INVESTORS have pulled millions of pounds out of commercial property funds in the past few months as fears of a crash in the sector grow.

Financial advisers are recommending that people who have made good gains over the past two to three years, and those who have too much money in the sector, take some cash out ahead of a downturn next year – although they stress that savers should not panic.

Returns on commercial buildings, including shops, offices and industrial premises, fell by 1.2% last month, according to the Investment Property Data-bank (IPD).

It was the first fall since December 1992, and the biggest monthly decline since 1989, when the sector was in the early stages of a slump which lasted until 1991.

The Bank of England also warned last week that commercial property remains extremely vulnerable to the continuing fallout from the crunch in the financial markets. Its biannual stability report stated that the sector is “particularly prone to further shocks and to rises in the cost of finance”.

Property shares have already been hit hard this year, with the real-estate sector having fallen 26%, according to Morningstar, a data company.

Morgan Stanley, an investment bank, thinks the share prices of companies such as Land Securities and British Land could fall a further 32% next year in the worst-case scenario. Even its central case is that prices will be down by 9%, with further falls for three years.

Martin Allen at Morgan Stanley said: “As a result of the credit crunch, the supply of debt funding has all-but dried up for larger transactions in the UK, and most agree it will be a long time before activity returns to this market.”

While most of the big commercial-property funds invest mostly in bricks and mortar, they have up to 20% in real-estate shares so they will be hit hard by further falls in the sector.

Capital Economics, a consul-tancy, is also predicting falls. It believes commercial property values will drop by 12% over the next three years, but warns that they could slide by as much as 20%.

Ed Stansfield at Capital Economics said: “The long boom in commercial property prices is over. We expect annual total returns to average 2% between 2008 and 2011.” This will come as a surprise to investors who have poured billions of pounds into commercial-property funds after the sector delivered average returns of 18.5% a year over the past three years, according to the IPD.

Around £16 billion is held in the schemes, according to the Investment Management Association (IMA), and the sector took £2 billion in the six months to April alone.

However, returns from some of the biggest funds are already falling. The two largest funds, the £4 billion Norwich Property Trust and £2.1 billion New Star Property, have fallen 8.2% and 7.9% respectively this year.

The declines are taking their toll on the sector: figures from the IMA revealed that £284m of new money was invested in property funds in August, but £201m was pulled out. This compared with April, when four times as much money went into the sector as came out. Many funds have changed their pricing to deter outflows, reducing the sale price of units by about 5%.

Philippa Gee at Torquil Clark, an independent adviser, said: “Commercial property has been an easy sell for fund groups and some advisers. We have had people coming to us with all of their money invested in the sector. It is very worrying, particularly as many of them have invested in the last couple of years when people were warning that commercial property was near its peak.”

Some advisers suggest investors who are sitting on profits take money out now, but warn against a mass exodus.

Mark Dampier at Hargreaves Lansdown, an independent adviser, said: “The worry is that if people panic and pull money out, they will create their own crash as managers will be forced to sell buildings, which will send prices lower.

“However, if you have been invested in commercial property for a number of years, pat yourself on the back because you will have done very well. Now is the time to take some profits. I recommend people have no more than 10% in the sector.”

Those who have invested recently face a more difficult decision because they may well be sitting on losses.

Dampier added: “Commercial property should be seen as a long-term investment. If your plan is to stay invested for 10 years or so then you should be okay, but you should prepare yourself for three or four years of very low growth.”

Gee recommends investors take the opportunity to review their holdings and take money out if necessary, especially if they have too much in the sector.

She adds that there is no need to panic: “There is nothing inherently wrong with commercial property as an asset class, but like anything it will have periods when it does better than others– this is one of the times where its performance is likely to be weak.”

Managers are also keen to emphasise the fact that commercial property still offers good long-term investment prospects.

Roger Dossett, who runs the New Star Property fund, said: “Values have fallen recently because we are seeing very few transactions, so valuers are becoming more cautious. This will continue for the rest of the year, but we are still confident that property is a sound investment.

“The time to be worried is if there is oversupply but that is not the case at the moment and rental growth remains strong.”