EUROPE - The fallout from the euro-zone crisis has reached central London office, British Land chief executive Chris Grigg said this week, as he pinned the firm's hopes on the future expansion of the UK REIT's development pipeline.
Posting a total property return of 8.3% on Monday, Grigg described the firm's performance as delivering "good results in challenging market".
He said the re-emergence of political and economic euro-zone tensions and negative domestic economic growth had combined to deal a blow to the UK occupational and investment market.
Although retail, which makes up 61% of British Land's portfolio, was worst hit, capital and rental growth in the hitherto resilient London office had begun to slow.
"Although occupational demand for office space in Central London was running at reasonable levels through the first half, it was more subdued in the second as occupiers became more wary of taking decisions," Grigg said, pointing to clear signs of weaker demand in the second half for secondary buildings in the City with shorter lease lengths.
London office, mainly in the City and West End, currently makes up 34% of British Land's portfolio. That will increase to 40% on completion of current development projects, which are 50% pre-let with £34m (€42m) annual income.
Despite negative macroeconomic forecasts, Grigg said he remained positive about the London market because upcoming lease expiries would support rental growth, and the city would continue to benefit from strong demand for projects in development.
To date, the £10.3bn REIT - which counts APG, the Norwegian oil fund and Singapore sovereign wealth fund GIC among its top five shareholders - has committed £1.4bn to development projects.
It expects £192m of profit from its office development projects, with an additional estimated £77.5m in rental income.
"There is also significant value still to come from our existing London office development programme," said Grigg.
"We do remain cautious about the overall economic environment, which remains difficult. We expect it to remain so, with the UK economy growing slowly at best and the euro-zone crisis unlikely to resolve quickly.
"Against this background, we expect property capital values in the UK to be variable in the near term."
In separate news, Hercules Unit Trust, a retail warehouse fund 41% owned by British Land, announced that it has signed an agreement with a consortium of lenders including US insurer MetLife for a £350m five-year loan deal.
The deal was announced as a report on UK property lending published by De Montfort University claimed borrowers would struggle to refinance as much as £100bn on current terms when the debt matured.
Outstanding property debt, including that secured by social housing, totalled £232.7bn at the end of December.