UNTIL this year, UK commercial property looked doomed to remain the poor relation of other financial assets, hampered by low investment returns and a market that had failed to keep pace with financial innovation.

But recent events suggest that property could be the Cinderella asset class, capable of being transformed from neglected sector into a thriving, modern market.

This transformation could take place in several ways at once. First, a group of institutional investors promoting property derivatives hopes next year to launch a range of over-the-counter futures contracts. These would enable investors to increase or hedge their exposure to commercial property values without going through the long and expensive process of buying buildings. This would bring property into line with gilts and equities, where derivatives are established investment tools.

Second, initiatives to repackage buildings into liquid securities - a process known as securitisation - are also moving forward. Dusco, the property fund manager, hopes this autumn to launch a retail property fund of up to £250 million sterling which will be quoted on the London Stock Exchange.

Unlike a traditional property company, the proposed Dusco fund is based on a unit trust and is therefore exempt from capital gains tax. The hope is that big investors such as pension funds will be able to exchange buildings for shares without suffering a tax penalty.

Other fund managers are trying to achieve a similar end by lobbying the Treasury to allow investment trusts - which, like unit trusts, are exempt from capital gains tax - to specialise in commercial property.

While it is by no means clear that the Treasury will quickly agree to such a change, the industry's representations appear to have been favourably received.

It is conceivable - if not yet probable - that within two to three years the commercial property market could be in the throes of fundamental change.

A survey of fund managers by Jones Lang Wootton, the chartered surveyors, found that about 20 per cent of funds regard securitised property vehicles as a potential substitute for direct investment in bricks and mortar. Extrapolating from this result, the firm estimates that perhaps £10 billion of property owned by institutional investors could be securitised if suitable vehicles are available.

This equates to about three per cent of the total UK commercial property market, which has an estimated total value of £300 billion.

Such figures are a matter of educated guesswork. But the experience in the US, where property securitisation has been going strong for five years, points to a similar conclusion.

The US real estate investment trust market has a value of about $60 billion (£38.4 billion), roughly 3 to 4 per cent of the country's total commercial property market, which is estimated to be worth $2,000 billion to $3,000 billion.

Moreover, the US trust market is growing strongly. On some estimates it will double in value by the end of the decade.

This suggests that, in time, the UK securitised market could grow well beyond the £10 billion estimated by Jones Lang Wootton. In addition to institutional investors, private investors might be expected to contribute a significant amount of capital, attracted by shares which are likely to offer high yields and security of income.

Some property companies might also be expected to transfer assets into new, tax-efficient trusts. This applies especially to companies which already operate in a relatively conservative "institutional" manner, with low gearing and limited property development.

In total, it is not beyond the realms of possibility that up to £15 billion to £20 billion of UK commercial property could be securitised if appropriate vehicles are available.

It is up to the property industry to argue strongly the case for such innovations with government, City regulators and the stock exchange.