Life Science REIT is weighing up potential joint ventures and other investment partnerships as a way of growing the business if it is unable to raise new equity.
Simon Farnsworth (pictured), managing director at Ironstone Asset Management, investment adviser to the REIT, told EG: “The investment market is still a little bit sluggish, but people are getting used now to the idea that interest rates have peaked. I think we should see increased levels [of activity] in the capital markets as well, which is obviously good for liquidity and for the sector as a whole.
“In terms of growing our business, if it becomes apparent that the [equity] markets are going to remain closed for some time effectively, with our trading at discount [to NAV], then I think we as a REIT would look at private capital sidecars and joint ventures.”
In its full-year results announcement yesterday, Life Science REIT reported net asset value per share of 81.1p as at the end of 2023, down from 91.3p at the end of 2022. Its shares finished the day down by more than 5% at 40.9p, a discount to NAV of almost 50%.
The firm’s portfolio valuation dropped by 7.1% in the year ended 31 December 2023 to £382.3m, driven by a decline in office values. Despite the fall, the business posted a rise in gross property income, up from £13.1m to £15.5m, and a reduction in its pretax loss from £27.5m to £21.9m.
With macroeconomic uncertainty continuing, the REIT has cut its total dividend for the year from 4p to 2p a share, a level it said is substantially covered by adjusted earnings. The move is expected to ensure that the firm retains the flexibility to progress projects.
Farnsworth said: “I think shareholders will understand that. We are early in our journey, so we are still repurposing assets that we acquired two years ago and we are still building out. We have already demonstrated levels of rental growth that we hope to see and we expect those to continue.
“I think ploughing all capital into our assets is absolutely the right thing to do.”
Leasing labs
In the meantime, Life Science REIT is focused on filling up the new-build assets across its development pipeline, most of which are situated at Oxford Technology Park in Kidlington, to the north of the city.
Buildings 4A and 4B, known as the Innovation Quarter, were constructed last year, and Building 5 reached practical completion early in 2024, resulting in the delivery of 231,500 sq ft, making Oxford Technology Park almost half-complete. Overall, the Innovation Quarter spans 12 facilities that are able to accommodate wet and dry labs, offices and light production.
The REIT now hopes to push rental growth across the portfolio by investing capital into laboratory space fit-out for start-ups or grow-on companies.
David Lewis, director of operations and finance at Ironstone Asset Management, said: “We are seeing at the smaller end of the market, in Oxford in particular, the premium that is available for fitting labs. So as a landlord we are prepared to speculate some capital expenditure on fitting out laboratory space to see the rents double.”
Most recently, Life Science REIT saw the average rent at Oxford Technology Park rise from £15 per sq ft to £20 per sq ft. However, for fitted labs the firm has pushed rents even higher, to £45 per sq ft, which is more than double anything seen before at the site.
The REIT has leased 7,497 sq ft of fully fitted space to ColdQuanta UK, part of Infleqtion, a quantum technology company. The lease will complete once the laboratory fit-out works are complete. ColdQuanta will pay an annual rent of £337,365, or £45 per sq ft, for 10 years, with a break clause and rent review at the end of the fifth year.
In Cambridge, Life Science REIT is converting 10,000 sq ft of office space in Building 2020 on Cambourne Park Science and Technology Campus into fully fitted labs with a view to targeting rents of £50 per sq ft, compared with the existing £22 to £23 per sq ft.
Lewis said: “The pool is much deeper at the smaller end of the market than it is at the larger end. That is not to say larger requirements don’t exist, they do, but the balance, in terms of sheer volume of enquiries, is firmly towards the smaller end of the market.”
At the higher end of the market, Life Science REIT is pressing ahead with the development of so-called tech boxes, measuring from 25,000 sq ft. Lewis said: “The main attraction of this product is flexibility. They can be used for labs, research and development, offices, production and storage. They are just big boxes but the science that can take place within them is exactly the same as the science being done in a glass building.”
Filling the gap
Elsewhere, the REIT is working on amending planning consent secured for Buildings 10 and 11 at Oxford Technology Park to develop a product that will serve occupiers in the mid range of the market, measuring between 7,500 sq ft and 25,000 sq ft.
Lewis said: “We are missing out on a chunk of potential demand, and rather than building more [tech box] space of 30,000 sq ft plus, we are looking to deliver two buildings on the same plot to diversify our offer and make sure we can capture all of the demand that is out there in the market.”
Life Science REIT has also challenged itself to deliver space that will be “generic” and appeal to the widest possible pool of occupiers. The move comes as life sciences occupiers grow rapidly, outgrowing their space faster than lease events come up.
Lewis said: “We don’t want to be ripping everything out and doing it again three years later if the tenant grows and moves on. We are looking at delivering a balance between delivering fairly generic, but also sufficiently robust, high enough quality product to last for a number of occupation cycles.”
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