Commercial Real Estate Is At A Dead End, But There’s One Avenue Left To Explore

Commercial Real Estate Is At A Dead End, But There’s One Avenue Left To Explore
Reda Farran, CFA

over 2 years ago4 mins

    • The life sciences real estate market is benefiting from huge, growing demand, as well as wider societal trends.
    • You can invest in the space using REITs like Alexandria Real Estate Equities, Healthpeak Properties, and Ventas.
    • All three look similar at first glance, so it’s worth researching them further as well as being aware of the risks before considering investing.
  • The life sciences real estate market is benefiting from huge, growing demand, as well as wider societal trends.
  • You can invest in the space using REITs like Alexandria Real Estate Equities, Healthpeak Properties, and Ventas.
  • All three look similar at first glance, so it’s worth researching them further as well as being aware of the risks before considering investing.

Offices, shops, restaurants, and other kinds of commercial real estate have all been struggling in the last year, as more and more people work and shop from home. But the pandemic’s proving to be a boon for one under-the-radar corner of the real estate market: life sciences.

💰 What’s the opportunity here?

There’s huge (and growing) demand

The life sciences real estate market – which includes buildings used for laboratories, medical research, testing centers, biotechnology manufacturing, and more – was booming even before coronavirus. But the pandemic unsurprisingly gave the sector a massive boost – and without the downsides. Unlike most workers in conventional offices, after all, scientists generally can’t work remotely.

Biotech companies are at the forefront of the boom, spending more and more on research and development (R&D) in hopes of new therapeutics and breakthrough scientific discoveries. And all that spending directly translates into more of a need for laboratories, as well as medical research and testing centers.

Total R&D spending by US biotech companies. Data source: Bloomberg
Total R&D spending by US biotech companies. Data source: Bloomberg

What’s more, this huge demand for life sciences real estate is resilient to recessions. That’s because life sciences companies don’t dial down their research and spending much during economic slumps, given how important their work is.

The sector’s attracting loads of investment

In dollar terms, deal activity in the life sciences real estate sector increased by 150% in 2020 from 2019. And this year alone, more than $10 billion has gone toward life sciences real estate, representing around 4% of all global commercial real estate transactions. That’s double last year’s share. No surprises, then, that the sector’s starting to attract some big private equity names like Blackstone and KKR.

The market’s favorably exposed to wider trends

An aging population, rising healthcare spending, the increasing importance of technology in drug discoveries, the growing prevalence of “lifestyle” diseases (think those caused by alcohol, drug abuse, unhealthy eating, etc.): these are all big and inescapable trends. And they’re all driving growth for the life sciences sector and, as a result, for the life sciences real estate sector.

📈 How can I invest?

Now, we’re not advocating going out and buying laboratories yourself. But you can buy publicly listed real estate investment trusts (REITs) operating in the life sciences sector. REITs are shares in companies that own and lease out properties, and they’re required to distribute 90% of their taxable income to investors as dividends.

In the table below, we’ve compared the key financials of the three main life sciences REITs.

The three main life sciences REITs stocks compared (Data source: Bloomberg)
The three main life sciences REITs stocks compared (Data source: Bloomberg)

A few interesting things stand out here. All three have performed well over the past year, with Ventas up the most. That could be one reason why the company’s stock price is currently higher than analysts think it should be. Ventas also stands out as the most volatile stock of the bunch, and therefore the riskiest.

They also all have attractive dividend yields that are higher than both the wider US stock market and US government bonds. Healthpeak Properties has the highest dividend yield of the bunch, while Alexandria Real Estate Equities has the lowest.

Equity value to forecasted FFO (funds from operations) is similar to the price-to-earnings ratio, but it’s more widely used when evaluating REITs. It’s basically the ratio of the REIT’s stock market value to the amount of cash it generates every year. The lower the ratio, the cheaper the REIT. On this metric, Ventas is the cheapest while Alexandria Real Estate Equities is the priciest. But they’re all arguably quite similarly priced.

If there’s one key takeaway from these metrics, it’s that the three REITs are rather similar – that is, none of them stands out as the best out of the bunch. That tells me it’s worth doing additional research into each of them before selecting one (or two, or all three).

⚾️ What’s the catch?

As always, be aware of the potential risks before considering investing. For starters, REITs may diversify your portfolio by adding real estate to the mix, but they’re still stocks – and their values may therefore move in sync with wider stock markets’ daily movements.

Second – and more specific to the life sciences real estate sector – there could be a risk of oversupply as more investor money flows into the sector, leading to higher vacancy rates. Life sciences buildings are also costlier to build than conventional offices due to their more intricate requirements. That makes their developers more at risk of making a loss if they aren’t able to fill their properties with tenants.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG