The COVID-19 pandemic has drastically changed the life sciences industry globally. Spending on drugs and vaccines has increased, and research & development (R&D) and manufacturing supply chains have been realigned. World and business leaders are planning for the diversification of critical elements of value chains in order to reduce dependency on any single region, and the life sciences industry is witnessing something similar. Life sciences companies are being forced to critically evaluate their own value chains, part of which may include reshoring critical processes or setting up operations in new markets, presenting opportunities for this real estate sector in India.
What Is Life Sciences Real Estate?
Life sciences real estate is a niche segment of the broader commercial real estate asset class. Assets include laboratories, warehouses, manufacturing, and integrated offices. Typical tenants include pharmaceutical companies, biotech labs, contract research organizations, and device manufacturers.
Asset managers that thrive in this industry rely on a significant presence in successful clusters and extensive facility design capabilities. Firstly, life sciences activities are conducted in clusters to form a complete scientific ecosystem, meaning asset managers can capitalize on a captive tenant base. Secondly, R&D labs and manufacturing units require specialized design capabilities; managers with the technological know-how and execution capabilities will have a competitive advantage.
Diversification of the Life Sciences Supply Chain: From China to India
Over the past decade, China has emerged as a dominant player in the life sciences industry, having invested heavily in its domestic ecosystem and R&D capabilities. It’s now the world’s largest producer of Active Pharmaceutical Ingredients (APIs) – also known as ‘bulk drugs’ – the ingredients needed for the formulation of a final drug. Globally, APIs are estimated to be a $180bn industry growing at a CAGR of around 6%.1 The World Health Organization (WHO) estimates that China accounts for at least 20% of this market, with its share growing at around double the rate for the industry.
Despite the growth in China, pressures are mounting on the life sciences industry. Rising R&D costs, longer R&D cycles, and lower R&D success rates are driving the move to a more globalized network of Contract Research Organizations (CROs).2 More than 50% of pharmaceutical enterprises globally have partnered with CRO firms to assist in the development of new drugs in recent years.
Lockdown measures introduced to control the spread of COVID-19 have disrupted these global supply chains, dramatically impacting the ability of manufacturers to continue operations. This has raised interest in the diversification of value chains to more effectively manage operational risks. Although the crisis is still in its early days, it’s expected that India will be a big beneficiary of this disruption.
India is a favored destination for multinational corporations (MNCs) setting up development centers – over 1,250 MNCs have Global In-house Centers (GICs) in India3, with 50 in the life sciences sector. India has multiple emerging life sciences clusters – Hyderabad and Bengaluru being the largest two, encompassing around 6.2 million square-feet of third-party and captive R&D space. The country is also the largest producer of generic drugs and supplies 50% of vaccines globally, giving it a natural competitive advantage.4 As life sciences companies move to re-establish value chains, India’s cost competitiveness, skilled scientific talent pool, and focused government support to promote the industry ecosystem will make it a clear option for MNCs. This is expected to drive demand for life sciences real estate facilities that support these trends.
What’s in it for Investors?
Life sciences real estate offers attractive risk-adjusted returns. Alexandria Real Estate Equities (ARE), one of the most prominent life sciences-focused REITs, outperformed other commercial real estate sectors measured by the FTSE NAREIT Index. As of April 2020, ARE beat the index by nearly 40% over the past five quarters, a testament to the sector’s ability to deliver strong performance (as seen in the chart above).5
The tenant base of life sciences real estate is typically made up of established, cash-rich companies which make for quality, long-term leases. Tenant stickiness is high as they invest heavily in fit-outs and equipment. Lease contracts are typically long term, between five and 10 years, leading to a stable stream of cash flows for asset owners. Given the all-weather nature of the industry, tenants have continued to operate even during COVID-19.
As the world deals with escalating concerns around chronic illnesses and contagious diseases, there is growing demand for life sciences solutions. COVID-19 has also resulted in institutions stepping up their research efforts on vaccines and drugs for pulmonary diseases. We expect R&D and manufacturing activity to intensify and diversify out of key regions such as the US and China – and the life sciences real estate sector in India will be a market to watch.
