The Indian economy continues to perform in a way that many other countries can only envy. The real growth in GDP for the most recent fiscal year, which ended in March, beat market expectations at 7.2 percent, making it among the fastest-growing large economies in the world. And economists expect growth to remain solid, with forecasts ranging between 6.0 percent and 6.5 percent for the next two fiscal years.

In an otherwise challenging global environment, the Indian economy remains a strong performer. Consumption — the key driver of growth in the country — is expected to grow by about 150 percent during the current decade. Many believe India is set to overtake Germany and Japan to become the world’s third-largest economy by 2030.

THE OPPORTUNITY

With that growth comes increased opportunity for international investors. The interest in India from global institutional capital has been firmly on the rise in recent years. India has witnessed an increase in foreign direct investment across all sectors of the economy.

There has been significant interest in infrastructure, including in areas that benefit from the energy transition, such as renewables. Real estate has also seen increased interest from overseas. The sector has benefitted from supportive and progressive government policies that have bolstered its reputation as an attractive destination. This has meant the sector has undergone a significant transformation toward institutionalization during the past decade. The rise in successful exits by global investors demonstrates both the growing range of exit opportunities open to them and the increasing ease of doing business in what is an increasingly transparent real estate market. So far, the majority of global real estate institutional capital has been invested in a limited set of more traditional property types — mainly office, residential, retail and hospitality — where there is a long-term sector track record. As these parts of the market become more mature, however, the risk-return trade-off has changed. In these sectors, transaction activity has multiplied. REITs and private investors looking for yield have added exit depth, reducing exit risk. As these mainstream property types have become more mature, potential returns have also moderated.

Investors are therefore seeking out different areas of the real estate market that offer a more attractive return profile. A compelling opportunity exists outside the mainstream, in alternative real estate property types. Some of these offer a promising early mover advantage, similar to that seen in the early years of the Indian office sector, which later went on to see significant value creation for those who were able to take advantage at the time.

This has supported activity in areas such as data centers or industrial and warehousing real estate. The life sciences real estate sector, however, stands out as a unique potential opportunity among these alternative property types. It offers attractive — and resilient — risk-adjusted returns in an environment where there is deep demand but a deficiency of good-quality supply.

On the demand side, India accounts for roughly 60 percent of global vaccine production, supplies nearly 40 percent of generic medicines consumed in the United States and produces about a quarter of all medicines consumed in the United Kingdom. The country has more plants approved by the U.S. Food and Drug Administration than any other country in the world, aside from the United States itself. Indeed, India’s life sciences sector is expected to grow by a compound annual growth rate of 13 percent, to $427 billion, by 2030.

ACCELERATING THE OPPORTUNITY

A number of factors will accelerate this growth. At a global level, the realignment of worldwide supply chains — of which India is a major beneficiary — and an ongoing patent cliff that will unlock a global market worth up to $250 billion will support the industry. Meanwhile, at a national level, rising incomes, increasing insurance penetration, a greater government focus on healthcare, and new policies providing research-linked incentives to the life sciences industry will also play their part. The country’s talent pool of chemistry, biology and biotechnology graduates means a well-trained workforce is available at a very competitive cost. Research and development (R&D) in India costs approximately one-third of that in the United States or Europe, giving rise to a huge and growing potential for outsourcing.

Because of this demand, India’s life sciences sector is poised for a decade of rapid growth. Yet, the market remains chronically short of the right quality of premises to support it. There are no mainstream property developers providing real estate solutions to life sciences corporations, which has forced most such companies to build their own premises. This means they have needed to divert capital for many years from their core competencies into real estate development and management, areas in which they are often not experts. The result is that life sciences corporations often operate from inappropriately zoned buildings, or from facilities that lack the right infrastructure and services to support their R&D or manufacturing operations.

Large investors that have their own deep pools of capital and the capability to provide real estate solutions for life sciences tenants have an opportunity to benefit from the sector’s growth. However, there are three key principles they need to follow if they are to harness the opportunities.

HARNESSING THE OPPORTUNITY

Firstly, investing in the sector requires deep technical know-how, as tenants’ requirements are varied and can be highly sophisticated. Understanding a client’s business is critical. Investors need to ensure that the partners they work with have in-country scientific expertise and understand the precise technical requirements of the laboratory or specialized manufacturing facility they are planning to own.

Secondly, it is important for overseas investors to adapt to — as well as be sympathetic to — the existing environment. The need to convert the industry from a self-build mindset to one where leasing solutions become more normal requires a thorough understanding of the market and how it operates. This means understanding clients’ outlooks and working with them to demonstrate the benefits of what to many is a new way of doing business, notably the quicker speed to market for a tenant’s business that a leasing arrangement offers.

Thirdly, operational know-how is vital. Life sciences buildings are often critical facilities for businesses and are under regulatory scrutiny. Hence, they have to operate to the highest professional standards. It is important for an investor to be able to demonstrate to a client that they have the operational know-how and track record to help them operate without interruption.

Crucially, the life sciences real estate opportunity in India differs from that seen in the United States and Europe for a number of reasons. Firstly, as opposed to discovery research in the United States or Europe, the customer in India is generally engaged in secondary research, which involves migrating an accepted innovation to commercialization and mass manufacturing. Secondly, while tenants in the United States or Europe are often venture capital–backed companies — and in many cases are startups — tenants in India tend to be existing, profitable and stable companies. Thirdly, tenants in India make a meaningfully larger investment in their equipment and fitouts compared with building owners, and a heavily licensed regime discourages them from relocating — a very different environment from the United States or Europe, where the owners invest in fitouts. This means leases typically tend to be stickier in India than elsewhere.

SEIZING THE OPPORTUNITY

The demand-supply mismatch and absence of mainstream developers in the sector present an opportunity for overseas investors to develop the facilities that will help the country meet the demand in the life sciences industry. For example, Actis is in the middle of building a market-leading builder-
operator-owner of life sciences real estate in India as part of propelling India on its future growth trajectory.

As it continues to grow, India is likely to move even further onto the radar of global investors. The size of its market, the depth of its talent pool and its lower costs mean it will remain attractive for those seeking to deploy their capital to the maximum advantage.

Working with the right partner — one who both understands the market and has deep knowledge of its unique characteristics and the potential positive outcomes it affords — will be critical for success. For those seeking more attractive risk-adjusted returns than can be achieved in traditional real estate, the life sciences sector in India remains a compelling opportunity.

Ashish Singh is partner, head of India and Southeast Asia, real estate at Actis. He is based in Mumbai.