UPDATE 2-Daiwa falls into red, hit by property investments

*Quarterly net loss of 20.5 billion yen

*CFO say outlook for second half severe

*Hit by fall in stock market, losses on securities

*Shares close down 2.2 percent ahead of announcement (Adds comments from Daiwa CFO, analyst coments)

By Junko Fujita

TOKYO, Oct 31 (Reuters) - Daiwa Securities Group (8601.T) said it swung to a quarterly loss, hit by tumbling stock markets, a drop-off in equity and merger deals and soured real estate investments, and warned of tough times in the coming months.

The outlook for Japan's brokerage industry remains bleak as the sharp slide in global equities markets has depressed trading commissions and sapped demand for capital raising, mergers and other fee-generating deals.

Earlier this week top broker Nomura Holdings Inc (8604.T) posted its third consecutive quarterly net loss due to trading losses and warned of potential losses ahead on its exposure to crisis-hit Iceland and Fortress Investment Group (FIG.N).

"We expect conditions to remain severe in the second half of this fiscal year," Daiwa Chief Financial Officer Nobuyuki Iwamoto told a media briefing.

Hit by falling equities, turnover on the first section of the Tokyo Stock Exchange fell to a daily average of 2.2 trillion yen in July-September compared with 3 trillion yen a year ago, according to data provided by the exchange.

Daiwa posted a net loss of 20.5 billion yen ($208.2 million) in July-September, compared with a 14.7 billion yen net profit a year earlier and an estimate earlier this month by Credit Suisse for a quarterly loss of 178 million yen.

The company said it was forced to book losses on investments in real estate made by its principal investment arm, the latest victim of a sharp deterioration of the country's property market.

It also wrote down 4.4 billion yen worth of swap trades with failed investment bank Lehman Brothers (LEHMQ.PK).

"The net loss was within expectations as the environment was bad," said Azuma Ohno, a brokerage analyst at Credit Suisse Securities (Japan). "What I did not expect was the losses from the real estate business and the losses from Lehman."

Japan's Nikkei stock average .N225 fell to a three-year low on Sept. 30 as the financial crisis deepened and has since extended its slide, hitting its lowest since 1982 earlier this month.

The benchmark 10-year government bond yield, which was 1.295 percent on April 1, rose to as high as 1.895 percent in June.