Is it time to build a stake in real estate?

Dragons' Den's James Caan is the latest to talk up the faltering UK commercial property market, saying that he believes "it is as attractive as it has been in the last few years". Caan is backing his view by launching a fund next month in partnership with ING Real Estate Investment Management. But should you follow his lead and add commercial property to your portfolio, or would ordinary investors be better off saying, "I'm out"?

"My view is that the real estate market has bottomed out, valuations have settled and there are opportunities to be had," Caan says. "Two years ago, the property market got overheated and yields were only between 3 and 4 per cent for prime real estate, with capital cost around 6 per cent. However, today you can acquire good quality real estate at yields of between 7 and 8 per cent per annum, and the cost of capital is still around 6 per cent."

Caan claims this represents a near 30 per cent shift in value. "Real estate is as attractive as it has been in a while. With the UK showing signs of grass-roots recovery, I feel this is an ideal time to be entering the market." His Hamilton Bradshaw Diversified Property Fund will launch in October, with a focus on prime commercial real estate across the UK. It will employ a conservative investment strategy that targets properties with strong covenants and long leases which can deliver stable cash flows.

But before you consider the pros and cons of investing in commercial property, you need to understand the risks, which have been particularly high in recent years as the global recession has hit property values around the world. Commercial property funds invest in offices, shops, factories and other commercial buildings. For much of this decade, the sector was booming as property development grew, particularly in the retail sector with the launch of such stunning new ventures as the Westfield shopping centre in Shepherd's Bush, west London.

But the credit crunch put paid to that as many planned developments were scrapped, and rental yields on existing properties began slipping.

Property funds hit their peak in June 2007 but had fallen by around 40 per cent two years later. The falls were so rapid in some cases that a rush of panicking investors pulled out of the funds, forcing some managers to introduce restrictions. Funds managed by Friends Provident, Aegon and Scottish Widows were temporarily closed to withdrawals at the start of 2008 and this year investors in Standard Life and Norwich Union property funds have similar controls.

But the sector has had a massive boost with the publication of the latest monthly performance figures from property analysts IPD. The figures published last week revealed capital growth in the UK commercial property market of 0.2 per cent in August, the sector's first positive movement in 26 months.

James Caan isn't the only one to notice the sector's resurgence. Seven Dials Fund Management is taking its new Lightstone Prime High Street Fund to potential investors this week. It's a commercial property portfolio focusing on prime retail properties on British high streets. Fund manager Astrid Cruickshank says she thinks the British commercial property market has reached a turning point, as the volatility of the past 18 months has created attractively priced stock opportunities.

Meanwhile, asset-management firm Aviva Investors looks set to launch a £250m "opportunities" fund to take advantage of the downturn in the commercial property market. The firm's real-estate team has been contacting potential investors for the fund, ahead of an official launch.

"There has been an increase in institutional money flowing into commercial property, and with new funds opening recently there is a strong sign confidence is returning," says Adrian Lowcock of independent financial advisers Bestinvest. "Prices in the UK are beginning to stabilise and more buyers are returning to the market, increasing competition – particularly in the best properties with the right tenants."

James Sullivan, the managing director at alternative asset fund specialist PILinvests, says: "We are seeing a flood of new commercial property funds coming on to the UK market, a trend that looks set to continue." But he warns that yields are falling, which means anyone anticipating assured growth needs to think again.

For that reason, he says, investors need to find fund managers who can demonstrate a real track record and experience in selecting the right stock for their funds. So, which funds should you consider if you fancy dipping a toe into the commercial property market?

Brian Dennehy, the managing director of investment specialists Dennehy Weller & Co, favours Aberdeen Property Share. "It has been a bit of a star since March, and is up more than 50 per cent since then," he says. "It won't be such easy money in the next six months, but there should be more to come from this fund."

Dennehy says that property shares run upwards ahead of bricks and mortar property. "So it is interesting to see that two of the larger funds that never had to suspend trading have been seeing days of positive inflows in recent weeks." Henderson New Star UK Property and Aviva Property Trust have both been well managed through a very difficult downturn, he says.

"The Standard Life Select Property fund is an interesting blend, international bricks and mortar and property shares, too," Dennehy adds. "And last, but definitely not least, I would not overlook Henderson New Star International Property. Although it's suspended for now, the spread of prime properties, particularly in Asia, make it interesting once the fund is open to investment again, which I believe should be in the not too distant future."