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, chief executive officer 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," Mr Hester said.
He 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.
The value of British Land's multibillion pound portfolio slipped five 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 five to six per cent rental income yields for prime assets, compared with sub-four 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 percent 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 pre-tax profits by 23 per cent to £74 million.
"Our prime property assets will see out many economic cycles with a dependability few businesses can match," he said.
Mr Hester said he was pleased to report "a much happier" state of affairs in its retail portfolio, with footfall up four per cent at its flagship Meadowhall shopping mall in Sheffield, Northern England.
In contrast to rival Liberty International, which earlier this month said it had set aside contingency funds to cover loss of income from retail tenant failures, Mr Hester said just 0.3 per cent of British Land's total rents were from retailers in administration.
"The retail property market is one example of a gloom that can be over-egged," he remarked.
"I don't want to downplay the squeeze in consumer spending ... but we have not experienced an increase in bad debt."