early and on top of that, we've lost a lot of onshore manufacturing capability. So as a result now, in 2019, we were importing $11 billion worth of pharmaceuticals and only exporting $4.5 billion, so a big gap. But the value add to GDP is huge. $2.9 billion in FY18, which is only a tad under what it was for iron and steel at $3 billion. So the good news is that the market failure is being addressed now, and we've seen the federal government pulls specific levers that you listed to turn this around. We've got the R&D tax incentive, the Medical Research Future fund, the $20 billion fund that's fuelling early-stage research. The Growth Centre Initiative MTP connect the MedTech and Pharma Growth Centre that's coordinating all the parts of the ecosystem to get efficiencies. The Biomedical Translation Fund was a really big help, and that helped to fund the cost of expensive clinical trials so they could not be a blockage for small companies in Australia, where capital markets are thin. But now, with the supply chain disruptions from the pandemic, that have pretty much been evident to everybody, including the ability to even get a Panadol here. There's been a sharp new focus on onshore manufacturing, and the great opportunity for Australia is that the global market really likes Australian pharmaceuticals. We've got a reputation for safe and high-quality medicines and vaccines, and pharmaceutical manufacturing is complex. The products are sophisticated and they're used for serious disease and they need to be trusted. So really, this is our opportunity for growth.
But the facilities that we need are in short supply and we need to be able to collaborate with researchers better. So there's a huge opportunity for new laboratories, new hubs where small companies, of course, most of the companies in our sector are SMEs, they might not need a facility for long term use, but as companies grow, their needs will grow as well. So all of this sets in motion an increased investment attraction for our world class research for investment coming from overseas. So just as an example, we do clinical trials really well in Australia. Everything has to be tested through clinical trials before it can be used in patients. So clinical trials supplies are needed. So a lot of companies have to get their clinical trial supplies made overseas, which is a shame so there's a real move to increase our ability to manufacture small batch clinical trial supplies and then that, of course, will move on and feed into final product manufacture and hopefully export to the global markets.
SB
Yeah, that's really interesting and in terms of already established precincts in Australia, do we have these precincts already across major states in Australia? So in New South Wales, Victoria, South Australia, Queensland?
JP
We do. One of the aspects which is really important to understand, is that the pharmaceutical manufacturing is really sophisticated and so it's not one size fits all so different types of products need different types of facilities and sometimes you can't even have nearby in the same facility to different types of products being manufactured. And so really, there needs to be recognition of this in the design and location of these hubs and so there's a huge opportunity for growth. Victoria leads the way the New South Wales, Queensland and then South Australia, but there's also a lot of growth in WA.
SB
Thanks so much, Julie. The next burning question is well, how does this translate into opportunities for investment? In Australia sale trends have been increasing for both office and industrial logistics in life sciences and reached record levels last year at the height of the global pandemic. Over 2017 to this year, life science investment sales have represented an average of only 2% of industrial logistics, total sales volumes and 6% for the office sector, direct investment in such assets remains limited in Australia. So Chris, why has demand for life science assets changed over the past couple of years and what type of investor groups are showing more interest?
COB
I think that the first thing to cover off is certainly the existing COVID-19 situation has obviously heightened our awareness regarding this sector and industry, and that hasn't changed even when you look at the real estate industry. Then I think what Julie commented on previously regarding the onshore manufacturing is a huge driver in our world as well, Sass. If you have a look at the occupier depth, it's much greater now. Whereas it probably wasn't the case three years ago And then if you look at Australia across the investment cycle for a very small country, but we've got a lot of capital trying to get in. So Australia is actually at the forefront of alternative investment and long whale specialisation, in particular with sale and lease backs. So we simply don't have enough traditional product to satisfy the amount of capital coming in. Hence, you've got groups like Charter Hall and these leading REITs and institutions looking at alternative investment classes.
SB
Given that we forecast the life science investable universe in Australia to nearly double over the next decade from $13 billion to $24 billion, what are some approaches to investing in life science real estate in Australia?
COB
Good question, I think to start with you have to be highly educated in this space, both from an occupier perspective but also an operational and building perspective. I think you really need to know the precincts as well. It looks like these groups appear to gravitate to the same locations, whether it's to follow the skilled workforce or the universities. I think it's really important that Julie has really highlighted this as well, to be aligned with social and government initiatives. I think you need to be really committed to the sector and embrace bespoke specialisation but importantly, I think is the most important one at the moment is just be patient. It's a really emerging market, it takes a bit of time. A lot of these groups are currently owner occupiers and making that transition into tenants and it's I liken it to a lot of the other emerging markets we've seen in the last five years and that the first thing is really patience to be honest with you Sass.
SB
Yeah, great insight Chris. One of the major transactions recorded this year was a sale and lease back by Charter Hall for the GSK Baronia site. Jack, what made this site an attractive investment proposition?
JW
Yeah, thank you, Sass. Well the GSK Baronia site caught our attention for a number of reasons. Firstly, from a pure real estate perspective, sites of this size and scale, which are located in core infill fuel markets, are very rare and difficult to secure and benefit from very high underlying land values. This site in particular is one of the largest continuous passes of land in the wider precinct, covering over 16.5 hectares with approximately 10 hectares a surplus land which provides us with plenty of optionality for future expansion redevelopment. Secondly, there is a significant embedded value in the infrastructure, power and specialist plant equipment on the site, which saw us ultimately purchase the facility at what we thought was well below replacement value. What this does it makes it very attractive and cost efficient for occupiers to come in and retrofit the facility for their desired use. Thirdly, as Julie touched on earlier, if we learnt anything from the COVID-19 pandemic is that there are certain manufacturing operations that are critical for Australia to have onshore. We've seen this across a number of sectors, including life sciences, recycling food and beverage and defence. We saw this asset as a key piece of Australian infrastructure that should be preserved for its current operation and we've had a huge response from global and local life science groups and pharmaceutical companies to our recent expressions of interest campaign to lease the premise
I think that the significant investment and infrastructure in plant and equipment by the tenant in order to operate these types of facilities means that the tenants are 1. of high quality and well backed, but secondly, they prefer to secure the sites with very long-term leases which perfectly aligns with our investment approach and strategy. Lastly, from a more macro level, we see life sciences as currently one of the most exciting growth sectors in the market. We have a number of existing and new investment opportunities outside of this site which are currently underway. With the investable universe tipped to grow I think you said Sass to 24 billion, but I think it could easily reach 30 billion in the next couple of years coupled with the strong tail winds you mentioned before. I think we'll see the life sciences sector become a large part of Charter Halls growth, moving forward.
SB
Great, thanks so much, Jack. Now, as a final question to everyone. Where do you see this sector in ten years? We'll start with you Julie.
JP
Thanks Sass. Well I think we all know that Australia needs to become a country with more economic complexity. We've been called rich but dumb. The life sciences sector can really address this and in ten years will be more mature, will be more efficient in translating these medical science ideas right through to manufactured products and importantly, for export to the global market and that will grow our contribution to GDP. This, in turn, this efficiency will attract more global investment and an important other feature is that this will provide an industry to employ more of our world class graduates and have a lot more opportunities for them to have work, integrated learning and create a better society.
SB
Great. Chris where do you see the sector in the next 10 years?
COB
Thanks Sass, I just really think it's going to continue to grow, and I think we're going to look back in 10 years' time and look at this moment in time and say that was when we started this journey to this being a genuine A-Class investment grade sector, and we won't be considering it specialised anymore or trying to find out about it, it will just be a very stable investment class. The likes of Charter Hall and other REITs will be investing in consistently but incredibly exciting. It feels like this is day one Sass and I'm looking forward to seeing what's going to happen over the next decade.
SB
Great and Jack, what are your thoughts?
JW
I think Julian Chris summed it up well, but I think what I would say is to Chris's point, I think this is the start, particularly for real estate companies in this sector. Traditionally, a lot of these life science groups have owner occupied sites and I think there will be huge evolution over the next 5 to 10 years where you'll see a number of large institutional real estate companies coming in and investing in the sector and working closely with these operators to build them new sites, both greenfield and brownfield and there will be a lot more integration between traditional real estate players and traditional life science group. I think it's an exciting time to be in real estate, particularly given all the growth and tail winds in this sector.
SB
We are still amid the COVID pandemic. The development of life sciences in Australia is significant and underpinned by strong demand and government support. We do expect to see investors evaluate this asset class more closely as it is considered a stable, long term driver of growth. Thank you, Julie, Jack and Chris for joining me today.
JW
Thank you Sass, great to be here.
COB
Thanks again Sass.
JP
Great to be here. Thank you. It's been a really worthwhile discussion and I'm excited about the future and the opportunities for Life Sciences in Australia.
SB
Thanks for listening to Talking Property with CBRE. If you like the show and want to listen to some of our other conversations, visit cbre.com.au/talking-property where you will find episodes on place making real estate market outlooks, disruption in the industry, creating resilient assets and more. You can also subscribe and rate the show through Spotify and Apple Podcasts.
To read the full report we've discussed today. Click on the link in our show notes until next time. Stay safe.
CLICK HERE TO VIEW THE LIFE SCIENCES REPORT
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