According to the Kotaku report, the Heavenly Sword franchise is not seen as commercially viable, in spite of generally favorable reviews and respectable sales figures. Supposedly, Ninja Theory has "grown increasingly bitter about their treatment at Sony's hands." The bad blood between Ninja Theory and Sony has supposedly caused the developer to move offices, further away from Sony Cambridge.
If there is any truth to this rumor, it would be the third major game canceled by Sony's European arm in recent memory (The Getaway and Eight Days being the last two games canned). Today, SCEE responded saying "I think it is fair to say that we do not comment on rumor and speculation, especially about games that have never been announced." In addition, the rep wants to remind everyone that Killzone 2, LittleBigPlanet and Motorstorm: Pacific Rift are all from Sony Europe, emphasizing that first-party development in Sony Europe is not in any kind of trouble.
Update: Speaking to Gamespot, Ninja Theory confirms that the relationship between Sony and Ninja Theory are good. "We are moving, but it's completely amicable," Ninja Theory cofounder and chief development ninja Nina Kristensen told GameSpot. "We move mid July and have been planning it for the best part of a year; there's nothing nefarious about it. We are excited about the move--our new premises are considerably bigger and in an excellent location near the town centre." According to the report, Heavenly Sword 2 was offered to Ninja Theory, but the team declined to work on it.