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The commercial-property sector also got a boost last month following the introduction of rules allowing direct-property funds to be held in Isas for the first time.

The rules, which came into force on December 27, apply only to funds that invest directly in bricks and mortar, such as the popular £2 billion Norwich Property Trust and the £726m New Star Property fund.

Schemes that invest in property shares, such as the Fidelity, Schroder and Swip funds, have always been eligible for Isas.

Industry commentators say that the rule change could make commercial property one of the most popular sectors this Isa season, both for new money and fund switches.

Paul Ilott of Bates Investment Services, an adviser, said: “There is £83 billion invested in 13.47m Pep and Isa accounts, and none of it gives exposure to real bricks and mortar. The new rules offer those investors an opportunity to reassess their existing portfolios.”

Advisers recommend some exposure to commercial property in your portfolio — say 5% to 15% — because returns do not tend to move in line with equities, protecting your portfolio from wild swings in value.

Ilott said: “There tends to be little coincidence between the patterns of returns from commercial property and either gilts or equities, which is why property is such a useful diversification tool.”

But if you buy commercial property, do not expect returns to be as good as they have been over the past couple of years: many property watchers think the best years are behind us.

It has produced a total return of 82% over five years, compared with 8% for the FTSE 100. The sector is believed to have delivered 15.4% in 2005, according to the Investment Property Forum. That would be its third year of double-digit growth, after 18.3% in 2004 and 10.9% in 2003.

Returns have been driven by a wall of money from institutions and individuals seeking an alternative to shares. As property values have soared, yields — which show rental income as a percentage of the asset price — have slumped to their lowest since 1989.

But with yields so low, and equities gaining in popularity, the commercial-property boom is widely expected to run out of steam this year. The consensus forecast among property analysts is a return of 8.6% this year and 6.9% in 2007 — still respectable, but much lower than lately.

Sabina Kalyan of Capital Economics, a consultancy, said: “We think that the period when investors could rely on super-normal returns will come to an end in 2006. But, in the absence of a full-blown UK recession or a sharp rise in interest rates, the chances of a crash are slim.

“Instead, we expect real annual total returns of about 5% from 2006, largely through growth in income rather than capital. This is bang in line with the 50-year average and represents a return to normality.”

Once you have decided to go into commercial property to diversify your portfolio, the next step is to choose between a fund holding bricks and mortar and one investing in property shares. There are pros and cons to each approach.

The shares of property companies are traded constantly day by day, and prices fluctuate according to the market’s view of the value of the underlying property. By contrast, direct property held in a unit trust is usually valued just once a month. This makes funds investing in property shares more volatile than those holding direct property, at least in the short term.

Ilott said: “Returns from property shares can be much better or worse than direct investments in property in the short term. Over the past five years, returns from global property shares have been 10 times more volatile than the returns from real bricks and mortar in Britain.

“Some of the additional risk comes from the fact that property companies can sometimes borrow to invest in bricks and mortar. This can boost share prices in rising property markets, but can also act as a drag in falling markets.

“Over the longer term, however, investors may find that returns are not that dissimilar because the share price of a property company should eventually reflect the performance of its underlying property portfolio.”

While the fact that property shares are constantly valued may make them more volatile than direct property, it also has its advantages.

Buller said: “With property shares, the market determines their value every moment of the day. You may not like it, but at least it is a true market. With bricks and mortar, you are relying on a surveyor’s appraisal.”

Many German direct-property schemes have been forced to freeze their assets because of a run on the funds following a mis-selling scandal.

The funds are often appraised only every three months and some have been found to be overstating values for several years.

However, direct-property fund managers in this country insist there are big differences here. Marcus Langlands Pearse of New Star said: “Direct-property funds in the UK tend to be valued once a month and there is a better flow of information between valuers.”

Finally, funds that invest in property shares can buy real- estate investment trusts.

Reits are the most tax- efficient way of owning property because the investment company does not usually pay tax on income or gains from the property; only the end investor pays.

With a UK direct-property unit trust, however, the fund must pay tax on the rental income — even if it is held in an Isa. And a listed property company must pay corporation tax.

Reits are available in a number of countries, including America and Japan, but will not be launched in the UK until next year.