When British Land PLC, the U.K. property group, reports fiscal-first-quarter earnings Thursday, it will most likely confirm what is becoming increasingly clear about the European property sector: The troubles are far from over.

Financial reports by property companies such as Liberty International PLC and Hammerson PLC have held some unpleasant surprises. Not only is it obvious that property yields are continuing to widen, causing property values in the U.K. and throughout continental Europe to decline. Perhaps more unexpected, said analysts and investors, is the possibility that some commercial property could soon be valued at less than the loans on the property. This could turn the subprime-mortgage debacle into a commercial-property crisis.

When Liberty reported last week, it surprised investors with the news that 62 of its U.K. shopping-center tenants, or 3% of its total, had gone into receivership during the first half of the year. Concerned about the ability of its retail tenants to pay their rent, Liberty set aside about £4.5 million ($8.6 million) in provisions to cover the potential lost rent. So, when British Land reports, investors will be anxious to know if the tenant troubles seen at Liberty are more widespread.

"The outlook for the U.K. is bleak," said Jeremy Anagnos, managing director in charge of the European portfolio for CB Richard Ellis's Global Real Estate Securities fund. "We may see banks writing off commercial property."

There is increasing concern among property companies about just how solid their tenants are. Anyone who bought property when the market was high is facing a dilemma that they could be left with property that isn't even worth the debt they owe on it. This is driving yields to widen even more because investors anticipate that valuations could fall even further and are building a risk premium into the capital rates.

"After Liberty, people will be looking at the bad debt," said Harry Stokes, a London-based property analyst for Citigroup Inc. "So far the banks have caused the commercial-property sector problems by withdrawing capital, but now the commercial-property sector could start to cause problems for the banks."

Hammerson, which has 75% of its holdings in retail property, reported it had swung to a pretax loss of £417 million in the first half of 2008 from a profit of £368 million during the same period a year ago. It reported a 9.9% drop in net-asset values. While it reported higher rental income, it also said it is having trouble finding tenants for some of its buildings.

In some cases, Hammerson has agreed to incentives, such as offering 30 months of free rent to woo new tenants. U.S. investment bank J.P. Morgan Chase & Co., for instance, withdrew from talks to build a new European headquarters at Hammerson's St. Alphage House site, a prime location in London's financial district.

John Richards, Hammerson's chief executive, said he expects property values to continue falling. "We will see some further outward yield shift in continental Europe, though perhaps not parity with the U.K. Continental Europe is lagging behind the U.K. and the U.S. in its reaction to the credit crisis," he said.

With property values still falling and credit harder to come by, transactions have slowed to a trickle. Still, there have been some impressive deals. In July, Unibail-Rodamco, the Dutch property-investment group, bought two shopping centers in Spain -- La Maquinista in Barcelona and Habernas in Torrevieja -- for €434 million ($646.8 million). Bucking the trend, Unibail also reported an increase of 1.6% in net asset value.

The Unibail deal is a sign that, even if property markets in continental Europe begin to feel more pain from the credit crunch, the continent isn't likely to sink as deep as U.K. property markets.

"The U.K. property market will have dark clouds for the rest of the year," CBRE's Mr. Anagnos said. "There will likely be another 10% decline in property values in the U.K. Continental Europe is on a different path."

The Unibail deal is encouraging. It shows that in continental Europe it is still possible to raise money to do large deals. "We have not seen this type of activity in the U.K.," Mr. Anagnos said.

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