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

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

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

In the commercial market, the move towards 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.

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. Last year, it booked nearly £10bn of investment from global pharmaceutical giants, venture capital investors and the government. To put that into perspective, sector revenues hit £88.9bn in 2020.

Venture capital has poured into the sector in record volumes over the past year. All of these companies need somewhere to call home. Moreover, they need specialised workspaces, usually laboratories, and they also want to be located close to other startups.

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” R&D (research and development) hubs of Oxford, Cambridge and London St Pancras.

Its latest acquisition is a great example of the strategy in action, and serves as a useful showcase for the required bespoke qualities of life sciences assets.

The Reit has just 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.

A lack of suitable properties is good news for Life Science Reit

That means that when a 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. Further deals are in the pipeline, according to management.

The firm is 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). It also hopes 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.

As of the end of 2021, the NAV was 100.2p. As there have been a couple of acquisitions this year, that figure is already out of date, but it does give investors a ballpark figure. On this basis, shares in the Reit trade at a small 2.8% premium to NAV, and offer a prospective yield of 3.9% based on the 4% per annum targeted return.

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 becoming darker by the day, 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.


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