WHILE hurtling down the mountain slopes last week in Verbier, the Swiss resort beloved of the rich and famous, British Land boss Stephen Hester could have been forgiven for wondering if 2007 would herald an equally exciting ride for the commercial-property market.

Growth in the past three years has been explosive, with prices for shopping centres, offices and industrial sheds reaching record highs. But experts now fear the market is teetering on the edge of a precipice ahead of tomorrow’s launch of real estate investment trusts (Reits) in Britain.

The London Stock Exchange is planning to celebrate the launch with a champagne breakfast party on Thursday, but investment experts are worried that after a bumper run the fizz may soon disappear from commercial property just as investors are being urged to put money into these new tax-efficient vehicles.

So far 10 listed property firms have said they will convert to Reit status — British Land, Land Securities, Liberty International, Slough, Hammerson, Great Portland Estates and Brixton plus specialists Big Yellow, Workspace and Primary Health Properties. But new Reits are expected to be created that own assets as diverse as hotels and prisons.

Reits will not pay capital-gains tax or corporation tax, in return for which they will distribute most of their income to investors as dividends. This should mean that unlike property shares, which have historically tended to trade at a discount to their underlying property portfolio, Reits should trade at a premium to asset value.

Justin Urquhart Stewart, director of Seven Investment Management, thinks Reits are a great idea but should come with a health warning for investors.

“Investors need to be extremely careful about going into Reits at what looks like the top of the property market. Reits are starting to look like the current fashion fad and we all know what happens to fashion fads,” he said.

Over the past 12 months the commercial-property market seems to have defied gravity, delivering returns of close to 20% — hot on the heels of 19.1% in 2005. But with rental yields squeezed down to as little as 4% for prime property, there is a growing feeling that the party cannot go on for ever.

Mark Dampier of Hargreaves Lansdown, a financial adviser, summed up the mood: “I struggle with the idea that the UK commercial-property market can continue to deliver incredible returns, but at the moment I can’t see it ending unless the money tap from new investors is turned off.”

Mike Prew, property analyst at Lehman Brothers and one of the leading experts on Reits, remains bullish. He insisted that the valuation structure of commercial property was robust and prices would be held up by buoyant investor demand.

“We can’t see any clear fault lines appearing in the real-estate sector. Any shock to property values is likely to be external and related to the bond and credit markets,” he said.

Prew estimates that Reits could attract more than £30 billion of new investment, which, combined with asset growth, could lead to a doubling in the value of the UK listed property sector over the next five years from £50 billion to £100 billion.

Richard Cotton, head of real estate at JP Morgan Cazenove, believes that, initially, money will flow into the new Reits from global Reit funds. But over time they could receive much more money if pension funds and life companies switch from owning commercial property direct to investing in Reit shares.

Prew and Hester agree that the property market will carry on going up in 2007, albeit at a slower pace. If they are right, maybe the ride won’t be so rocky for Reit investors after all.