British Land, the FTSE 100 property developer, decided yesterday to go ahead with a 736ft (225m) skyscraper in a £286 million bet that the City market for office rentals has four years left to run.

Stephen Hester, the chief executive of British Land, has said that the coming year will be “challenging” for the British commercial property market as price inflation tails off and landlords have to work on rental growth to achieve better overall returns.

Nevertheless, Mr Hester believes that there is still enough pent-up demand for smart office space in the City to ensure that British Land can start construction on the 47-storey Leadenhall Building, dubbed the Cheese Grater, without a pre-let in place.

Francis Salway, the chief executive of the rival Land Securities, said last week that Britain’s £710 billion commercial property market was already experiencing a marked slowdown and noted that parts of the retail sector had already seen price falls.

BACKGROUND

• British Land fears property slowdown

• British Land to soar upward with £286m tower

• British Land offers equity

• British Land hoists for sale sign over EBRD’s head office

• New British Land boss builds up his holding

British Land comment: Tall call

No more free rides says Hester. But is he right to gamble on the Leadenhall Building?

Related Internet Links

• British Land company information

• British Land share price chart

• British Land forecast

The Leadenhall Building will not be ready until the first quarter of 2011, by which time many property agents fear that rents could start to fall because of oversupply, especially if the list of skyscrapers with planning permission progresses to construction.

Land Securities is awaiting a government decision to approve its own City skyscraper, dubbed the Walkie Talkie, at 20 Fenchurch Street. Mr Salway has said that he may not start construction without a prelet in place.

Delivering a 13 per cent rise in British Land’s underlying trading pretax profits to £257 million, Mr Hester said: “Will 2011 be a great year? It is impossible to tell. There could be risks from supply. But the risks are always on our side in the long term . . . I’m not saying the market will be great in 2011, but our building will be the best available in that year. Our job is to know how to add value.”

British Land confirmed that it had sold the European Bank for Reconstruction and Development (EBRD) building for £406 million to KanAm Grund, the German fund. “Even within our favoured sector [City offices], we think there are other areas where we can add value. The EBRD building is a terrific investment but we are looking at developments and refurbishments to add value,” Mr Hester said.

At the end of the first quarter this year there was 8.3 million sq ft of empty City office space, a 5 per cent fall from the end of last year. However, Knight Frank, the property consultancy, reported that construction had started on one million sq ft of speculative office buildings – no prelets in place – bringing the total City speculative construction under way to an “unprecedented” five million sq ft of space. Much of that should be mopped up by big banks continuing their hiring spree.

British Land has focused over the past year on more development of both City offices and out-of-town retail while selling off so-called more mature assets in both sectors to profit from the strong investor market. The developer churned £3.7 billion of assets from its £21.3 billion property porfolio over its financial year to end-March and has sold another £1.2 billion since.

Net asset value per share increased 20 per cent to £16.82, and the total return for the year rose 21.3 per cent. The dividends rose to 20.35p a share from 17p last year.

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