July 1 (Bloomberg) -- U.K. real-estate stocks had their worst performance in more than 20 years in the second quarter as property values dropped and rents for new office leases fell for the first time in more than four years.

The FTSE 350 Real Estate Index of 23 stocks slumped about 24 percent in the second quarter to the lowest since August 2004. The biggest decliner was Quintain Estates and Development Plc, which plunged 58 percent. The index fell 1.1 percent today.

``The landlord has no power at the moment,'' said Harm Meijer, an analyst at JPMorgan Chase & Co. in London. ``We haven't reached the bottom yet.''

Shops, offices and warehouses lost 18 percent of their value since the U.K. market peaked 11 months ago, according to Investment Property Databank Ltd., as purchases became harder and more expensive to finance. The index last performed worse in the fourth quarter of 1987, which included the biggest ever one- day decline of global stocks known as Black Monday.

``Real estate is getting very cheap if you look at the fundamentals,'' said Patrick Sumner, head of real-estate stocks at Henderson Global Investors Ltd. ``The trouble is, sentiment is so negative at the moment.''

U.K. rents for new tenants fell in May for the first time since December 2003, according to CB Richard Ellis Group Inc., the world's largest commercial realtor. The decline was led by London's main financial district, known as the City, where rents dropped 1.3 percent from the prior month.

Empty Premises

Banks and securities firms in the City of London may cut as many as 40,000 jobs by the end of next year, analysts at JPMorgan Chase estimate, reducing demand for office buildings. At the same time, a drop in consumer spending is increasing the amount of vacant retail space.

Securities firms including JPMorgan, Credit Suisse Group AG, Morgan Stanley, Lehman Brothers International Inc. and Citigroup Inc. have downgraded their price targets and estimates for net asset value for real-estate companies at least once this year.

U.K. property stocks have fallen for 15 of the last 18 months and have declined 52 percent since the FTSE 350 Real Estate Index reached a record on Jan. 3, 2007.

Short Selling

That month, Britain introduced real estate investment trusts to encourage individuals to buy property shares. REITs have fallen 18 percent this quarter and 47 percent since the start of 2007, according to the AME Capital U.K. REIT Index.

The dive in prices has been accelerated by short sellers, who borrow shares in anticipation of buying them back for less and pocketing the difference.

On June 26, Grainger Plc, the U.K.'s largest publicly traded landlord, had 12.86 percent of its stock on loan, a figure often used as an indicator of short selling, according to London-based analysts at Data Explorers Ltd., which tracks stock lending. The average for all stocks on FTSE indexes in London that day was 4.53, said Data Explorers.

Grainger was the second-worst performer in the index in the second quarter, sinking 48 percent.

Henderson stopped lending its 1.5 billion-pound portfolio of property stocks to short sellers last year, said Sumner.

Quintain Estates, the developer of homes, offices and shops around London's Wembley Stadium, and other residential landlords were hurt by the slump in the U.K. housing market caused by lending restrictions. The number of home sales in England and Wales has slumped by 40 percent this year, according to the Council of Mortgage Lenders. Mortgage approvals in May were at their lowest since at least 1997, the British Bankers Association said June 24.

`Freefall' for Stocks

The five-year U.K. swap rate, which influences borrowing costs for property companies, rose to 6.061 percent yesterday from 4.99 percent at the end of the first quarter. The yield on 10-year U.K. government bonds rose to 5.126 percent at June 27 from 4.348 percent at March 31, making bonds relatively more attractive, according to Meijer.

``The sudden jump in the 5-year swap rate and the 10-year bond yield has sent some stocks into freefall,'' he said.

Britain was the only major commercial-property market in which investors lost money last year, IPD said June 7. The best performer in the London-based research firm's 22-member global index was South Africa, which generated returns of 28 percent against the global index return of 11.5 percent. The U.K. lost 3.4 percent. The returns were calculated in the local currency.

Mapeley

The best performer in the FTSE 350 Real Estate Index in the second quarter was Mapeley Ltd., the landlord to U.K. government departments including the customs and tax authority. The investment company, controlled by New-York based buyout firm Fortress Investment Group LLC, fell 7.4 percent.

The relative performance of the index against broader equity benchmarks is the worst for almost 10 years. The FTSE 100 Index fell 1.3 percent in the quarter, outpacing the real estate index by more than 22 percentage points. The last time the gap was bigger was in the fourth quarter of 1998 when the FTSE 100 Index jumped 16 percent and the property index dropped 13 percent, a difference of 29 percentage points.

Article by: Peter Woodifield - www.bloomberg.com