No need to rush out and buy a skyscraper

If asked to name the second best performing UK asset class not many people would say commercial property. Nevertheless between 1968 and 1994 it was the top performer for 10 years - second only to UK equities (12 years) and way ahead of gilts (3 years) and cash (2 years). Furthermore, some experts are predicting that commercial property, having been dull for most of the 1990s, is about to enjoy something of a purple patch.

Norwich Union has been beating the drum the loudest, pointing out that property currently has an average yield of around 8 per cent, which is similar to the yields on gilts and twice the average on equities.

It predicts that increases in rental growth will see commercial property outperform equities and gilts for the next three to five years. For the next two years it is talking in terms of total annual returns of 10-15 per cent.

Such forecasts will do little for investors desperate to give up the day job. Nevertheless, with most experts pointing to a continuation of low inflation and low interest rates, they are certainly worthy of due attention.

Paul Ashby at Barclays Unicorn, says: "Don't commit more than 5-10 per cent of a portfolio to property, but for those bearish about equities it is probably the next best thing after Bond PEPs.

Mark Searle, investment director at private client stockbrokers Gerrard Vivian Gray, feels that property ranks alongside equities and gilts as an asset class. He points out that it has tended to produce the least volatile returns of the three and because its performance has a low correlation with the others, represents a good diversification of risk.

Those wishing to invest do not have to rush out and buy a skyscraper. Many of us in fact already invest in property unknowingly. Most managed funds in personal pension plans and unit-linked investment plans, for example, normally have a holding in property.

Some investment trusts specialise in property, although they buy shares of property companies as opposed to the property itself. Property funds which invest in property - not property shares - are commonly available in personal pension plans and unit linked investment plans.

Those who have maximised their pension entitlements might wish to consider a single premium or regular premium unit linked contract. The former is commonly referred to as an "investment bond". Problems can, however, arise if a lot of investors wish to withdraw money at the same. This is because property normally takes longer to sell than other assets. Most unit linked property funds therefore reserve the right to defer payment for three or six months should it prove necessary.

Investing in an authorised property unit trust can help to avoid this problem yet still provide most of the benefits of a unit-linked fund. This is because it is required to be invested at least 20 per cent in property shares or cash. In theory it could defer payments, but the extra liquidity makes such a situation unlikely. Nevertheless authorised property unit trusts have only been permitted since 1991 and there are only two available - managed by Barclays Unicorn and Norwich Union.

The former, which has pounds 23 million under management, invests only in smaller properties. The latter, which manages pounds 109 million, invests in all sizes of property. It has enjoyed a slight edge on past performance.

It should nevertheless be stressed that not all experts agree with Norwich Union's outlook. Bristol & West Building Society, a market leader in lending on let commercial property, is notably lukewarm in sentiment.