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QD view – LABS launch should get lift-off

The remarkable response to the COVID-19 pandemic by the UK life sciences sector, with the development of the Oxford-AstraZeneca vaccine in record quick time, brought the sector into the consciousness of the masses.

In truth, UK life sciences has been a budding sector for years, with four of the top 10 universities in the world here – clustered in the so-called ‘golden triangle’ of London, Oxford and Cambridge. The talent is here and the companies too.

Unsurprisingly, investment into the sector has followed. In the first five months of this year £2.4bn was invested into UK life sciences companies. That’s just short of the £2.8bn raised last year, which in itself was a record year of investment. This year’s figure amounts to around 60% of the total biotech venture capital invested in Europe.

So we were very excited to see the intention to float announcement this week of the Life Science REIT. It is looking to raise £300m that it will invest in the underlying properties that are let to these budding companies. Things like wet laboratories (where chemical or drugs are tested) and dry laboratories (where results are analysed using state of the art technology), offices, manufacturing and testing facilities and data centres would all appear in its portfolio. Assets will be mainly multi-let.

The tenants paying the rent will be a mix of major corporates, private equity-backed companies and some government departments, with a small exposure to start-ups.

It will be the first listed company in the UK focused on life sciences property and therefore there is nothing else to compare it with in the UK. However, one of the largest REITs in the US, which has the largest life sciences sector globally, is Alexandria Real Estate Equities. This has had huge success owning and developing life science property.

Its MO is based around the cluster theory – where renowned academic institutions, scientific talent and investment meets to create thriving innovation hubs and dynamic ecosystems that accelerate discovery and commercialisation. It provides the real estate and campuses to make this happen and has been successful in different parts of the US but most notably in Boston.

Life Science REIT will look to create something similar in the golden triangle where, as mentioned earlier, four of the best life sciences universities in the world are located (Oxford, Cambridge, University College London and Imperial College London). It has a pipeline worth £305m in exclusivity or advanced negotiations. A portion of this (around £85m) will be spent on forward-funding or development opportunities, where returns on offer are far greater. They will be de-risked through partial pre-lets, while the supply of quality and fit-for-purpose life science property is in short order, with planning restrictions adding to the issue.

The pipeline has a net initial yield of 5%, but there is also a degree of vacancy (16%), giving the company the opportunity to increase rental income with the letting of the space. The income producing assets in the pipeline have a weighted average unexpired lease term (WAULT) of 6.3 years.

If successful with the IPO, it hopes to deploy the capital raised within six months. It is targeting a net asset value (NAV) total return of 10% a year, and a dividend yield of 5% once fully invested. It will look to achieve this through market rental growth (from the favourable supply-demand dynamic) and active asset management of the properties.

Another pleasing aspect of the potential float is that the management team (which all have expansive real estate experience) will all have ‘skin in the game’ having committed to invest £3m in the issue, while 15% of the advisory fee will be paid in shares.

We are really excited about this proposition, which taps into a rapidly growing sector that benefits from favourable real estate characteristics. Unlike recent REIT intentions to float, this has every chance of succeeding long into the future.

QD view – LABS launch should get lift-off

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