Rocketing construction costs and subdued occupier demand has forced property company British Land to delay development of a landmark office skyscraper in London's City financial district by at least a year.
In a first quarter conference call today, Chief Executive Stephen Hester said the company was now targeting a 2012 delivery of the 225-metre high Leadenhall Tower in the heart of London's Square Mile because it wanted to minimise costs and ensure the "premium building" would attract "premium rents".
"Our perception is that we may be passing the peak of construction costs cycle," said Mr Hester, referring to the recent fall in steel futures from a peak two months ago.
"We will be retendering contracts to see if we can get some costs out, as contractors become more eager to price business keenly."
Hester said the delay would bolster the tower's letting prospects, timing its delivery to coincide with an anticipated uptick in occupier demand from 2010 onwards.
News of the delay did not surprise investors or analysts, many of whom had expected British Land to follow rival Land Securities and streamline its London office development programme in line with choppy market conditions.
British Land shares were trading 1.1 per cent up to 730 pence by 0922 GMT versus a 0.3 pe rcent rise in the FTSE 350 Real Estate Index.
The value of British Land's multibillion pound portfolio slipped 5 per cent in the quarter to end-June as gloomy economic portents continued to depress UK property market sentiment.
Mr Hester blamed sparse property investment volumes for a slump in the value of net assets to £6.3 billion and a 10 per cent drop in quarterly net asset value per share to 1,212 pence.
He declined to comment on when the UK property correction might tail off but said British Land's portfolio was already in the "long-term fair value zone" of 5-6 per cent rental income yields for prime assets, compared with sub-4 per cent yields regularly seen at the peak of the last boom cycle.
Despite describing investment markets "as thin, nervous and negative in tone", Mr Hester said the company remained on-guard to snatch opportunities forged by the credit market freeze.
British Land said shallow occupier demand had started to hit office rents but retail rents were still growing, albeit at a slower rate. Group occupancy held firm at 98 per cent and renegotiated rents rose by an average 4 per cent above estimates.
Demonstrating the resilience of its operations, the company chalked up like-for-like rental growth of 6.3 per cent versus the industry benchmark of 3.3 per cent, which boosted quarterly underlying pretax profits by 23 per cent to €74 million.
Reuters