UK's young REITs may face extended bear market

Britain's listed property sector is already down 19 percent so far this year despite newly won tax privileges after several firms converted into real estate investment trusts (REITs).

That follows an outstanding 2006 in which UK property stocks rose by almost 50 percent in anticipation of the new REIT legislation.

The correction may have further to go, even though a UK property crash is still seen as unlikely by market experts.

"Don't be tempted to jump into the property sector," analysts at Morgan Stanley said in a note on Thursday, which warned of the stock market's capacity to overshoot on the downside as well as the upside. "We think the factors that have driven the sector down so far this year have some way to run."

The consensus among key industry figures at the Reuters Real Estate Summit this week was that Britain's property price boom was over or almost over but that higher rental growth will partly compensate landlords, especially in the central London office sector.

Is the UK commercial property market heading for a soft landing? "Absolutely," said Francis Salway, chief executive of Britain's biggest REIT, Land Securities (LAND.L: Quote, Profile, Research), at the summit on Tuesday. "Because we have a strong economy," he said, citing strong and rising occupier demand for office space.

Investors have long known that commercial property returns are set to halve this year and to halve again in 2008 -- that is clear from consensus expectations data published by the Investment Property Forum.

With yields on prime UK property shrinking well below 4 percent and benchmark borrowing rates above 6 percent, debt-financed property investment has grown increasingly untenable, robbing the market of a key font of liquidity.