February 14, 2022

Propsci in France: An Emerging Market

The U.S. Propsci (or property sciences) market is far and away the largest and most mature, with key players such as Alexandria Real Estate. The European market is emerging and, as is often the case in the healthcare sector, first started in the United Kingdom and the Nordic countries. In 2021, USD$445 million has been invested in the United Kingdom (including, in particular, joint venture Harrison Street and Trinity IM’s acquisition of a portfolio of 12 PropSci assets in bio-parks) and USD$222 million in Denmark.

In France, while not yet an active market, the propsci sector is arousing real estate investors’ interest, which can be explained firstly by the attention paid to life science R&D investments stemming from the COVID-19 pandemic, and secondly by a focus on office building transformation.

The French healthcare startup ecosystem has changed significantly in recent years, highlighting many of those companies and giving way to more mature players whose real-estate requirements have not, or have only somewhat, been met to date. The Parisian plateau (Génopole in Evry, Paris-Saclay, Biocitech in Romainville) is a good example of this, even though this phenomenon can also be observed in the provinces (for example, Marseille, Lyon, Strasbourg, Bordeaux, Nantes).

New startups, before their first fundraisings, typically set up inside business incubators located within hospitals or specialized institutes, such as Paris Santé Cochin or Paris-Salpêtrière.

As and when these startups raise funds and grow, the question arises of who they should set up with and what their premises should be like. Findings show their requirements and requests change as they mature.

For example, new startups (at the seed funding or Series A* stage) often seek to set up within business incubators not far from a hospital complex, university, or higher-learning and research institution. In most cases, they can only stay there for two or three years (for example: Agoranov, in Paris’s 6th arrondissement, or Paris Innovation Boucicaut).

Today, demand for properties in central Paris appears to exceed supply considerably.

Many of these business incubators were launched and financed using public funds, some of which in conjunction with industrial or pharmaceutical groups (Paris-Saclay cluster). A few rare incubators have more recently emerged at the initiative of private investment funds specializing in tech/biotech (such as the Passage de l’Innovation in Bastille financed by the iBionext fund’s founder).

In these incubators, young startups are looking for flexibility to occupy more space as they grow, technological equipment and platforms, as well as general services (legal affairs and marketing/press departments, etc.).

The agreements entered into in these arrangements are service agreements under which office space is provided. Their durations usually range from 24 to 48 months with, in some cases, the ability for the host institution to terminate the agreement early if the start-up does not achieve its next round of fundraising within a given period.

More mature startups (Series B or Series C) are looking for premises with greater surface areas, which they find on a more typical tertiary rental market, and sign nine-year commercial leases with the option to vacate the premises at three and six years.

Demand in Paris seems to substantially exceed available supply. The Biopark building in the 13th arrondissement, specializing in the life sciences sector, was quickly fully leased.

Investment funds dedicated to the life sciences identify the importance of where their young enterprises are headquartered. To their minds, being located in central Paris close to higher learning or industrial centers is a prerequisite for attracting talent, in particular researchers from abroad.

In a context in which the aging population, changes in scientific research, and the emergence of a French healthcare startup ecosystem are all factors which are expected to grow the market for companies and funds specializing in the life sciences, it is highly probable that more and more real estate investors look into investing in this new real-estate asset class called propsci (in consonance with proptech).

Our analysis of the French propsci market is that real estate investors are still unfamiliar with life science players, their needs, how they grow, and their ecosystem. But they are increasingly intrigued by this asset class, especially given this sector’s keen interest in the United States for international investors (Blackstone, KKR, Lasalle), the strategy based on demographics and healthcare, and the rapid rise in venture-capital financing.

More than one investment strategy is possible: One based on purchasing an operational platform dedicated to the life sciences sector or one based on building real estate assets (which assumes partnering with companies or developers experienced in dealing with this kind of asset). Lastly, the challenge will be finding the right location: The success of this asset class is highly dependent on its ecosystem.