Money is continuing to flow into commercial property, with a second record year of investment in the sector looking possible, according to research from Lambert Smith Hampton.

Investors keenly pursuing every opportunity which comes to market is putting further downward pressure on yields, though with weakening consumer spending, yields in the retail sector appear to have hit the bottom.

Terry Corns, chief executive of Lambert Smith Hampton's Birmingham office, says approximately £20 billion was invested in UK commercial property in the first six months of 2005.

"With last year's record investment level at £41.8 billion, and most activity taking place in the final quarter, we could be looking at another record year," added Mr Corns, who based his comments on the latest quarterly property and economic research from Lambert Smith Hampton.

"Overseas investors and quoted property companies were the principal players in the market. UK institutions also continued to be net investors, increasing their property weightings."

According to Mr Corns, activity levels in the retail market are slowing in response to weakening consumer spending and retail sales levels.

"Many retailers are likely to struggle to deliver profits as margins come under increasing pressure.

"In turn this will relieve pressure on yields. In the retail sector the decline in yields is slowing, although investor demand for retail remains keen. Prime yields are currently around 4.25 per cent for the best locations and there is some evidence of keener yields being paid on some occasions.

"However, with the consumer sector slowing and yields already at a 20-year low, it is hard to envisage any further downward shift in shop yields. Retail warehouses remain top of many investors' lists and a shortage of stock is expected to create pressure on yields for the best retail parks."

Lambert Smith Hampton's research also found that yields in the office sector have fallen further in the last quarter as investor appetite has improved and focused on lease lengths and covenant strength.

"In Birmingham lack of available grade A space is likely to push top rents further towards the record £30 psf barrier in the next 12 months and with rental growth also expected in central London and other key regional centres, we anticipate further downward pressure on office yields in the coming months," said Mr Corns.

According to Lambert Smith Hampton, the industrial sector is likely to continue to be driven by the performance of the distribution market. The downturn in the manufacturing sector in the past few months and the rising cost of oil and raw materials will provide little respite for production and manufacturing facilities.

Demand for distribution warehousing is likely to continue to rise as retailers increase their requirements for mega sheds. At present retail distribution is expanding substantially ahead of overall economic growth and this will help maintain activity and rental growth in the distribution sector.

Mr Corns said: "As a result of this activity prime yields in the industrial sector have also fallen, reflecting investors' desires for a secure income."

Commercial property continued to be a strongly performing investment.