As a real estate sector, the life sciences industry in Asia-Pacific is seeing rapid expansion. The total space used by the industry — including manufacturing facilities, pharmaceutical logistics, R&D centres and corporate offices — amounted to more than 100 million sq ft at end-2020.
According to CBRE’s recent report, “A New Era of Life Sciences Growth”, the industry is experiencing such expansion in Asia-Pacific due to rising demand from ageing populations and a steady flow of mergers and acquisitions (M&A) activity. It also highlights the key trends, demand drivers, corporate real estate strategies and investment opportunities in the region’s major life sciences hubs.
The region has huge potential, says the real estate services and investment firm. “Asia-Pacific’s large population and rising middle class are underpinning the rapid growth of the life sciences industry, which CBRE defines as including the pharmaceutical, biotechnology, medical equipment, food science and healthcare sectors.
“Despite its large market size, health expenditure in Asia-Pacific stood at just half of that in the US (US$3,475 billion) in 2018. While mature markets such as Japan and Australia spend around 10% of their GDP on health, most other countries in the region spend just 2% to 7%. With health expenditure in the US accounting for close to 17% of GDP, this indicates substantial room for growth in Asia-Pacific.
“Several major Asia-Pacific markets have identified life sciences as a strategically important industry and have introduced supportive policies to facilitate the development of the sector. These policies have spurred the proliferation of domestic pharmaceutical companies and supported the expansion of international pharmaceutical firms seeking to establish a headquarters in the region.”
The report highlights the occupier strategies seen in the life sciences industry during the Covid-19 pandemic. For instance, in the corporate office segment, domestic life science companies have displayed a strong appetite for expansion.
“In contrast, many international life sciences companies, especially those involved in recent M&A activity, are consolidating sales offices to achieve efficiencies and [lower] costs. The adoption of remote working has enabled international pharmaceutical firms to adopt Activity-Based Workplaces (ABW), featuring high desk-sharing ratios for sales staff (1:4 to 1:5). While such firms like to maintain hub offices in key cities, locational preference for core or decentralised areas is mixed and depends on individual companies’ business requirements,” says CBRE.
“Organic growth and flight-to-quality relocations led to a 17.4% y-o-y growth in life sciences leasing volume in 2020, compared with a 25% decline in the overall leasing market. The most active markets for life sciences office leasing are Shanghai, Beijing, Tokyo, Bangalore and Hyderabad.”
Meanwhile, the demand for specialised R&D facilities is growing across the region. “China is providing preferential policies to support new R&D set-ups in key industrial parks, with Zhangjiang in Shanghai a leading example. The authorities are also playing a role in providing facilities such as those at Biopolis in Singapore and the Science Park in Hong Kong,” says the report.
Proximity to universities is a key requirement of R&D facilities, particularly in Japan, where universities often sponsor such projects, says CBRE. “However, this also means the volume of R&D facilities available for lease on the open market is limited. In Australia, there are more leased facilities in life sciences clusters close to universities and major hospitals.”
Pharmaceutical manufacturing facilities tend to be located in India, China and Japan, with most of such sites being self-owned, says the firm. “There is increasing demand for high specification logistics facilities, including cold storage, partly due to specialised storage requirements for mRNA Covid-19 vaccines. However, the total quantum of demand remains limited.”
Beijing and Shanghai have been identified by CBRE as being the most competitive cities for the life sciences sector owing to their manufacturing and R&D capabilities as well as large domestic markets. “Shanghai’s port enables it to outperform in terms of the supply chain while Beijing is reliant upon neighbouring cities for exports.”
The report identifies several key cities around the Yangtze River Delta, Bohai Bay and Greater Bay Area as key life sciences hubs in mainland China. Hong Kong also has a prominent role to play in supporting growth in the GBA and as a location for fundraising.
Moving forward, CBRE believes the sector has significant potential, although life sciences real estate is at a budding stage of development as an investable asset class. “Entry routes include, but are not limited to, the following: Investors seeking income-producing assets can target sale leasebacks or disposals by life sciences companies looking to improve their balance sheets or offload non-essential assets following M&A. Most such opportunities are available in Australia and Japan,” it notes.
“CBRE expects numerous assets to come on the market in the coming years as pharmaceutical companies recycle capital for R&D,” says the report, adding that South Korea, where ownership restrictions in the Pangyo 1st Techno Valley began to expire in 2020, also offers prospects.
“As some of these assets are multi-use sites and include industrial properties, laboratories and offices, investors should note that they will have to purchase such properties in their entirety. Value investors can consider converting older industrial properties into BSL-1/BSL-2 laboratories or cold storage. This strategy is more appropriate for markets with a limited supply of land dedicated to accommodating the life sciences sector, such as Hong Kong and Japan,” it says.
CBRE points out that while assets do not necessarily have to be located in city centres — a criterion that may help lower initial investment — any properties will need to comply with certain specifications related to ceiling height, floor loading and floorplate, along with power capacity for additional ventilation and waste management systems.
“Given the prominent role of government bodies in promoting the development of the life sciences industry, investors are advised to consider forming partnerships with local authorities. Some science parks also permit developers to obtain land from the government to develop build-to-suit facilities,” says the report.
Examples of this trend include private entity Labzone’s participation in the Bengaluru Life Sciences Park in Bangalore. “In Singapore, developers can lease business park sites for 30 years plus another 30 years through a tender, with Ascendas and Ho Bee Land using this approach for their development projects in Biopolis. As life sciences assets attract investor interest, yields will be tight, particularly for R&D labs. Manufacturing facilities will offer relatively higher yields given their unique specifications,” says CBRE.