Life Science REIT headed straight into an extended spell of market turbulence after floating on the London Stock Exchange in November 2021. But after two years of drift, Simon Farnsworth, managing director at the REIT’s investment adviser, Ironstone Asset Management, says he is “seeing the fog lift a little” in the capital markets. “We’ve seen a decent movement in the share price over the past few months and, medium to long term, we want to raise more capital and grow the business,” Farnsworth tells EG.
When the REIT listed on the AIM – it moved to the main market of the LSE a year later – it pitched its potential to become “the property provider of choice for life sciences companies in the UK”. Now other public and private companies are making their own play for a piece of a growing market. But Farnsworth is standing his ground: “We want to be the dominant force in this sector.”
As of late September, the REIT’s share price is down by roughly 30% on its IPO price, compared with a largely flat performance from the FTSE All-Share over the same period. It has a market capitalisation of £252m, compared with a net asset value of £314.3m in its half-year results, published last week and covering the six months to 30 June.
For now, the share price is holding the company back from raising fresh equity. “We wouldn’t raise money at a discount to NAV and dilute all existing shareholders,” Farnsworth says. “But in time, I’m sure that share price will recover as we demonstrate lease-up and accretive value across the portfolio.”
The REIT has built up an 883,600 sq ft portfolio across the UK’s Golden Triangle of London, Oxford and Cambridge, valued at more than £400m. “We bought this portfolio very quickly after the IPO, and the main takeaway was capital allocation discipline,” Farnsworth says. “We haven’t overexposed ourselves to ground-up development, we de-risked trying to prelet some of our space.
“There have been turbulent times,” he says. “Interest rates have gone through the roof, but we’ve stuck to our disciplined approach and that’s going to bode well for us going forward.”
Thoughtful tenants
As such, Farnsworth says the firm intends to be “rigorous” in its hunt for opportunities and “won’t overpay for things”. The REIT expects to continue to seek opportunities within the Golden Triangle markets, where demand is still outstripping supply.
“We’ve always got one eye on what’s going on in other markets,” Farnsworth says. “There’s some really good stuff happening in Liverpool, Manchester, Leeds, Birmingham, Edinburgh. But what we’re not seeing at the moment is that supply-demand imbalance that’s driving rents.”
In contrast, across the Golden Triangle markets Farnsworth expects the current supply-demand dynamic to remain in place “for a number of years”, driving rents across its portfolio up “quite quickly”.
Over the first six months of 2023, the firm grew rents by 35%, with total gross property income totalling £7.6m, against £5.6m reported a year ago.
Chair Claire Boyle notes that occupiers are being “more thoughtful” about taking space, with the pace of decision-making slowing so far this year. Still, Farnsworth believes the occupational market remains strong.
“We should see some more transactional activity over the next six months,” he says. “We’re seeing strong levels of demand for life sciences space, including wet labs, dry labs, production facilities and traditional offices across all key markets, which is Oxford, Cambridge and London’s knowledge quarter. Supply is increasing in markets as it naturally will do, but it is a difficult process.”
Life Science REIT has developed what it calls “a deliberately differentiated offer”, the key features of which are flexibility and affordability. Farnsworth says: “We can offer a menu where occupiers pay a low rent and fit the labs out with their own capital or we can fit the labs using our capital and occupiers pay a higher rent, or something in between. [Occupiers] can be quite demanding in terms of what space they require and how they want to fit it out. And that’s great. That suits us.”
The REIT wants to create a platform suitable for occupiers of various sizes and sub-sectors of the life sciences industry. Spaces ranges from 3,000 sq ft, designed for an occupier coming out of an incubator, up to 50,000 sq ft.
“[Occupiers] have their own unique requirements, whether it’s what sector they operate in, where the founders of the business are based, where they recruit their staff or whether they have joint ventures with particular hospitals or universities,” Farnsworth says.
At Oxford Technology Park, the REIT is catering to occupiers that prefer to have R&D, labs, production, distribution and the head office facilities under one roof. In London, however, the firm is focused on serving smaller start-ups coming out of incubators which will want to be based in the city centre, close to the talent pool and the Francis Crick Institute.
“We’re adjusting our build products to provide that whole menu of a space offer for an occupier as they grow their business. As with any good owner, we want to retain our best occupiers by offering them the ability to grow within our portfolio,” Farnsworth says. “We always want to have space available. We always want to be ahead of the market.”
Smaller requirements
Although Life Science REIT is the only listed company dedicated solely to life sciences real estate, other property groups and investment firms are making inroads.
Legal & General has a partnership with Bruntwood to develop in the sector, while British Land has become a masterplanner for Cambridge Biomedical Campus, as well as securing life sciences occupiers for its buildings at Surrey Research Park in Guildford and Regent’s Place in Euston, N7.
Farnsworth is relaxed about the growing competition. “There’s plenty of room in the sector for different types of investors,” he says. “There are developers producing stock just for the income, others are doing ground-up construction or repositioning.”
The REIT is pushing ahead with the delivery of new-build stock. Almost 70,000 sq ft has been completed since the end of June 2023 and planning approval has been secured for the construction of a further four buildings on the Oxford Technology Park.
However, the company has been forced to adjust the product as it builds out to match shifting occupational trends. “We’re seeing a lot of smaller requirements coming through,” Farnsworth says. “So we’re actually looking at some of the buildings that we’re going to be developing out and adjusting those to smaller requirements.”
At Oxford Technology Park, the REIT is refining the planning consent to deliver more flexible and affordable space, while at Cambourne Park Science & Technology Campus near Cambridge, the firm is set to deliver more plug-and-play space.
Both projects are expected to build on the rental success achieved so far this year. At Oxford Technology Park, the REIT has secured two new lettings to Oxford Ionics at £28.50 per sq ft, and Arcturis Data at £28.70 per sq ft. At Cambourne, the REIT has also secured its first letting following a rebrand. The leasing deal was signed with Rakon at £25 per sq ft.
At Rolling Stock Yard in King’s Cross, N7, the 57,600 sq ft office building was turned into fully fitted labs on a speculative basis. This has driven rent up to £110 per sq ft from £65 per sq ft, a record rent for life sciences space in the area. The development is occupied by Beacon Therapeutics.
Boyle says: “The prices we are achieving are ahead of our own – and valuers’ – assumptions.”
Farnsworth adds: “I think the particular product we’ve got is priced really well and the occupiers in the life sciences sector aren’t quite as rent-sensitive as they are in other sectors. Rents will continue to grow at a steady rate.”
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