Investors see uncertainties in UK comm. property

* Schroders sees continued rental declines in the UK

* The Wellcome Trust remains positive about UK residential

By Daryl Loo

LONDON, Jan 15 (Reuters) - A recent upswing in investments in UK commercial properties masks uncertainties and risks that could further hit rentals, real estate experts said, urging caution when investing in the recovering market.

"The UK economy is in uncharted waters, we know rents are falling and corporate failures are increasing, and we know there's this small thing called an election coming," Ian Mason, Schroder Property's Head of UK Property Fund Management, said.

"But amidst all these uncertainties and risks, it would appear investment markets are going bonkers," said Mason at an Investment Property Forum (IPF) conference late on Thursday.

"We believe tenant demand should start to recover or at least be less worse in 2010, 2011, but that's not going to be nearly enough to prevent further declines in rental values."

Peter Pereira Gray, managing director of the investment division at UK charity The Wellcome Trust, said the trust had reduced its exposure to UK commercial property in the last two years as it became concerned about overleverage in the sector.

"Today we are in fact extending our investments in cash-flow generative commercial properties, but we are very careful about giving up liquidity and flexibility, because those are crucial at this time," said Gray, who is also chairman of IPF.

The global economic outlook remains highly uncertain, due to unclear long term consequences of concerted monetary and fiscal expansion by governments such as in the United Kingdom and United States, he said.

This has prompted The Wellcome Trust, which funds biomedical research and has an endowment of about 13 billion pounds, to hold more cash and higher exposure to mega-cap equities.

"We need to be very careful about what we invest in going forward ... we do remain positive about residential, particularly high-end, prime residential in and around London," Gray said.

Despite the risks in commercial property, UK pension schemes are still expected to nearly double their allocation to the sector as yields outperform other assets such as UK treasuries, said Michael Turner of Aberdeen Asset Managers.

"Property spreads versus gilts is now probably the highest in 30 years, so from a pure yield perspective, it is attractive relative to other income producing assets," said Turner, Aberdeen's head of Global Strategy and Asset Allocation.

UK pension schemes' average allocation to property is 5.3 percent at end-September 2009, versus about 35 percent in bonds, although he predicts this will increase to about 10 percent. (Reporting by Daryl Loo; Editing by Andrew Macdonald) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)