Could a shortage of lab space be a golden opportunity?

It will come as little surprise to many that property in the life sciences sector is under some strain, with the demand for lab space far outstripping availability. Such is the demand, that Bidwells reported available space in Oxford and Cambridge in June 2022 was “close to zero”. This is off the back of a record-breaking 2021 for investment in the UK life sciences sector, with an increase of 60% on the year before, taking investment to almost £4.5bn. Whilst this is certainly cause to celebrate, the concern is that the lack of space to harness this investment might push both big and small life science companies to set up or move outside of the UK, where they perceive they will have more certainty as their businesses grow. However, with it being reported that there is an estimated £20bn of capital ready to invest in the UK life sciences property market, can we look at this shortage as an opportunity for life sciences real estate rather than a threat?

Landlord’s market

Firstly, it is a seller’s market and landlords are perfectly poised to hand pick high quality tenants with a strong financial covenant strength and a good reputation. It goes without saying that it also means landlords are in a strong position to negotiate healthy rents and specific lease terms beneficial to their investors. However, this does not mean that a life science tenant will be any less demanding in respect of the quality of the space and amenities and landlords will be aware that they need to ensure that their negotiating strength doesn’t, in fact, drive tenants out of the UK market in search of a better deal.

Repurposing space

Re-purposing space is a hot topic for other sectors, and it is already being utilised by life sciences, with companies beginning to take on surplus office, retail or warehouse units to convert to lab space. Previously, there was a reluctance to repurpose in favour of purpose-built lab space, most likely because there wasn’t the same need to and also due to delays with obtaining planning consent for change of use and finding appropriate space to convert (labs need high ceilings and specific service infrastructure). The introduction of the much wider Use Class E in 2020 has simplified the conversion of spaces from offices and retail to labs and at the beginning of 2021 Savills identified approximately 100 units of up to 1.8 million sq ft in London alone. Once suitable units are found, it could be a great opportunity for developers to capitalise on the shortage of lab space and regenerate properties and the local area as a result.

Growth of smaller hubs

The vast majority of investment in life sciences in the UK is focused on the “Golden Triangle” of Oxford, Cambridge and London but the shortage of space in these areas could be a golden opportunity for development of science hubs elsewhere, particularly those areas with an existing university and research ecosystem. Specifically, Savills have predicted we will see growth in regional centres such as Birmingham, Manchester, Edinburgh, Glasgow, Bristol and Stevenage. This will not only provide an opportunity for expansion for existing landlords, investors and developers but also for new entrants seizing an opportunity in a less mature market. The growth of smaller hubs will also likely bring property investment in complimentary sectors such as manufacturing, logistics and house building.

Innovation

Finally, could the shortage of space encourage more innovative ways of providing lab space? It remains to be seen what would be suitable, but some developers and landlords might capitalise on the lack of space by introducing more overspill and temporary space in communal labs on short term licences with flexible terms, as well as increasing their offering of incubator space to start ups and small companies.