Developing Markets Bring Opportunity But Not Without Real Estate Risk

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Life-sciences markets develop in their own way, but one aspect they all have in common is the unpredictability of their growth. Not only are local economies unpredictable, but so are companies and their needs. Driven by competing pressures to seek new markets and new innovations while operating more efficiently, biopharmaceutical companies are increasingly setting their sights on new horizons abroad. Those investments are not without risks, however. Real estate is at the core of overseas expansion, and that’s where it can get tricky.

Got 20 Years?
Timing of a drug market’s path to profitability is highly variable. Got 20 years? JLL’s fourth annual Life Sciences Outlook Report (www.us.jll.com/united-states/en-us/Documents/Life-Sciences/JLL-US-Life-Science-Outlook-2015.pdf) estimates that it could take that long for some developing markets to deliver real consumer buying power for biopharmaceutical products and medical devices. In 2015, China’s economic growth trajectory made headlines for its dramatic decline from 15.1% in the first quarter to 4.6% in the second, calling attention to the volatility of fast-growing economies. Although consumer market potential remains just that — potential — many developing markets are go-to locations for production. Biopharmaceutical companies are directly investing in low-cost sites in countries such as Turkey, South Korea, and Brazil for production and clinical trials.

The Course Is Rarely Clear
Developing markets offer the chance to grow at a lower cost, but they also present real estate challenges. A company establishing manufacturing or R&D facilities outside of a mature market will inevitably encounter new regulations, employment practices, and financing structures along with intricate ownership configurations. Often, those unknowns begin at the real estate level when potential sites are considered for manufacturing, R&D, distribution, or sales.

Whereas mature markets tend to provide access to market information and public records, developing markets often have cultural and social dynamics that are difficult for outsiders to navigate. The lack of clarity equates to a slower speed to market, greater operational complexity, and more barriers to entry. Lack of market transparency and unfamiliar regulations can make assessing facility options, lease negotiations, and laboratory design difficult to navigate. It can also be challenging to determine what facility specifications will meet national regulatory standards.

Developing markets often lack consistent fiscal and monetary policies, which can make financing risky and challenging. Interest rates and asset values can shift rapidly, and financial institutions and government agencies can be less predictable in their actions than more-advanced countries.

Few Real Authorities on Local Real Estate
Winning value in less-mature markets hinges on scoring the right space with the right environmental controls and the right kind of labor force. In developing markets, however, low cost is often accompanied by low levels of transparency. Such developing markets often have little publicly available data on current lease rates or sales prices for commercial or industrial space — information that is easily obtained in the more mature markets of the United States or Europe. Without such information, “market rates” exist only through word of mouth.

Public–private ownership structures can be another game-changer. Lease or purchase negotiations may involve multiple third parties with unclear roles in a transaction. In China, for instance, it’s common to pay a “facilitation fee” to a middleman in commercial real estate transactions. With some properties owned indirectly or partially by government entities, US companies might inadvertently violate the Foreign Corrupt Practices Act when paying what appears to be a brokerage commission.

Speed to Market
Securing facilities in a developing market can be a significant drain on the skills and finite resources of in-house corporate real estate teams. It’s easy to underestimate time and cost involved and then watch them rapidly escalate. Factor in the inevitable compromises in the quality of the real estate solution, and risks for a larger entity now exist. Compounding those challenges, senior management officials might not even be aware of those ground-floor obstacles, or they may be so consumed with other details associated with global expansion that they’re not thinking about real estate issues at all.

One tactic for shortening time to market in new markets is to partner with a third-party real estate company specializing in life sciences to provide industry expertise, on-the-ground real estate knowledge, and cultural savvy. Partnerships are becoming a given in the biopharmaceutical sector, and those include a need to manage real estate and facilities. A local partner can navigate both biopharmaceutical requirements and local commercial real estate customs to address facility options, lease negotiations, laboratory designs, regulatory compliance, and other facility details.

Despite the many risks, industry interest in expanding production and innovation overseas continues to grow. High risk may be synonymous with high potential for multinational companies hoping to stay ahead of the competition. Smart companies won’t let real estate and facilities issues get in the way of opportunities.

Roger Humphrey is executive managing director at JLL Life Sciences; 1-908-698-1379; roger.humphrey@am.jll.com.

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