Schroders sees volatile 2010 for UK comm. property

* UK property market recovery hit by weak economy

* Sees threat of distressed sales from banks

* Raising up to 400 mln stg for UK property opportunity fund

By Daryl Loo

LONDON, Dec 2 (Reuters) - Asset management firm Schroders (SDR.L) expects 2010 to be a volatile year for UK commercial property, with economic uncertainty and debt issues buffeting a market barely emerging from a two-year downturn.

British commercial property values in October staged the largest monthly rise in nearly four years after falling 44 percent from a mid-2007 peak, but the market could still be hit by further tenant failures in a weak economy, Schroders said.

"The market will be more volatile ... we may have avoided a double-dip recession next year, but our economics team is not ruling out a long period of slow growth," Schroders' head of property research, Mark Callender, said in a media briefing.

A rising chorus of investors are warning of a short-lived recovery for UK's commercial property market, Europe's second-largest after Germany, if values rise too quickly without growth in the economy and rents. [ID:nLA705280] [ID:nL4211729]

There is also the threat of distressed property sales from banks, which over-gorged on UK commercial mortgages during the market's boom years but may now have an estimated 30 billion pounds ($49.71 billion) of those loans under water, Callender said.

"It has become a more distant threat, but it's not one that we should ignore when at the same time we're seeing the income from portfolios start to fall, which should impact the ability to pay interests," he said.

Schroders, which manages 7.5 billion pounds in property-related funds, forecasts UK commercial property total returns -- which includes rental income and capital value growth -- at 2 percent in 2009, rising to 18 percent next year.

It expects total returns to fall back to minus 2 percent in 2011 however, after an over-optimistic investment market drives up prices for some properties -- in particular prime buildings on long leases -- triggering a correction in values.

BANK JOINT VENTURES

Schroders, which is aiming to raise up to 400 million pounds by mid-2010 for a UK property opportunity fund, expects to invest selectively and may seek to form joint ventures with banks, its head of property William Hill said.

"At the moment we find long lease properties over-priced, and will concentrate on assets we can do something to, whether to improve planning consent or re-position assets banks need to sell," Hill told Reuters on the sidelines of the briefing.

Other property investors including London & Stamford LSP.L and Legal & General (LGEN.L) have also indicated plans in recent months to work with lenders such as Lloyds (LLOY.L) and Royal Bank of Scotland Group PLC (RBS.L), to detox their troubled property loan books. [ID:nLN300678][ID:nLC487595]

"At the moment banks are very reluctant to sell their distressed assets to buyers looking for 20 percent returns. As time go by, I think there will be more opportunities to partner (the banks) as opposed to buying distressed assets," Hill said.

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)

((daryl.loo@thomsonreuters.com; +44 (0)207 542 5228; Reuters Messaging: daryl.loo.reuters.com@reuters.net))

(editing by Judy MacInnes)

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