A new category of investors with millions to spend is about to swell the ranks of those looking for scarce commercial property. Self-employed people, now entitled by law to run their own pension fund, are increasingly targeting property investments because of the strong returns from this sector over the past three years.

Before the 1999 Finance Act came into force, all pensioners were obliged to purchase annuities with the bulk of their pension funds, out of which a retirement income was paid.

Under this system, pensioners have no capital sum to pass on and the income from the annuities is reduced for surviving partners when the fund owner dies. This is still the case if you are in pensionable employment.

Under new regulations introduced earlier this year by Finance Minister Charlie McCreevy, self-employed people, or directors of family companies, can choose to run their own retirement fund.

They now have the option of either drawing the entire sum in cash, taking 25 per cent as a tax-free lump sum and the balance as a taxable payment, or transferring their pension into an Approved Retirement Fund (ARF).

This is designed by a qualified fund manager to suit individual preferences. The money can be spread over a mixture of investment vehicles such as stocks and shares, gilts and property, or the entire sum may be invested in a single project.

With property offering good capital appreciation just now, many managers will be advising their clients to invest in this sector.

Where as in the past, newly retired company directors had no option but to give their pension fund to an insurance company, some will now have as much as £1 million to play with - a sum that could provide a comfortable pension of £60,000 in rental income from the right investment. (Anyone who doesn't have a separate pension income of at least £10,000 per annum will have to put a minimum of £50,000 in an Approved Minimum Retirement Fund until they reach 75 years of age.)

Pension fund manager John Mulholland is currently looking around for commercial property investments worth around £10 million for 12 of his clients. He expects his company, The European Pensioner Trustee Company Ltd, to handle a good percentage of up to 1,000 pension millionaires each year.

The Georgian office buildings around Dublin's city squares are ideal for his purpose - if he could find any to buy, that is.

The real difficulty investors will have is finding good commercial property, says John Moran of Jones Lang Wootton. "The market is so hot at the moment that anyone with surplus cash will have to look at both commercial and residential letting property. People have stopped asking because of the lack of supply," he says.

The ideal type of investment for pension purposes would be a prime commercial property with a secure tenant. This will obviously cost more and produce a lower return than other more speculative properties outside the capital, says Gunne Investment director Ronan Webster, but the income is more likely to grow over time.

Gunne has recently sold a small office block in Windsor Place, off Pembroke Street, with a letting income of £62,000 per annum for £1.25 million. Still available, at £1.8 million is an office and retail investment on Eden Quay producing £120,000 in annual income; an office building on Baggot Street with £40,000 rental income, priced at £750,000 and a retail showroom at Stillorgan Industrial Estate with £60,000 in rental income for £900,000.

In the absence of property at home, fund managers are looking further afield. The UK is already experiencing an influx of Irish investors. However, the uncertain exchange rate could make countries within the European Monetary Union more attractive.

Paris and other European cities will be considered by fund manager John Mulholland. The exchange rate is fixed, the different property laws can be easily overcome and letting agents can be hired to manage day-to-day matters, he says. "Taking a purely commercial view, there's no reason why not. Another option would be buying a good apartment for around £200,000 in one of the fashionable Spanish resorts - preferably on a managed complex - which can be rented in high season and used by the client when it suits." "

Property consultant Bill Nolan says buying abroad is only for the well-advised investor: "It's very easy to lose money in a foreign system. Even the cost of an airplane to meet your lawyer will cost several hundred pounds and there will be documents to translate."

On the other hand, he warns that the home market is more overheated than elsewhere and a lot of Irish commercial property has been seriously "talked up" to prime status. So only buy first-rate quality property that will hold its value, he advises. At yields of up to 8 per cent, property is still the best protection against inflation.