Questor share tip: British Land downgraded as the outlook gets tougher BRITISH LAND, the UK's second-largest real estate investment trust, has suffered a sharp correction this week after brokers downgraded the outlook for the shares. That is because sentiment has turned negative after the US Federal Reserve tapers its bond-buying programme, and Questor believes it is a good time to rethink the investment case. There are significant movements in the fundamental pillars that underpin the property market. The well publicised possibility that the Fed will reduce, or taper, its bond buying has caused turmoil in the credit markets. The borrowing rate, or yield, on a UK 10-year gilt, has jumped to 2.6pc, from lows of 1.6pc in early May. This move comes after the UK 10-year gilt rate has fallen uninterrupted for almost a quarter of a century. The trend of rising rates is set to continue. Credit markets are difficult to stop once they start moving. Experts at JP Morgan Cazenove predict the yield on UK 10-year gilt rate will rise to 3.6pc within the next two years. So far this increase in government borrowing costs has not fed into the bank lending market. The London inter bank offered rate (Libor) is glued to the floor, but it is a brave man that bets against a rising tide. Martin Allen, analyst at Deutsche Bank, said: "We expect tapering of US quantitative easing over the next 12 months to reduce the liquidity in the global financial system on which property shares thrive." There are worrying trends in some core property markets as well. JP Morgan Cazenove say there are signs of overheating in the London West End property market, with red flags such as rapid price rises and high expectations of future growth. Prime property prices in places such as the West End have outperformed the wider market by 200pc from lows in March 2009. "West End magic will fade in the next 12 months," say JP Morgan Cazenove analysts. Questor agrees that mean reversion is a powerful trend, and at the very least price momentum should slow. British Land shares could be set for further weakness. The shares currently trade at about an 8pc discount to the 2013 forecast net asset value (NAV), compared to a long-term average discount at about 11pc. The property portfolio of British Land that has previously been a strength could become a weakness. More than a third of the £11bn portfolio is focused in London offices, and the company has been greatly increasing its exposure to offices in the West End. Major developments to be completed in the next 12 months are also London centric. Debt levels are also something to consider. While not an immediate cause for concern, those investors looking across the listed options of property exposure should bear in mind that British Land is one of the most indebted. On Deutsche Bank analysis, the British Land net debt to net assets is 83pc, compared with the UK average of 61pc. British Land shares have had a rough week. The shares have fallen as brokers turned negative. They are now almost 17pc lower than May highs of 658p. However, Questor doesn't think this represents a buying opportunity. The favourable conditions that have seen the shares rise more than 80pc from lows of around 300p in March 2009 are changing. British Land looks more exposed to these changes than most. As the shares fall through the support of the 200-day moving average it is time to take profits and the shares are downgraded to a sell.