THE crisis in the commercial property market accelerated last week, when figures revealed that the sector has suffered its biggest recorded price fall.

The news came as Axa became the fifth fund open to retail investors to stop customers getting their cash, in an effort to avert a crisis. The Investment Property Databank (IPD) said total returns fell 7.6% in the final three months of 2007 – the biggest drop in the history of the index – and an “unprecedented reversal”.

Dr Ian Cullen, a director at the IPD, warned investors they should be braced for a period of extended flat or negative returns. He said: “The question focusing our minds is whether the unavoidable market correction will become a potentially much longer period of negative or zero returns. This could follow if the failure of investor confidence spreads into the consumption and employment markets which underpin the demand for commercial property.”

Investors in some of the UK’s biggest property funds will have to wait up to a year to get their money after several funds shut the door on immediate withdrawals.

Axa is only the latest insurer to suspend redemptions. The 100,000 investors in its £2.1 billion life and pension funds will have to wait up to six months to make withdrawals – unless they are at their expected retirement date, or it is a death claim.

The decision was made after Axa’s cash buffer fell to less than 5%. Ian Colquhoun, a director at Axa, said the notice period would give fund managers time to sell properties “in a considered manner and at a reasonable price”.

In December, Friends Provident imposed a six-month notice period on its £1.2 billion fund, while Scottish Equitable has told investors they will have to wait up to 12 months to pull out funds. Scottish Widows has also told its 200,000 policyholders they cannot remove their money for at least six months.

About £8 billion of investors’ cash is now locked into crisis-ridden property funds, at one stage the most popular schemes in the UK.

Last month, New Star Asset Management issued a profit warning, partly on the back of withdrawals from its property fund. Typically, property funds have fallen in value by about 20% but in some instances the drop has been closer to 50%.

The slump has dragged the 12-month total return from commercial property to 4.4%, the lowest calendar year return since 1990, driven by a “sudden collapse in investor confidence, triggered by pervasive financial sector uncertainty”, the IPD said.

Other insurers, including Norwich Union, Zurich and Skandia, are monitoring their property funds.

Investors who are happy to hold commercial property for the long term are being told to sit tight and ride out the tough times. However, if you need money in the shorter term, perhaps because you are due to retire, it might be worth getting out while you can.