According to the Wall Street Journal, UK Real Estate Investment Trusts, which were introduced in January, will give negative returns this year, causing analysts to call the end of the four-year boom in British commercial property.

The Bank of England’s ongoing interest rate policy is clearly having a deflationary impact upon UK commercial property. Traditionally, REITs trade at a premium to net asset value, reflecting the vehicle’s tax efficient structure. The UK is the only country where the REIT market is trading at a discount to the net value of the underlying property asset.

The UK stock market real estate sector’s high was registered in December, just prior to the introduction of REITs. If this negative price action continues, property funds may be put under pressure because of their innate illiquidity. If investors start redeeming, a situation may then develop forcing property funds to sell property in order to meet the needs of departing investors. Such selling may represent a real problem for investors. Credit contraction will then hit these types of investments hard.