John Duffield, one of the country’s savviest investors, has put millions of pounds of his family’s money into overseas commercial property, including German offices and Polish warehouses, as property chiefs warn that the British market is past its best.

Millions of ordinary investors who have piled into UK commercial-property funds in recent years will now be wondering whether they should dump Britain and back Europe too.

Investors have poured £5 billion into commercial-property funds over the past year alone, with the bulk of the money going into funds that invest in bricks and mortar here in Britain. Interest in the funds, which invest in shops, offices and industrial premises, was sparked by stellar returns: 65 per cent over the past three years, according to the Investment Property Databank (IPD), against 58 per cent for the FTSE All-Share index.

The consensus, though, is that the UK market has peaked. The chief executive of Britain’s largest commercial-property firm, Land Securities, took the unusual step last week of warning that the returns available to investors are set to decline. Francis Sal-way said that some of his firm’s properties had fallen in value since the autumn. “This is a big deal,” he said. “We have had four years when everything was going up.”

His warning came a day after Savills, the estate agent, said almost a third of the properties at its last commercial auction had failed to sell.

And Spanish company Metrovacesa has recently bought HSBC’s Canary Wharf headquarters for a record £1.09 billion, with a yield – rental income as a portion of the property’s value – of just 3.8 per cent. This is an extremely low return with interest rates at 5.5 per cent and many analysts suggest it signals the top of the market.

Returns from the UK commercial sector, which were 18 per cent in 2006, are expected to be 6 per cent-9 per cent this year, and the smart money is now seeking better returns overseas.

Duffield, founder and chairman of New Star Asset Management, has a vested interest in talking up international commercial property because his firm has just launched a fund that invests directly in bricks and mortar in Europe and Asia.

However, the fact that he is prepared to commit his own money to the scheme suggests it is a genuine opportunity, and many independent analysts agree.

Justine Fearns at AWD Chase de Vere, an adviser, said: “The consensus view among fund managers is that in the UK the returns from commercial property are falling, and to enjoy high income yields and higher returns now might be the time to look globally.”

Roger Dossett, manager of New Star International Property, said: “We have lined up a broad spread of properties in cities such as Berlin and Munich in Germany, Amster-dam in the Netherlands, Sydney and Mel-bourne in Australia, Hong Kong, Singapore, and Honshu and Kitakyushu in Japan. We are also looking at opportunities in central Europe such as the Czech Republic and Poland.”

The German property market is a favour-ite with many fund managers because it has lagged its neighbours in recent years and looks cheap by comparison. Last year, the total return – rental income plus capital growth – from German commercial property was just 1.3%, compared with 21.7% in France and 17.4% in Spain, according to the IPD.

Ian Stewart of Merrill Lynch, the US investment bank, has even called Germany one of the best property investments of the decade. He said: “The greatest potential for price rises is perhaps in one of the most depressed and undervalued markets in the world – Germany.”

One of New Star’s first investments has been a new office block in Berlin let to a professional firm in a part of the city that resembles Knightsbridge, yet the rent is the euro equivalent of £9 per square foot, against £65 or more per square foot in that part of London. Dossett said there was therefore considerable scope for rents to grow as the German economy recovers.

For prime Berlin warehouses the average rental yield is about 6.8%, according to property consultant Jones Lang LaSalle.

Comparable properties in London yield 5%. Shops in Berlin yield about 4.5%, compared with 4% in London.

Dossett said: “Berlin was held back for decades by being divided and by being isolated from the rest of capitalist Germany. It is now the political centre and is likely to be in a catchup phase for many years.

“In the Low Countries, cities are benefiting from revived German economic growth while Brussels is benefiting from its position as the administrative centre of the enlarged European Union.”

The New Star International Property fund is also looking at Polish and Czech warehouses. Dossett said: “As companies locate low-cost manufacturing plants in such countries, their need for distribution facilities rises. The added attraction is that most tenants are well-financed international companies.”

Asia is another region that many analysts like. Hong Kong and Singapore are benefiting from the growth in China as a whole. About 400m people are expected to move from the countryside to urban areas over the next 15 years, which means China needs about 3,000 new towns or cities.

Managers also see good investment opportunities in Japan because it is emerging from a prolonged downturn and, for the first time in years, property prices are rising.

Norwich Union has also launched a scheme that invests directly in European property. Run by Morley Fund Management, it will focus on France, Germany and Spain at first.

Fidelity, First State, Franklin Templeton, Premier Asset Management, Schroders and Swip also have overseas property funds, although these invest in shares rather than bricks and mortar.

If you have already invested in UK property, advisers do not recommend you sell, but put new money into an overseas fund as a way to spread your investments. For investors who have no commercial property an international fund could be a better bet given the outlook. Advisers suggest 10% to 15% of a portfolio should be in property.

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