Falling property prices around the world have not deterred the Investment Management Association (IMA) from devising a dedicated property funds sector, which is due to be launched in the new year.

The new IMA sector will track the performance of 35 property-related investments and include funds of funds and direct property funds as well as securities funds and hybrid property funds. To qualify, funds must have either a minimum of 60 per cent of their assets invested directly in property or at least 80 per cent in related securities.

But while the move by the IMA is aimed at boosting confidence in the sector, advisers are still warning cautious clients to avoid buying into property as the hammering that both the commercial and residential sectors have taken in recent months seems likely to continue.

Worsening economic conditions have taken a toll on almost every commercial property market in the world, analysts say. By the end of the year, global capital values of commercial properties are expected to have fallen by more than 30 per cent from the June 2007 peak.

While yields in certain sectors have risen to 6 to 8 per cent and now look more attractive than five-year gilts, they are still not high enough to tempt many advisers. “It’s probably too early. I can’t see why you would rush back in at the moment,” says Ben Yearsley, analyst at Hargreaves Lansdown, the advisory firm. “I’d rather sit patiently for another three to six months to give yourself a bit more protection. Property prices are still falling and rents could fall as well.”

In uncertain times, managers tend to keep a large chunk of their portfolios in cash and focus on buying into distressed properties and areas offering value, such as student accommodation. “You don’t want to buy from people who don’t want to sell,” advises Alan Patterson, head of European research at Axa Real Estate Investment Managers.

In a year’s time, however, the market could prove more viable as an income play as commercial property yields could rise to a high of 7.5 to -9 per cent if interest rates fall further, and if the cost of borrowing continues to drop, Patterson predicts.

Also, UK investors with largely domestic portfolios are better-placed as the UK market is likely to emerge from recession ahead of other areas. “It will probably reach the point of being a strong buy much earlier than most other real estate markets,” predicts David Skinner, property economist with Aviva.

Amid the recession, he suggests inexperienced investors should avoid core markets such as the UK, France, Germany and the Nordic countries and turn to distressed ones such as Spain, which has faced severe falls in property values. “Spain might start to look good in 12 to 18 months,” he explain.

But these remain challenging times for property fund managers. Earlier this month, a commercial property fund open to retail investors, and managed by Aviva, was forced to suspend trading, raising fears UK property funds could be facing a run on cash.

Aviva blamed a “rapid increase in the level of redemptions over the last few weeks” in the £387m European Property Fund that caused a lack of immediate liquidity. It has been trying to sell property to generate cash to pay investors, but has been hampered by a freeze in commercial property investment markets.

Open-ended property funds endured a difficult period this time last year as large numbers of investors started to leave when the slide in property prices accelerated. Funds under pressure were unable to sell property fast enough, forcing pension and institutional property funds to close doors on departing investors for between three months and a year.

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