This week could mark the turning point of the investor love affair with commercial property after up to 6 per cent was wiped off the prices of more than £20bn of UK property funds.

Advisers are now warning of a potential run on commercial property funds.

Almost every day this week saw another big name fund manager forced to revalue their previously best-selling retail funds.

Prudential began the price cutting two weeks ago. It switched two property funds worth around £1bn from “offer” to “bid” status, equating to a price drop of 6 per cent.

Standard Life followed, dropping the price of five of its funds, totalling around £4.5bn, by 6.7 per cent. On Tuesday this week, New Star knocked 3.9 per cent off its £2bn-plus UK Property Unit Trust and Norwich Union cut the price of its £4.4bn Norwich Union Property Trust by 4.7 per cent.

Norwich Union then slashed prices of its remaining three funds on Wednesday, when the pricing on the Scottish Widows’ SWIP £1.3bn property trust was also cut back.

It is not unusual for funds to move pricing from an “offer” price to a “bid” status to reflect the net flows of money, although the extent and the severity of this week’s actions has caused concerns in a market already dealing with falling returns.

Equity funds make the switch relatively often, but normally they are revalued by less than 1 per cent.

Fund managers have put a brave face on the pricing changes. A Prudential spokesman says the move is an inevitable reaction to several years of strong growth. “Redemptions have exceeded new money. This is a crystallisation of investment and a general reflection of what is happening to investor behaviour to UK commercial property,” he says.

But Tim Cockerill, head of research at Rowan & Co, says the price cuts send the wrong signals to investors already worried about diminishing returns: “It is only bad if you sell now of course but it doesn’t send a terribly positive signal to retail investors, who will now be pretty worried about what they have got themselves into.”

Mark Dampier, research director at Hargreaves Lansdown, says two years ago German open-ended funds went through a liquidity crisis that forced a firesale of many of their properties. Many of the funds were frozen to withdrawals as German investors panicked. At its worst, more than €3bn was withdrawn from Germany’s 35 open-ended funds in a single month in 2005.

In a worst case scenario, UK funds can ask the FSA to defer redemptions, particularly if they have to sell property to cover exiting investors. This could mean that investors have to wait several months before they see their money.

This is only likely if the funds run out of liquidity. Typically, most funds have a significant tranche of equities and cash in their portfolio, and so delayed redemptions are unlikely.

Ironically, it is the stocks that have dragged down performance since the turn of the year. Many funds invested in UK real estate investment trusts (Reits), which have massively underperformed.

Of the 10 funds that focus on bricks and mortar alongside shares monitored by Bestinvest, only two have made positive returns in the year to date. The New Star property fund has dropped around 5 per cent, while the SWIP fund is down 3 per cent.

But James Pearson, fund development manager for the £4.4bn Norwich Union property fund, reassures investors that commercial property is not in crisis despite the lower level of returns and falling fund prices.

He says: “We don’t see a fundamental problem with property. It has gone through a period of extraordinary returns over the past few years and this is hard to repeat.”

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