This property fund should thrive even amid high inflation and wobbly growth

The UK property market looks increasingly shaky. But one sector stands out as a safe haven – life sciences property.

Scientist in a lab
The UK life sciences market has proved itself to be incredibly resilient
(Image credit: © Dan Kitwood/Getty Images/Cancer Research UK)

The foundations of the UK property market have trembled. In the residential market, the cost of living crisis and rising interest rates are eroding affordability.

In the commercial market, flexible working has sent shockwaves through the office market and the shift from high-street shopping to warehouses and out of town parks has bifurcated the retail market.

Amid these challenges there’s one sector that stands out as a safe haven. That’s the life sciences property sector.

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THIS COULD BE THE MOST RESILIENT PART OF THE PROPERTY MARKET

Over the past two years the UK life sciences market has proved itself to be incredibly resilient – It’s one of the fastest growing sections of the economy amid growing interest levels from developers, investors, and landlords regarding the science sector. 

Venture capital has poured into the sector in record volumes over the past year. In total, the “Golden Triangle” R&D (research and development) hubs of Oxford, Cambridge and London St Pancras saw £2.4bn of VC raised in 2022.

Life Science Reit (LSE: LABS) was set up to capitalise on this theme, raising £350m from investors in an oversubscribed initial public offering (IPO) in November 2021. It is the only real estate investment trust (Reit), specifically targeting properties suitable for life sciences companies in the “Golden Triangle”.

The Reit has bought 11 Herbrand Street, an Art Deco building close to University College Hospital and University College London. The £85m deal comes with a net initial yield of 4.42%. The property is currently leased to Thought Machine, one of the UK’s leading fintech companies, until 2026.

The Reit plans to transform the building into a “major life science asset.” It’s very close to major universities, while its “ceiling heights, structural slab and large, column-free floor plates,” make it perfect for turning into a life sciences laboratory. As you might imagine, assets with these specific qualities don’t come around too often.

It also acquired Oxford Technology Park for £120.3m, in a deal comprising two complete multi-let office/lab buildings, an on-site hotel and a forward-funded development site.

Contracted rent roll on the portfolio increased from £9.3m at 31 December 2021 to £13.8m at 31 December 2022, primarily as a result of the acquisitions. The portfolio’s estimated rental value (ERV) is £17.2m.  Like-for-like ERV growth reached 4.7%.

The company paid or declared dividends totalling 4.0 pence per share in the period from admission in November 2021 to 31 December 2022, meeting its IPO target.

A LACK OF SUITABLE PROPERTIES IS GOOD NEWS FOR LIFE SCIENCE REIT

When a pharma company moves in, it’s likely to stay. What’s more, the money flooding into the sector suggests demand for these unique assets will remain high.

Overall, the company has spent 75% of its IPO proceeds on six major acquisitions with an average unexpired lease term of nearly seven years.

The firm was originally targeting a net asset value (NAV) total return of more than 10% a year and an initial dividend yield of 4% (based on the issue price of 100p). 

However, Life Science REIT  reported a 8.9% fall in net asset value (NAV) in its maiden annual results. The fund is currently trading at a 32.50% discount, with shares at 61.4p. 

The real-estate investment trust is still hoping to achieve dividend growth of 5% a year in the “early years”. That’s below today’s inflation rate, but it could offer investors some protection against uncertainty.

Life Sciences is one of my favourite picks for the current market. Property in general tends to be a solid hedge against inflation, but with the outlook for the economy bleak amid higher interest rates, it’s challenging to pick potential winners.

However, the biotech and healthcare sectors tend to be fairly resilient to economic ups and downs. This factor, combined with the flood of money entering the UK life sciences industry, as well as the unique nature of these assets, implies the backdrop for this sector of the property market is better than most.

The stock might not be the most exciting investment around – it’s unlikely to be a double-bagger any time soon –but as a way to protect and grow your wealth in uncertain times, this seems to me to be one of the better options.

SEE ALSO:

Invest in commercial property – British landlords are back in business

Are UK house prices heading for a fall?

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Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification. 

 

With contributions from