The market for life sciences services in Asia Pacific has matured rapidly, but the real estate required to support the sector’s growth prospects has yet to match the growth trajectory. This is not a new reality but more of a reality that has been exasperated by the emergence of a global pandemic, lifestyle changes regionally, and demographic shifts ranging from an ageing population to enhanced access to healthcare solutions through greater wealth. 

From our recent close interactions with institutional investors from across the world, we have observed a rapidly growing interest in allocating capital to the life sciences sector in the Asia Pacific region, particularly in Australia, India, Japan, South Korea, and Singapore. While the life sciences sector is still in its nascent stage of development in the region, we believe therein lies a tremendous opportunity for institutional investors to capitalise on the rise of this specialised investment asset class that offers diversified and resilient income streams.

The realisation clearly exists that life sciences transitioning from an emerging to an embedded sector of the economy has created new and unchartered demands on the real estate required to support present and future growth. As we’ve increasingly seen pre- and post-pandemic peaks, the life sciences sector is tethered to the idea of having the right real estate to suit the operational business of the tenant. 

The drivers are undeniable. Compound annual growth rates of the sector, according to KMPG, are poised to remain in the high teens for the foreseeable future. This is largely because Asia Pacific is expected to make up close to two-thirds of the world’s population by 2050, with Asia accounting for over 60% of the world’s ageing population. 

This ageing population will drive demand for pharmaceutical and medical services in Asia Pacific for the foreseeable future. Asia Pacific’s demographic strength and middle-class growth will likely give long-term investors confidence that the region’s supporting real estate is poised for sustained expansion. Furthermore, a universal health benefit scheme for the domestic market to grow the usage of drugs is emerging in many markets regionally and, when coupled with the huge patent cliff coming through in 2023, bodes well for the life sciences sector.

However, given that 40% of growth in healthcare globally is expected to come from Asia in the next decade, how will the real estate market need to respond? 

Unsurprisingly, in Asia Pacific, demand for quality space is constantly outstripping supply. On numerous fronts, the industry in Asia Pacific is still nascent, yet leasing activity in the sector remains strong. Seeing that the life sciences real estate demand is often clustered in locations with concentrations of knowledge-based industries, research institutions drive demand for lab space. We expect this to continue especially given that, according to JLL analysis, life sciences-focused companies in Asia Pacific will expand significantly between now and 2025, with Singapore, Japan, Seoul, Shanghai, Beijing, and Hong Kong as well as Australia for proximity to leading universities – poised to emerge as key hotspots for life sciences investments. 

The opportunity for increased partnership between investors and occupiers will arise from the requirement of highly specialised spaces and added layers of complexity in finding the right real estate. Currently, supply constraints are linked to an owner-occupied market. The knock-on effect of this reality is that despite robust demand for research and development (R&D) labs and medical offices, specialised spaces are not available. 

This mismatch leads us to conclude that specialised space will become a greater priority area of investment within the wider commercial real estate sector going forward – and there are numerous micro-drivers that should appeal to investors in addition to the broader macro-influenced trends. 

Firstly, life sciences companies are more willing to commit to longer leases over short-term flexibility to secure high-quality spaces. Foremost, front-line activities, including R&D, delivering healthcare services, and manufacturing medical devices or pharmaceuticals, will drive more demand for space in the coming years than back-office or administrative functions that require less specialised spaces and are more easily adapted for long-term hybrid working. 

Secondly, demand will be strongest for high-specification assets with ESG credentials which are no longer a ‘nice to have’ for occupiers. Many corporates mandate sustainable real estate, and employees are increasingly demanding it. As such, occupiers are likely to be willing to pay a premium for high-quality real estate, particularly in markets where demand outstrips supply. 

Thirdly, life sciences clusters have traditionally been located in out-of-town science parks and university campuses to accommodate larger space requirements across Asia Pacific metros. Concurrently, the limited number of opportunities to invest in life sciences creates high barriers of entry for investors. 

The encouraging news is that core investors for life sciences real estate are usually looking at build-to-suit projects and increasingly have an awareness of the space required to incubate the industry. The principal buyers of life sciences real estate are developers (27.7%), fund managers (25.9%), and operators (23.6%), who together account for 77.2% of investors in this sector, according to JLL Research. The remaining 22.8% is attributed to a wide variety of entities, including insurance companies, pension schemes, banks, private investors, REITs, and sovereign wealth funds.

What are the next logical steps? Demand in the life sciences space tells us that the pool of well-funded tenants is vast and willing to pay for specialised real estate. Specifically, the focus on spaces for high-quality labs and specialised facilities that need to be purpose-built will swell further regionally. Additionally, there are many government policies and incentives to expand the life sciences sector with built-to-suit facilities where investors and developers can pursue asset development with pharmaceutical companies now available. 

Partnerships are essential to unlock the most productive opportunities, more than other commercial real estate sectors. Investors and developers need to engage more directly with life sciences businesses across Asia Pacific to understand their changing needs. This will ensure their future projects deliver the opportunities for custom fit-out and bespoke design that will prime life sciences for their future growth. There are also more opportunities now available to investors to capture investment opportunities by engaging public-private partnerships in newly planned science parks or land tenders. 

As occupiers are likely to target markets with deep talent pools and innovative cities with strong consumer demand, redesigning and retrofitting offices are likely to be key themes as life sciences organisations formulate their hybrid strategies. China is one market poised to be a key focus in the short-term, but with areas of pharmaceutical production moving to India, supported by a broad talent pool of chemistry and biology graduates, offshoring of contrate life sciences research and drug manufacturing will drive investor decisions more in the future. 

In other words, be it R&D, distribution, manufacturing, or front office requirements, the future success of the Asia Pacific life sciences sector is linked to the depth and diversity of the commercial real estate supporting it. As competition for high-quality and specialised space intensifies, owners of and investors in life sciences real estate have the opportunity to play a role in incubating the next phase of the sector’s growth. The sector’s profile and profitability, undeniably boosted by the pandemic, are now hinging its long-term future on both the demographics and changing lifestyles in the sector. 

By Priyank Shah, Senior Director, Capital Markets, Asia Pacific, JLL