The results season for the UK property companies has seen a succession of the sector’s big hitters announce sharp reductions to their net asset values in the first half of 2008.

Hammerson saw its net asset value (NAV) dip by 10%, British Land and Liberty International both reported 13% falls in NAV while Brixton suffered more than most, shedding 18% of its NAV. This prompted Brixton’s chief executive, Tim Wheeler, to quote Bob Dylan’s All Along The Watchtower as a way of illuminating the plight of real estate companies, suggesting plaintively: “There must be some kind of way out of here.”

When it comes to forecasting the short-term fortunes of UK real estate companies he might have been better off quoting Dylan’s Subterranean Homesick Blues: “You don’t need a weatherman to know which way the wind blows.”

Yet despite the relentless stream of property portfolio write-downs, the gloom and doom scenario has not been reflected in share price performance, with the sector’s gains double that of the FTSE 100’s during August.

Top of the tree has been Capital & Regional, the cash strapped property asset manager which saw its share price surge as it confirmed it had renegotiated financial covenants with its principal lending bank.

Even ignoring this special situation, the sector has been on the up, thanks to declining government bond yields and indications that, as share prices lose touch with NAV per share, consolidation within the sector could take place.

While the yield on the benchmark 10-year gilt has tightened recently to around 4.50%, the dividend yield for the property sector has grown to 7.6%.

The comparison is significant because ten years is the typical lease period granted by British property companies, and while no one is suggesting that rental income is as gilt-edged as the return on government bonds, the income stream is fairly predictable, although tenants do occasionally find themselves unable to pay the rent.

Around 3% of Liberty’s tenants are in administration but this is at the high end for the sector and contrasts unfavourably with the 0.3% of British Land’s rent roll accounted for tenants that are in administration.

Merger speculation has been fuelled by the growing gap between share prices and asset valuations. The big four in the sector are Land Securities, Hammerson, British Land and Liberty International, and they might be expected to be the predators. However, for well financed companies prepared to take a long term view, even the big players are starting to look tempting to overseas companies.

Land Securities, Hammerson and British Land can all be bought for far less than the ostensible value of their assets; the discount to NAV per share for the three ranges from the low to mid-thirties. Meanwhile, the only reason that Liberty’s share price is trading within 11% of its adjusted NAV is because of the stake building by US-based Simon Property Group, which has lifted its stake from 3% to 4.22%, and Australia's Westfield Group, which revealed it had taken a 2.96% stake.

The trading outlook for the companies in the sector remains bleak. John Burns, chief executive of London-focused property company Derwent, recently predicted “the current tight market is expected to last through 2010”. Despite this, property shares are no longer tanking. Property is a cyclical business and predicting the bottom of a cycle is notoriously difficult, but indications are that enough of the future bad news is already factored into share prices to make the shares worth holding again.

• News Channel