Property recovery could take years

This volte-face in market sentiment was also mirrored at the individual stock level, with development plans and debt taken as proxies for risk. Those companies that had outlined punchy construction pipelines in anticipation of a serious supply shortage - Land Securities, the largest of the Reits, and West-End office specialist Great Portland Estates - were hit hard in the sell-off. So were companies with either higher-than-average debt levels or big refinancing deadlines looming, like student-accommodation leader Unite and housing specialist Grainger (though its shares have since recovered strongly).

The companies that performed best were the West-End specialists Derwent, Shaftesbury and Capital & Counties. That reflects the resilience of Britain's most expensive property market. Not only is the West End an area of very limited supply but, much more importantly, it benefits from demand on a global scale. The individuals who frequent its shops and buy its flats have only a passing connection with the moribund UK economy.

So what now? The second-half rout has left large-cap property shares looking pretty cheap relative to underlying property values. Land Securities' shares currently languish on a 27 per cent discount to adjusted book value, and British Land's shares trade on a 21 per cent discount. That's wide by historical standards, implying valuation write-downs this year of over 10 per cent - a highly unlikely scenario given the quality of the companies' assets. Dividend yields are also higher than they have been since mid-2010.

The rationale behind such analysis - and behind all value investing - is that discounts will eventually 'revert to the mean', rewarding shareholders who have had the courage to look beyond the bad news, however long it may last. This is perhaps the most powerful of all investment tools, and on this basis we recently recommended buying shares in Hammerson (currently trading on a 30 per cent discount) as our value tip of the year

Apart from cheapness, however, most property shares have little going for them this year. Property companies face two underlying markets - the market for buying their property (the 'investment market'), and the market for renting it (the 'occupier market'). Both drive the book value of property companies' estates, and with a few exceptions both look stagnant at best.

The biggest threat facing the investment market is all the property held by banks. Lloyds and RBS sold a combined £2.3bn of distressed real-estate debt in December to US private equity groups Lone Star and Blackstone. That paves the way for further sales by the banks and re-sales by the private-equity firms, which will weigh on prices. But that's counterbalanced at the top end of the market by equity-rich investors looking for a safe haven, which should protect the value of the Reits' portfolios.

The occupier market is more fragmented. But outside of the West End, the balance of power tends to lie with the tenant, particularly in retail. Ultimately, UK commercial property is a play on the UK economy, and rents will only grow with the wider economy. The sector is cheap, but there's no catalyst in sight for a re-rating.