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Why UK property isn’t a bargain - despite the Brexit vote

Bargain-hunters circling the U.K. property market after the post-Brexit plunge in sterling stand to get their fingers burned, analysts said.

"The British exit from the EU (European Union) has struck fear into the U.K. real estate market at a time when the property upswing cycle looked set to reverse anyway on growing supply and high prices," Societe Generale said in a note Monday.

The bank expected commercial property prices to fall 25 percent peak-to-trough on rent declines alone -- the equivalent of about a 21 percent downside to share prices from here, the bank said.

But it added, "if London's property market 'safe haven' status is challenged, London's commercial real estate prices could fall by as much as 32 percent."

A 'To Let' letting sign is seen displayed outside a rental property in an area that is popular for buy-to-let properties
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Soceite Generale noted that in the wake of last month's referendum, several British property funds froze attempts to withdraw funds as investors attempted to beat a fast retreat, adding that could push property prices down even further.

The bank added that this month British Land sold the Debenhams building on Oxford Street for 400 million pounds, which it attributed to investors seeking the type of assets that would only be available in times of crisis. But it noted that other real estate funds, including Aberdeen Asset Management, Henderson and Standard Life, were now also planning to sell London assets.

The London residential sector was particularly vulnerable to a severe correction as Brexit was likely to force job relocations, Societe Generale said, citing data showing the segment's prices had surged more than 60 percent over the past three years. It also pointed to data from PwC that indicated a Brexit could lead to 70,000-100,000 fewer jobs in the financial services sector and 950,000 job losses overall.

"Given the current 12 times price to income ratio in London, we believe a price correction of even 40-50 percent is possible in some of the most expensive boroughs in London," it said. "This is where most top executives from overseas companies chose to live, and these are people whose relocations are likely to have the greatest impact on their specific market."

Those concerns could prevent international investors from attempting to take advantage of the sharp drop in the British currency, which fell from as high as $1.50 just before the referendum's results to as low as around $1.28.

Societe Generale wasn't alone in warning against U.K. property.

Credit Suisse said it was staying underweight on the U.K. real estate investment trust sector despite the sharp selloff in the wake of the Brexit vote.

Despite valuations becoming more reasonable, with yields now roughly in line with fair value, "we do not yet fully believe that either the degree of underperformance seen, or current valuations, compensate adequately for the risks," it said in a note last week.

Credit Suisse said the sector was closely correlated with sterling and it tended to underperform as the currency weakens.

The bank also noted that property stocks appeared to only be pricing in an around 10 percent fall in real estate prices. "This is too small," it said, noting that previous cycles saw greater declines and that oversupply, particularly in the office sector, may be looming.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter