Standard Life has slashed the value of its £4.5 billion property funds, becoming the first investment house to give a serious warning about price falls in the £700 billion UK commercial property sector.

Thousands of Standard Life investors will see the value of their investment cut by 6.7 per cent if they attempt to pull their money out of the funds. Financial advisers fear that investors in other property funds could be scared into selling their holdings, sending commercial property prices into a downward spiral. Mark Dampier, head of research at Hargreaves Lansdowne, the financial adviser, said: “I can see a lot of unhappy investors.”

A spokesman for Standard Life said: “We still think there’s legs in the commercial property market, high single-digit returns, but we don’t think we’ll see the same sort of returns as we’ve had for the last couple of years.”

Commercial property returns were about 18 per cent in 2005 and last year but are forecast to fall to about 8 per cent this year.

The insurer’s move comes five months after the Financial Services Authority gave warning of a danger that too many small savers were overexposed to the property sector. Investment Management Association figures show that retail investors shovelled a record £1.1 billion into open-ended property funds in the last quarter of 2006. A third of all new investment in the second half of last year went into property funds, investing in both bricks and mortar and property company stocks.

Standard Life has cut the value of withdrawals from five of its bricks and mortar funds, which have a combined value of £4.5 billion, after a rush of investors pulling out of the funds.

The insurer said that it needed to drop payouts to cover the costs of selling properties. The funds returned between 42 per cent and 52 per cent over the past three years.

Mr Dampier said that Standard Life’s move could precipitate a flight from property funds. “It’s not that the property market’s going to crash tomorrow but if you say that a trust might be revalued, it’s a self-fulfilling prophesy because people start pulling out of the sector,” he said.

M&G, the investment house, dropped the value of withdrawals from its £720 million offshore property fund, aimed at institutional investors, by 2 per cent earlier this month.

Standard Life’s move follows warnings from heads of several of Britain's largest quoted commercial property companies that prices of assets have peaked.

British Land and Land Securities, Britain’s two largest property companies, have sold their East Kilbride shopping centre near Glasgow, held in a joint venture, for £386 million, against an original £400 million target.

Capital Economics this week forecast price falls across commercial property of 12 per cent – 18 per cent in real terms – between the end of this year and the end of 2010.

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