Property group Terrace Hill yesterday reported a fall in full-year pre-tax profit but said its Scottish operations were performing well.

The AIM-listed company said it remains confident for the long term despite market challenges and warned of a modest slowdown in occupier-demand with some further weakening in investment yields since the year-end.

Terrace Hill said Clansman Homes, its Scottish housebuilding division, is beginning to gather "significant momentum". It has purchased several new sites and has secured planning permission for new housing developments.

The group has a landbank with capacity of more than 1400 units.

"We expect the business to continue its excellent growth, both through the existing landbank and acquisitions," said Robert Adair, the company's chairman.

Terrace Hill has acquired new sites at Fenwick, south of Glasgow, and Carnwath, near Lanark, which the company said is "within commuting distance of both Glasgow and Edinburgh".

The group has obtained planning consent for 168 units at Shotts in north Lanarkshire, where the first homes are scheduled to be delivered this spring.

Philip Leech, the group's chief executive, sounded bullish on the firm's activities. "Demand for our homes remains, with the Scottish housing market appearing to hold up well compared to other parts of the UK," he said.

"We believe our focus on affordable, suburban homes with no exposure to high-cost city-centre dwellings will help us to withstand the challenges of any housing downturn."

Leech also said Terrace Hill plans to demerge Clansman from the main group when financial markets improve.

On the downside, Terrace Hill said the value of some of its commercial property holdings has fallen.

Commercial property, particularly in the Greater London area, has been hard hit by the economic slowdown, the on-going credit crunch and other factors.

Terrace Hill said full-year pre-tax profit for the period to October 31, 2007 fell to £18.1m compared with £25.8m in the year-ago period, on revenues of £69.84m, against £80.49m a year earlier.

City housing industry analysts said higher administrative costs help account for some of the drop in pre-tax profits.

The company said triple net asset value (TNAV) increased by13.8% to 83.7p per share from 73.6p per share earlier, and said it is increasing its total dividend for the full year by 16.7% to 2.1p per share.

TNAV revalues trading assets to current value and deducts tax that would arise on their disposal.

The group has a strong cash position with more than £26m, together with £37.3m of undrawn debt facilities.

The company is "well positioned" to take advantage of adverse conditions in the housing market by buying homes from distressed or forced sellers - homebuyers who can no longer keep up mortgage payments on their properties.

The fragility of the housing market was underlined yesterday by Simon Rubinsohn, chief economist for the Royal Institute of Chartered Surveyors.

He said the market, which has seen price falls in recent months, was underpinned by a resilient economy but credit woes could still lead to a deeper downturn.

In another sign of trouble in the property market, Countrywide, Britain's biggest estate agent, said UK home sales are likely to remain about a quarter of a million below trend in 2008 after a 20% drop in the second half of 2007.

Grenville Turner, Countrywide's group chief executive, told the Reuters Housing Summit that up to 1.1 million transactions were likely this year compared with a long-term average of 1.35 million.