Investors have been warned they could be piling into commercial property just as the smart money pulls out.

Commercial-property funds, which invest in shops, offices and industrial premises, have been some of the hottest investments in recent months.

About 55 per cent of money that flowed into unit trusts in November went straight into the sector, according to the Investment Management Association. Popular property schemes such as Norwich Property and New Star Property are thought to be taking an astonishing £100m a month, the biggest inflows into funds since the dotcom boom.

Interest in the sector has been sparked by stellar returns: 55 per cent over the past three years, according to the Investment Property Databank (IPD), compared with 46 per cent for the FTSE All-Share index.

Last week’s launch of real-estate investment trusts (Reits), a new type of tax-efficient property fund, has added fizz to the party.

The schemes, introduced last Monday, will not pay capital-gains tax or corporation tax, in return for which they will distribute most of their income to investors as dividends.

Anna Bowes at AWD Chase de Vere, an adviser, said: “The launch of Reits will create a buzz about the sector and keep property flashing on the radar screen.”

But most analysts agree that returns are at a peak. Some of Britain’s top property fund managers have even taken the unusual step of warning that investors could be rushing into property at the wrong time.

Janet Measom at Morley Fund Management, which runs the Norwich Property Trust, said: “The mass of money that has been flowing into the sector worries me. Many of those who are coming into the sector so late in the day will be expecting too much and are bound to be disappointed.”

Most fund managers expect gains to drop to between 7 per cent and 9 per cent this year. Although this looks a reasonable return compared with the profits from other assets — the UK stock market is expected to rise about 10 per cent including dividends — it is well below the double-digit growth that investors have come to expect.

Scottish Widows Investment Partnership, one of Britain’s biggest property investors, expects returns of just 5 per cent in the next 12 months, meaning you could make more by leaving your money in cash. Stewart Cowe at Swip said: “Yields have fallen to historic lows and the prospect of rental growth isn’t that great. Property looks less appealing than it has for years.” ()

The flood of investors into the sector has pushed property prices to record levels, deflaing rental yields — the rental income as a proportion of price. Yields on many properties have dropped as low as 5 per cent compared with more than 6 per cent two years ago.

Fund managers say that as prices have surged it has also become harder to identify good investment opportunities.

Roger Dossett at New Star said: “One of the most difficult things over the past year has been to identify good stock.”

Property funds always hold an element of cash in case investors want to sell, because the asset class is so illiquid. However, many funds have almost double the cash they would normally. Swip Property Trust has about 18 per cent in cash. It would usually have about 10 per cent.

Advisers say that returns from property funds have already suffered from this inability to find decent investments. The most popular property funds underperformed the 18 per cent return from the commercial property market last year. After charges, New Star Property rose 11.6 per cent , Norwich Property was up 12.5 per cent and Swip Property Trust rose 9.7 per cent, according to Standard & Poor’s, a data company.

Mark Dampier at Hargreaves Lansdown, an adviser, thinks existing investors should cash in some of their gains. He said: “It’s madness to buy into commercial property at these levels. I’m not saying the market will crash, but we are advising clients to take some profits from their holdings.”

Advisers say investors should not abandon commercial property, however. Returns are expected to fall, but are unlikely to collapse as they did in the 1990s. Rents fell by 22 per cent between 1990 and 1995 and capital values dropped by 27 per cent in nominal terms from peak to trough.

Commercial property remains a good way to diversify your portfolio as the sector is uncorrelated with other assets. Advisers also say that commercial property can be an excellent long-term investment. But you should expect returns of about 5 per cent to 8 per cent a year. Recent gains have been exceptional.

Simon Lee, 43, pictured with his wife, Tracey, 33, and two-year old daughter Abigail, invested in New Star property last March. Simon, an investment manager from Woking in Surrey, said: “Returns have been impressive recently, and I realise they are likely to be lower in future. We invested in commercial property because we didn’t want everything to be in equities. It’s a small proportion of our overall portfolio and I wouldn’t want to have more than 15 per cent in the sector.”

For more on house prices visit www.timesonline.co.uk/mortgage