When British Land PLC, the U.K. property group, reports fiscal-first-quarter earnings Thursday, it will most likely confirm what is becoming increasingly clear about the European property sector: The troubles are far from over.

Financial reports by property companies such as Liberty International PLC and Hammerson PLC have held some unpleasant surprises. Not only is it obvious that property yields are continuing to widen, causing property values in the U.K. and throughout continental Europe to decline. Perhaps more unexpected, said analysts and investors, is the possibility that some commercial property could soon be valued at less than the loans on the property. This could turn the subprime-mortgage debacle into a commercial-property crisis.

When Liberty reported last week, it surprised investors with the news that 62 of its U.K. shopping-center tenants, or 3% of its total, had gone into receivership during the first half of the year. Concerned about the ability of its retail tenants to pay their rent, Liberty set aside about £4.5 million ($8.6 million) in provisions to cover the potential lost rent. So, when British Land reports, investors will be anxious to know if the tenant troubles seen at Liberty are more widespread.

"The outlook for the U.K. is bleak," said Jeremy Anagnos, managing director in charge of the European portfolio for CB Richard Ellis's Global Real Estate Securities fund. "We may see banks writing off commercial property."

Aug 13, 2008