British Land upbeat as City office rents hit five-year high

British Land revealed yesterday that office rents in the City of London had broken through the £50-a-square-foot barrier for the first time in five years as it unveiled better-than-expected first-quarter results.

The commercial property giant said it was now letting space at its Broadgate complex, next to Liverpool Street station, for £50 a square foot, adding that the outlook for the sector looked increasingly strong, as London office vacancy rates fell. The chief executive, Stephen Hester, said the length of introductory rent-free periods in the City had also halved in recent months.

The news came as British Land announced a stronger-than-expected 7.1 per cent rise in its net asset value per share over the past three months, from 1,486p to 1,592p. The company's underlying pre-tax profits increased by 33 per cent on the previous quarter to £73m.

Although the group said the outlook for the London office sector - which accounts for about 35 per cent of British Land's portfolio - was strong, it conceded that growth was slowing in the retail sector, which accounts for most of the remainder of the company's exposure.

High street shops and out-of-town shopping centres are forecast to make returns of between 4 and 5 per cent a year over the next five years. However, the group said it was focusing more attention on warehouses which are offering much higher likely rates of return.

The group said it planned to be one of the first UK property companies to convert into a Real Estate Investment Trust (Reit) next year. It claims to be on track for a conversion on 1 January, the day on which the legislation comes into force.

Reits provide a more tax-efficient environment for property companies. On conversion, the company must pay a charge of 2 per cent of its assets to the Government - more than £130m in the case of British Land - after which it will no longer have to pay corporation tax. However, the company will then be obliged to pay back at least 90 per cent of its taxable income as a dividend to shareholders, who will in turn be taxed.

The Reit framework was adopted after its success in countries such as France. Most UK property companies are considering the conversion, with the likes of Hammerson and Land Securities having already announced their intention to make the shift.

As well as converting to a Reit, the company will make another landmark change in January, when the chairman John Ritblat steps down from the board after more than 35 years at the top. He will be replaced by Chris Gibson-Smith, who joined the board three years ago.

Shares in the company rose as much as 1 per cent in early trading yesterday, before falling back to close down 0.9 per cent at 1,364p, giving the group a market value of about £7.1bn.

British Land is trading at a discount of more than 14 per cent to its net asset value, greater than most of its peers.