UPDATE 3-Three UK property funds halt trade in first sign of post-Brexit seize-up

* REITs, housebuilders, asset managers, insurers all hit

* Follows decision by three funds to stop investors leaving

* BoE flags concerns; investors fear crisis re-run (Adds more detail on fund performance, bank holdings,background, updates shares)

By Simon Jessop, Vikram Subhedar and Carolyn Cohn

LONDON, July 5 (Reuters) - Three British commercial propertyfunds worth about 10 billion pounds suspended trading within 24hours, in the first sign of markets seizing up since Britain'svote to exit the European Union sent asset prices into atailspin.

Policymakers rushed on Tuesday to emphasise that theseize-up was confined to the sector of "open-ended" funds inreal estate that normally allow investors to exit at will, anddid not signal a liquidity problem in wider financial markets.

However other shares and funds in the commercial propertysector also faced a sharp sell-off on Tuesday as theimplications set in that assets could be due for a fall.

Commercial real estate has wider implications for thefinancial system because it is often used as collateral bycompanies that borrow from banks.

The three suspended funds collectively account for nearly athird of the 35 billion pounds ($46 billion) in open-endedBritish commercial property funds, which the Bank of England hadflagged as a major risk ahead of the June 23 vote.

The 4.4 billion pound Property Portfolio run by M&GInvestments, the fund arm of insurer Prudential, was the latest to go on Tuesday afternoon after a run on the fund frominvestors seeking to take their money out.

Insurer Aviva's fund arm had earlier stopped tradingin its 1.8 billion pound UK Property Trust, following in thesteps of rival Standard Life Investments, which suspendeda 2.9 billion pound fund late on Monday.

The M&G fund owns 182 properties including the New SquareBedfont Lakes office park near Heathrow Airport, while Aviva'sowns the Omni Leisure Centre in Edinburgh, among others. TheStandard Life fund, meanwhile, owned 124 properties at the endof May including Monument Mall in Newcastle.

While open-ended funds tend to hold a pile of cash orsimilar assets to manage redemptions, in a worst case scenariothey could turn into forced sellers of buildings in a fallingmarket as more investors seek to redeem. Suspending trading is ameasure designed to prevent that from happening.

The head of Britain's financial markets regulator, AndrewBailey, said on Tuesday the Standard Life move showed theliquidity mismatch needed to be addressed and that he was in"very close touch" with investment funds over the issue.

"It does point to issues that we need to look at in thedesign of these things, because it comes back to my fundamentalpoint about holding illiquid assets in open end funds thatrevalue and are required to be revalued," said Bailey, CEO ofthe Financial Conduct Authority.

"My own feeling is ... that we will need to come back andlook at those."

Other leading British property fund managers includingHenderson Global Investors, the fund arm of Legal & General, Aberdeen Asset Management and Kames all saidthey had already cut the value of their assets to better reflectmarket pricing or made moves to price funds more regularly, buthad yet to suspend any funds.

Columbia Threadneedle said it had yet to make any changes toits property fund but was monitoring the situation.

Bank of England Governor Mark Carney said on Tuesday thatBritish financial markets were less vulnerable to a shock thanthey were at the time of the financial crisis in 2008.

BANKS ALSO EXPOSED

Among other large holders of commercial property which couldbe hit if the market jitters turn into a longer-lasting sell-offare the banks, which are due to report their half-yearly resultsin the coming weeks.

Royal Bank of Scotland had UK commercial real estateexposure of 25.24 billion pounds, Lloyds about 12.7billion pounds and Barclays about 11.6 billion poundsat the end of 2015, according to their annual reports.

HSBC Holdings had exposures of $26.3 billion tocommercial real estate in Europe at the end of 2015, although itdid not specify its exposure to the UK market. StandardChartered, meanwhile, had no exposure to the UK.

Fidelity International Investment Director Adrian Benedictsaid British commercial property still benefited from a fallingpound, a planned corporation tax cut and the prospect of moreBoE monetary easing.

Strong demand from investors across the globe looking forextra yield to pay pension holders during a period of lowinterest rates meant that liquidity was much better than duringthe last slump amid the financial crisis, he added.

"This is very different from 2008, very different... we'renot really seeing an illiquidity crunch right now.

"We're seeing a small, relatively confined lack of liquidityin the open-ended real estate funds, but if they were to puttheir stock to the market, I'm pretty confident they would finda lot of interested parties. Whether that's at a price they wantto sell at is another matter."

Just days before Standard Life Investments suspended itsfund, it had put one of the buildings in the fund - in OrangeStreet, central London - up for sale.

Simon Hall of surveyors Hanover Green said the price tag of11 million pounds had not been changed as a result of the Brexitvote and there had been "very good interest" in the property.

While cash-rich foreign investors had been big buyers of UKproperty in recent years as a yield safe-haven amid globaleconomic stress and had plenty more to spend, they may yet waitbefore investing more given the still-uncertain outlook forBritain as it negotiates its EU divorce, Benedict said.

INVESTORS SPOOKED

Spooked investors sold out of a range of stocks connected tothe industry on Tuesday, including property firms, listed realestate investment trusts, asset managers and insurers.

At 1457 GMT, Standard Life's listed real estate fund was down 7.4 percent, while F&C Commercial Property Trust had fallen 6.1 percent and the Schroder Real EstateInvestment Trust was down 8.6 percent, albeit all offtheir lows.

Listed funds have a fixed number of shares which can be soldon an exchange by investors wanting their money back, and unlikeopen-ended funds do not have to sell assets to meet redemptions.

"When open-ended funds close the gates the market startsgetting nervous," said Collette Ord, an investment trust analystat Numis said. "The danger is if open-ended funds have to sellassets at distressed levels, that will then lead to pricediscovery and force listed trusts to also write down assets."

Of the ten listed property funds it tracked, Numis data onTuesday showed the average fund was trading at a 13.1 percentdiscount to the value of its assets, which are typicallycalculated on a quarterly basis.

Concerns that weaker consumer sentiment could spread toother investments added to pressure on asset managers andinsurers, which are already grappling with stubbornly highinvestor outflows and a dearth of investment income. Schroders was down 4.4 percent, Legal and General 6.3percent and Standard Life itself 5 percent.

Goldman Sachs, Barclays and Credit Suisse are among majorbanks forecasting a recession in the UK in the second half of2016 or early 2017 with firms holding off on hiring and capitalspending as a key reason.

($1 = 0.7601 pounds) (Additional reporting by Peter Stoneham, Alasdair Pal, AndrewMacAskill and Huw Jones)