UK investors pulled more money out of property funds in February than in any month since 2008, amid fears of weakening property markets.

The Investment Association said outflows from property funds, which are invested mainly in commercial buildings, reached almost £120m in February, compared with £28m in January and a reversal on sales of £150m in December 2015.

The asset class has plummeted in popularity with individual investors and is now among the five worst-selling sectors, a striking turnround since 2015, when it was among the best-sellers.

Figures for the first three months of this year put it on course to be the first quarter to register net redemptions from retail funds since the Investment Association began measuring monthly sales in 2010.

Institutional investors have been net buyers of property funds in every year since 2005, apart from in 2007 and 2008.

Jake Moeller, head of UK and Ireland research at fund data provider Lipper, said investors were wary of signs that the market was "overheating".

“There are some signs of this happening with some strong yield compression in pockets of the market, and supranormal returns in a number of funds,” said Mr Moeller.

The draining effect in property funds may force some fund managers to sell, analysts warned. “Structurally open-ended property funds don’t work,” said Danny Cox, chartered financial planner at fund supermarket Hargreaves Lansdown. “Managers are forced to buy and sell properties according to cash flow, not on market conditions.

“The rush of money into property funds leading up to 2007 saw managers overpaying for properties they didn’t want simply as they had to invest the wall of money hitting the sector.”

Morningstar, which last week issued a research note warning investors to expect lower returns from property funds, said that fund performance may no longer compensate for the illiquidity of the asset class.

However, Poppy Fox, of asset and wealth manager Brooks Macdonald, said the company was not “unduly worried” about liquidity in property funds.

“When we speak with the managers of the funds on [OUR]buy list, I think they all clearly remember the problems faced by property funds during the financial crisis,” said Ms Fox.

“[THEY] are aware that they need to keep liquidity levels quite high as flows can switch pretty quickly in times of market turbulence.”

Open-ended property funds are not the only property investment products to suffer this year, with share prices in the UK’s biggest real estate investment trusts (Reits) also falling by as much as 20 per cent in the three months to February.

The two largest UK Reits — Land Securities and British Land — were in February trading at their biggest discounts to net asset value since 2011.

Wealth managers are warning clients of depressed returns for UK commercial property, with some investors avoiding London in particular.

Heartwood Investment Management said investors should expect lower yields and increased dependence on rental growth to drive returns, adding that it was looking to reduce its exposure to the capital.

“One important driver for UK commercial property in the last few years has been foreign investment flows, where we are now observing shifting trends,” said Charu Lahiri, investment manager at Heartwood.

Ms Lahiri said that while foreign investment was not expected to drop off materially in 2016, the wealth manager expected to see more foreign investment in Manchester, Birmingham, Bristol and Leeds.

Brooks Macdonald said it is also focused on regional cities in its portfolios — but attributed this to the “superior returns” to be found in those sectors and not to the threat of Britain voting to leave the EU.

“We have been warning investors that they should reduce or sell down core property fund holdings,” said Steven Grahame and Niall O’Connor, of the company’s specialist property team.

Andrew Friend, co-manager on Henderson Asset Management’s UK property fund, said there were “definitely risks in London”.

“Prices and rents are at or above 2007 levels in core markets and the prospect of Brexit presents a major threat,” he said. “As a result, expected returns for these core locations are forecast to be down considerably compared to previous years.

“Equally, there are many exciting emerging sub-markets that present attractive investment opportunities going forward and London remains one of the world’s most liquid commercial real estate markets.”

According to the Investment Association, UK funds registered net outflows of £400m from retail investors across all asset classes in February.

Equity funds suffered outflows of £195m and bond funds lost £265m, whereas absolute return funds attracted inflows of £243m.

(Copyright The Financial Times Limited 2016.)