Property group Hammerson - part of the three-strong alliance behind Birmingham's Bullring shopping centre - yesterday painted a gloomy picture for retail and office markets following higher interest rates and tighter credit conditions.

The group, which also owns the Ravenhead Retail Park in St Helens, said higher interest rates and falls in disposable incomes had led to "challenging" conditions for retailers.

It also warned that demand for office space, particularly in central London, could be hit by the recent weakness in financial markets.

Hammerson, which converted to a tax-efficient real estate investment trust in January, added that investment activity in UK commercial property had slowed during April, May and June.

The news came as the company posted a 26.5 per cent rise in net rental income during the six months to June 30 to £138.3 million as it benefited from an increase in rental rates across its portfolio.

Adjusted net asset value rose 11.6 per cent to 1635p - ahead of consensus forecasts of 1600p - while adjusted pre-tax profits rose 22 per cent to £54.8 million.

During the first half of the year, the group said demand for office space in central London remained strong with vacancy rates at their lowest levels for five years as the City continued to build its growing dominance as an international finance centre.

But the company has been under increasing pressure from retailers to offer greater lease incentives, including rent-free periods of around 18 months. Retail makes up some 70 per cent of its UK portfolio.

Construction and lettings at the group's Cabot Circus retail development in Bristol and expansion of the Shires shopping centre in Leicester progressed well, while it had seen good demand for space at its new retail park at Union Square in Aberdeen. The group also has planning consent for two retail developments in Leeds and Sheffield.

Hammerson, which also has investments in France, saw its property portfolio portfolio grow from £6.7 billion at December 31 to £7.5 billion at June 30.

The company said despite a more uncertain background, it was confident about its prospects for the remainder of the year given the strength of its investment portfolio along with its development programme and pipeline.

Chairman John Nelson told shareholders: "We are maintaining our strategy of creating value through asset management, development activity and capital recycling in key property markets in the UK and France.

"We have an investment portfolio of exceptional quality which, coupled with our outstanding development programme and pipeline, will enable us to continue to drive the performance of the business."

But Citigroup analyst Harry Stokes said: "Life is getting tougher and that is clear from management's statement. A number of companies have beaten consensus net asset value forecasts at interims, but we continue to expect a sharp slowdown in the second half."

However, analysts at JP Morgan and KPC Peel Hunt described Hammerson's results as strong.

KPC Peel Hunt said Hammerson's shares were "actually better value than the public declaration suggests" and - alongside Land Securities - the company offered the "best chance for net asset value growth in the lean couple of years ahead".