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* Negative bets against Berkeley rise sharply
* Sector faces slowing construction growth
* Brexit fears seen hurting sentiment further
By Atul Prakash
LONDON, March 18 (Reuters) - British housebuilders might bewitnessing more signs that their share prices are overheatingafter a blistering four-year rally with negative bets againstBerkeley surging, while "Brexit" concerns could furtherhit the sector.
The British property market has been fuelled by foreignbuyers from places like China, Russia and the Middle East, whograbbed huge swathes of property in the capital. That, coupledwith market speculators buying homes and demand far outstrippingsupply, sent London prices skyrocketing.
However, shares in some housebuilders could be impacted asgrowth in the construction industry slows, while Britain'sreferendum on its European Union membership on June 23 - withrejection dubbed as "Brexit" - could also affect demand, saidanalysts.
The Thomson Reuters UK Housebuilding index is down 7 percent this year, against a flat FTSE 100 index, after surging 350 percent in the past four years on theback of record low UK interest rates and several governmentschemes to boost the housing sector.
Shares in Berkeley, Barratt Development, TaylorWimpey and Redrow are down 7-14 percent in 2016.
Berkeley shares fell on Friday to underperform a rise in thebroader FTSE 100 index, even as the firm said it was seeing gooddemand for its properties.
Markit data showed that "short interest" - which measuresthe number of shares lent to speculators betting on a fall inthe stock - in Berkeley had surged to nearly 5 percent of thecompany's total shares available for loan, against just 2percent on March 1 and 0.8 percent at the start of 2016.
"This bear raid, which comes on the heels of a sharp retreatin Berkeley's shares since mid-December, represents the firsttime in over five years that short sellers took a position ofabout 5 percent of shares outstanding in a UK-listedhomebuilder," said Markit analyst Simon Colvin.
"Despite the fact that the recent bearish sentiment has beenisolated to one London-centric developer, indications are thatthe overall sector is slowing," added Colvin.
A recent survey showed growth in Britain's constructionindustry hit a 10-month low in February, with housebuildingexpanding at the slowest pace since June 2013, when Britain'seconomic recovery was starting to take hold.
BREXIT MANIA
Jefferies analysts said Berkeley shares were "not theappropriate financial instrument to short in order to play thetheme of alleged oversupply of high-value homes in the Nine Elmsand Battersea area", referring to a part of London which somecommentators have said is emblematic of the capital's propertyboom.
According to Nationwide, London was the strongest performingregion for the fifth year running in 2015, with average houseprices up 12 percent year-on-year and 50 percent above theirpre-crisis peak in 2007. London homes are overwhelmingly ratedas expensive, with a median of 9.0 on a scale of one to 10,ranging from very cheap to very expensive.
Brokerage Peel Hunt also advised investors to ignore theshort-term negative sentiment and focus on Berkeley's trackrecord, yet some analysts remained cautious on the sector.
IG analyst Chris Beauchamp said the sector was now lookingslightly overpriced.
"Fundamentals are now much more demanding and requireimpressive outperformance, which is becoming hard to deliver nowas the cycle has reached a mature stage. The outperformance haspeaked, and while the sector may still continue to press higher,it is likely to see a harsher approach to weaker performance."
Analysts said nervousness ahead of the 'Brexit' referendumwas also hurting investors' sentiment towards the industry.
"The uncertainty over 'Brexit' is clearly a contributingfactor when looking at housebuilders, and in markets like Londonwhere foreign investment makes up a significant proportion ofdemand, the effects are likely to be most accentuated," saidKevin Doran, chief investment officer at Brown Shipley.
"Our base case is that the UK remains in the EU, however thecontest will likely be a close run thing, and with the 'leave'camp likely to make the most noise as we approach, we would besurprised not to see increasing volatility across the sector." ($1 = 0.6921 pounds) (Reporting by Atul Prakash; Editing by Toby Chopra)
