Investors are being warned , in this column and elsewhere, of a property slump in which the prices of shops and offices could drop by up to 20%.

The downturn would threaten the savings of hundreds of thousands of people who have been lured into commercial property funds in the past few years.

The schemes, including those run by New Star and Norwich Union, were the most popular Isas by far last year and the sector as a whole took £2 billion in the six months to April, the height of the Isa season.

However, the funds have been losing money since January as five interest-rate rises have taken their toll on the sector.

New Star, Norwich Union, Standard Life and M&G, owned by Prudential, have been forced to impose exit charges to stem a wave of selling as disappointed investors dump their funds.

The firms said last week that the value of the shops and offices in their portfolios had not in fact fallen; returns are down because they also hold some commercial-property shares, which have plunged by more than 20% this year.

Many analysts think it is only a matter of time before the value of bricks and mortar falls too, though. Capital Economics, a con-sultancy, predicts that prices will slide 12% over the next three years, with a slump of 20% a distinct possibility.

Even the most optimistic forecasters predict that returns will be little better than those from savings accounts by next year.

Mark Dampier at Hargreaves Lansdown, an adviser, said: “I have been saying for some time that commercial property is overvalued and returns will be low over the next few years. There’s a danger of a huge spiral if people pull out. Fundamentally there is nothing wrong with commercial property, but if people lose confidence it could get messy.”

The sell-off comes amid fears of a global property crisis. America is suffering a sub-prime mortgage meltdown, with nearly 2m people behind with their repayments. Last Tuesday the FTSE 100 index shed 100 points on fears it could spread to Britain – though it ended the week up 0.4% at 6,717.

The Royal Institution of Chartered Surveyors (Rics) also reported the first real signs of a housing slowdown in this country, when it said price growth halved in June.

Advisers are drawing parallels with the tech boom of 2000, when investors were lured in just as returns peaked – although property funds are unlikely to suffer such a severe fall.

Justin Modray of Bestinvest, an adviser, said: “We see it time and time again. A sector produces great returns, so it is an easy sell for the investment companies. However, savers can get in at just the wrong time.”

Until recently, the commercial-property market had seen impressive growth. The average annual return over the past three years has been 18.5%, according to the Investment Property Databank.

However, many commentators, including Sunday Times Money, have been warning that the party would come to an end as rising interest rates took their toll. Commercial-property funds buy shops and offices and let them to businesses. When interest rates rise, demand from tenants falls and returns drop.

Andrew Jackson, who runs Standard Life’s Select Property fund, said: “We expect total returns – capital growth plus income – to average between 3% and 5% over the next year or two, but that will mask significant price falls in some sectors. Retail will suffer most. Shops in some towns could fall in value by more than 10%.”

This will be bad news for thousands of buy-to-let investors who have moved into high-street shops, often with flats above, to add spice to their portfolios.

Last year, auction rooms were buzzing with individuals snapping up retail outlets, pubs and even bank branches, but activity has fallen off a cliff. A new fund, Invista Opportunity, is hoping to cash in by buying from individuals who are forced to sell.

Duncan Owen, chief executive of Invista, said: “Individuals and syndicates of pension investors have bought high-street retail outlets at ambitious prices with a high level of debt. We have seen examples where investors have been in negative equity and if prices move down it will break sentiment.”

Most analysts are not as bearish as this, but the consensus is still that prices will fall and that total returns, once rental income is included, will barely cover the costs of buying bricks and mortar.

The Investment Property Forum, which polls property advisers, fund managers and brokers, is forecasting a total return of 9.1% for the sector this year, 5.4% in 2008 and 4.7% in 2009 – down from 18.1% in 2006.

Once you strip out rental income, capital values are forecast to grow just 4% this year and by 0.5% in 2008, and they could fall 0.2% in 2009.

New Star Property, which was advertised by giant billboards around the City of London and was taking £100m a month at its peak last year, is down 5% this year, while the rival Norwich Property Trust has slipped 4.6%.

They have slashed the value of their units by 4.4% and 4.9% respectively to stop investors pulling out. Anyone selling will get back less then they would have done; on the other hand, buyers get in at a lower price.

However, advisers have urged people not to panic and to stick with their funds unless they absolutely have to sell.

Justine Fearns at AWD Chase de Vere added: “Recent investors who got in at the top need to stick with it for the long term and not move in and out. Over five to ten years, your investment should come good even if in the short term returns are poor.”

While the double-digit returns of recent years will probably not be repeated for the foreseeable future, analysts do not believe the sector is about to implode.

John Buckley, a property economist at Mor-ley, which runs several Norwich Union funds, said: “Property in the best locations with quality tenants, such as London offices, could continue to make double-digit returns.”

Amanda and Tony Fitzgerald, pictured with their five children, have decided to stay put. The couple, from Melksham in Wilt-shire, have money in New Star Property. Amanda said: “I’d have preferred not to have read the news about falling returns over the past week, but I invested in property for the long term. “As with any investment, I know there are going to be ups and downs and I intend to ride out the storm.”

The sell-off in commercial property funds, coupled with the crisis in the American mortgage market, has sparked fears that the global property market is heading for trouble, writes David Budworth.

We answer questions for investors and homeowners.

What has sparked the crisis? A dramatic rise in interest rates around the world has increased the cost of borrowing for businesses and consumers.

The Bank of England has raised rates by one and a quarter percentage points in the past two years from 4.5% in August 2005 to 5.75%. In the US rates have risen 17 times since June 2004 from 1% to 5.25%.

While rates were low investors borrowed cheap money and ploughed it into property, pushing up its value to record levels. Now borrowers are having to pull in the purse strings as they find it harder to pay off their debts.

How has this affected America? There has been a huge upturn in loan defaults as borrowers fall behind with their repayments. Defaults have been particularly bad in the sub-prime market, where lenders offer mortgages to people with poor credit records.

Lenders sold billions of dollars of these mortgages to people with weak credit ratings on the basis that rising house prices would allow them, if necessary, to remortgage their property to meet repayments.

Instead, house prices have fallen in some states. Standard & Poor’s is predicting that US house prices will be down 8% on average by the year-end.

Millions could see the value of their houses fall, leaving them with “negative equity” – meaning their mortgages are greater than the value of their property.

Growing numbers of borrowers have been missing payments and hundreds of thousands are expected to lose their homes altogether.

Mortgage banks are expected to foreclose – a legal process that often leads to repossession – on 1.8m loans this year: a 44% jump on the 2006 figures. Some states have even been talking about raising funds to bail out struggling homeowners from their mortgages.

Will the problems spread here? In Britain a housing market slowdown is expected, but nothing like as severe as in America.

The high-risk sub-prime loans that are at the centre of the crisis in the US make up a much smaller part of the mortgage market here.

Last year, $600 billion (£295 billion) of sub-prime mortgages were agreed in the US, 20% of the $2,980 billion total.

Britain has its own problems. The Financial Services Authority has criticised firms for offering mortgages that customers might not be able to afford. But here the deals account for just 6% of sales and lenders have generally been more cautious.

In America about 15% of mortgages are 100% loans, while in the UK most providers require a deposit of at least 5%.

However, higher interest rates are starting to have an impact, as the turmoil in the commercialproperty sector shows.

Why have stocks been hit? Investors are worried that strife in the mortgage market could drag down the wider American economy, which would hit company profits and stock markets worldwide.

Rising defaults by borrowers have already forced dozens of sub-prime firms to file for bankruptcy, put themselves up for sale or shut down. The turmoil has even hit British banking giants such as HSBC, which have exposure.

Pension funds, insurance companies and hedge funds have also run into trouble after investing in bonds exposed to sub-prime loans. Known as collateralised debt obligations or CDOs, these invest in securities, such as bonds, that are backed by sub-prime mortgages. As mortgage defaults have risen the value of many CDOs has plummeted.

Two hedge funds run by Bear Stearns nearly collapsed in June, in part because of struggling CDO investments, sparking fears of falling prices and panic selling. This explains why the FTSE 100, Britain’s index of leading shares, fell nearly 100 points last week after Standard & Poor’s and Moody’s, the ratings agencies, warned that losses from CDOs would be greater than feared.

Fresh bouts of turmoil are likely until the outlook for the US housing market brightens. However, unless the crisis worsens, many analysts think stock markets will be higher by the end of the year.

Shares still look good value on the whole and takeover activity is expected to continue to buoy the markets. The Footsie had recovered its losses by Friday to finish the week up 0.4% at 6,717.

Any effect on bond funds? High-yield bond funds, such as M&G Optimal Income & Baillie Gifford Corporate Bond, have some exposure to CDOs in their portfolio. As a result, returns are likely to be hit. Investors in bond funds are already suffering losses after a dramatic sell-off last month sent yields soaring. When yields rise bond prices fall to compensate.

America was once again the trigger. That time it was because of fears that the US economy was growing too strongly, which could push up interest rates. Many commentators believe a rate cut is more likely if the turmoil in the housing market continues.

What’s the outlook for UK residential property? Most analysts expect price growth to slow, although they do not see a crash. The worst they predict for the housing market is several years of stagnation, where prices rise in line with earnings at about 4%.