UPDATE 1-Bofa downgrades U.S. self-storage sector to neutral

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March 25 (Reuters) - Bank of America downgraded the U.S. self-storage sector to "neutral" from "market weight", and cut Extra Space Storage Inc EXR.N and Public Storage (PSA.N: Quote, Profile, Research) to "neutral" from "buy", mostly on valuation.

Shares of Extra Space Storage were down 3.8 percent at $16.50 in late morning trade on the New York Stock Exhange, while Public Storage fell 5.5 percent to $89.35.

In a research note, analyst Christy McElroy, who has a price target of $92 on Public Storage and a price target of $16 on Extra Space Storage, said the valuations now appear fair and she no longer has the conviction to recommend investors continue to build positions in the shares.

McElroy said she continues to view the two real estate investment trusts as core long-term holdings within the sector, but following a substantial run-up of share prices, the risks to the downside as well as upside are equally weighted.

For the sector, she expects to see improved property-level growth trends in 2008 over year-ago levels as comparables become easier, and views 3 percent to 4 percent growth as sustainable.

"PSA and EXR remain our favorite names in the self-storage sector. Both have raised market share, taking advantage of a tough demand environment by boosting concessions and easing market rents. This strategy has enabled them to gain pricing power and maximize revenue growth by pushing rents on existing tenants," she said.

(Reporting by Biswarup Gooptu in Bangalore; Editing by Bernard Orr)