Europe’s life sciences sector has continued to grow, buoyed by rising investment volumes and its successes in developing the coronavirus vaccines, among other factors. Outside of well-known centres like the UK’s Cambridge and Oxford however, the sector remains relatively nascent – making it difficult for real estate investors to assess the maturity of different clusters, how their relative strengths compare, and which locations present the greatest opportunities for investment into labs and other specialist facilities.

To address this, we collected and analysed market and real estate data on both the size and concentration of the local life sciences sector in 39 European clusters. We then developed a composite score for each cluster along two axes: Human Capital, which measures the depth of the local company, employment, and academic ecosystems; and Physical Capital, which summarises the level of private and public sector funding, as well as the commercial real estate offering.

After scoring each of the clusters along these axes, we placed them into one of five descriptive groups that summarises their overall performance.

This analysis provides investors with both directional guidance on the maturity of Europe’s leading life sciences centres, as well as pointing them to emerging markets that may present opportunities in the future.

How to score a cluster

To assess the maturity and comparative merits of the different clusters, we categorised the 17 variables we collected for each cluster into one of our four groups:

• Ecosystem. This includes variables related to the size and composition of the local sector, including the number of life sciences companies and the rate of startup formation.
• Talent. Life sciences employment, the number of universities and the impact of research done by these universities.
• Funding. The levels of private and public funding invested into companies in the local sector.
• Real Estate. The lab stock, the liquidity of the market for property investors, lab yields, etc.

Based on their place in the distribution of the underlying variables, each cluster was awarded a number of points that sums up to their score in the category. We then added these category scores, after some weighting, into one of our two axes: the Ecosystem and Talent scores combined to form the Human Capital score, and the Funding and Real Estate scores combined to form the Physical Capital score.

On the graph above we have plotted these composite Human and Physical Capital scores out of a maximum score of 50, which is arbitrary, but allows us to see the relative position of each cluster in relation to others.

Europe’s most established clusters – such as Cambridge, Paris and London – all score well along both axes, but the analysis also shows the strong performance of the continent’s secondary clusters, such as Berlin, Amsterdam, and Basel.

Identifying comparable clusters

To further segment the performance of the clusters, we assigned each cluster into one of five groups based on its position along the Human and Physical Capital axes. These groups are:

• European Leaders. Markets which have strong fundamentals and are dominant markets for life sciences research and development, often built on decades of growth.
• Fast Movers. Mostly composed of established markets, where strong fundamentals in either physical or human capital are positioning the cluster for fast growth.
• Maturing Hubs. Established and emerging clusters with existing solid hubs or anchors for life sciences activity.
• Cluster Specialists. Clusters that are often strong in a single fundamental, but still improving in other areas.
• Seed Markets. Less mature clusters with potential for growth, but little funding or physical infrastructure.

This segmentation provides instructive insights on the comparative maturity of different locations. For instance, many of the Cluster Specialists perform better along the Physical Capital axis than in Human Capital, as their comparative advantage lies more in the availability of funding for specialised R&D and the provision of specialised space than in significant company numbers.

Stevenage, for instance, is a specialist in cell and gene therapy, home to the GSK R&D facility, the Bioscience Catalyst, and Cell and Gene Therapy Catapult, which provide excellent infrastructure for growing early-stage cell and gene therapy companies, despite not having a local university.

By contrast, Seed Markets like Lille, Leeds, and Hamburg are arguably underserved by commercial labs space relative to their company numbers and employment levels.

The opportunity for real estate investors

The prospects for the life sciences sector are strong. A greater consumer-reliance on medical devices, the effects of an ageing population, and rapid advancements in medical technology will drive long-term growth in the sector.   

This presents considerable opportunities for real estate investors, as a growing sector will lead to greater demand for specialist stock. We envisage that Europe’s top clusters will inevitably strengthen, building on decades of growth. However, our analysis also highlights the new wave of emerging clusters, where investors who are able to deploy capital now are likely to see outsized returns as these markets mature.

If you’re interested in learning more about the Europe’s life sciences sector, download our recent EMEA Life Sciences Cluster Outlook.

Economic debates about demographic change have tended to focus on the effects of growth – whether it’s Malthusian concerns over the burden of feeding a larger population, or how the carbon emissions created by larger populations amplify the impact of climate change. However, many of the world’s largest economies are now entering an unprecedented period of demographic stagnation and even population decline.

This phenomenon is perhaps most acute in Europe, where the continent’s population began to shrink in 2020. According to estimates from the UN Population Division, by 2030 they’ll be almost 10 million fewer Europeans than there were at the start of the decade. Germany’s population may decline by around half a million people over the same period, while Italy’s could shrink by almost two million.  

Elsewhere, Japan’s population, which peaked in 2009, is forecast to fall by more than 5 million people before the end of the decade. China’s population may have already peaked last year.

The United States, something of a demographic outlier among developed economies, will see its population continue to grow through to the end of the century. However, it’s rate of growth is slowing – in 2030, the United States will be home to around 16 million more Americans than it was in 2020, compared with the 25 million the country added in the previous decade.    

Between now and the middle of the century, just five countries will account for around 43% of the world’s population growth: India, Nigeria, Pakistan, the Democratic Republic of Congo and Ethiopia.

How economies change as they age

Shrinking populations, or even slowing growth, should be a cause of concern for businesses and policymakers. Economic growth is, in large part, simply a function of more people in work and rising levels of output per worker. From 1960 to 1990, when the global population grew at an average rate 2% a year, annual GDP growth averaged more than 4% a year. Since then, population growth has almost halved and global economic growth has slumped to an average rate of less than 3% a year.

Moreover, while life expectancy has risen over the last few decades, retirement ages have tended to remain around the mid-60s. Combined with falling fertility rates, this has left many economies with a surging stock of retirees and a dwindling supply of working age people (those aged between 15 and 64).

Over the next two decades, we are on course to see major shifts in the size of the workforce: China and Germany will see around an eighth of their workers retire, while South Korea and Italy will experience declines of 24% and 21% respectively. Japan will similarly lose around 18% of its workers. The United States and Britain, in contrast, will still see increases – albeit paltry ones – with the working age population rising by 3% and 1% respectively between 2020 and 2040.

It’s relatively uncontroversial among economists that the dwindling supply of workers, in the absence of significant rises in productivity, will limit the prospects for economic growth. However, there is considerable debate about the effects of ageing on inflation.

It’s often supposed, based on the experience of Japan, that growing ranks of retirees pushes down the rate of inflation. This is because those in work spend more than those too old (or indeed too young) to work – so as the proportion of working age people declines, demand and prices fall too.    

Recent analysis by economists Charles Goodhart and Manoj Pradhan however, has called this line of argument into question. Those in the workforce, they point out, produce more than they consume themselves – if they didn’t, there wouldn’t be anything for non-workers to consume. As workers retire, demand may well decrease, but supply will decrease more. This reduction in supply, according to Goodhart and Pradhan, will in fact push inflation up. The jury is out on which effect will dominate.  

Moreover, a shortage of workers is likely to drive policymakers to seek to bring in new supplies of labour. They may tolerate higher levels of immigration, or pursue initiatives to increase birth rates or boost labour participation among groups such as women, where it has traditionally been lower.

The property life cycle

Population is perhaps the most fundamental determinate of demand for different types of property. As economies age and workforces shrink, how will demand and investment opportunities across the real estate sector change?   

Demand for office space will be impacted not only by the dwindling supply of workers, but also because many of the jobs created in an ageing economy will be in non-office sectors such as health and social care, and life sciences. Indeed, these demographic “growth areas” have already spurred considerable investment into alternative sectors such as retirement living, healthcare and pharmaceutical laboratories.

At the same time, the competition for workers will intensify among firms, which may lead them to be more selective about the countries and cities they invest in – perhaps shifting more of their operations to those locations which offer a considerable pipeline of future talent. This will create opportunities, and perhaps buoyant office markets, for young economies like India and South Africa.

Acute labour shortages are already impacting the industrial and logistics sector, and these will only intensify as populations age. This could possibly spur greater adoption of robots and other autonomous machines inside warehouses and factories, which in turn will impact how these sorts of facilities are designed, operated and powered.

The residential sector is likely to prove somewhat resilient to slowing or even negative population growth, due to both the longstanding undersupply of housing and because many older people will opt to continue living in their existing family houses. This will mean there will continue to be demand for new housing stock in aggregate, but that much of the existing stock may be occupied inefficiently. We’re also likely to see relative demand for smaller households rise, both because young workers are opting to delay having families until later in life and because of falling fertility rates.

Unlike many phenomena in economics, demographic trends are indisputably of profound importance and relatively easy to forecast. This should prompt decision-makers at both occupiers and investors to start reckoning with the effects of ageing now.