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This week New Star made a huge judgement call on the troubled UK property market taking the decision to make a multi-million pound investment in property shares within its £1.5bn UK property fund.

The move comes off the back of New Star’s decision to sell its largest property in the portfolio, the London headquarters of Commerzbank, for £127.5m, with around half the returns set to go into real estate shares.

New Star took a loss on the property, at 60 Gracechurch street, which the firm bought 14 months earlier for £146m but chief executive of property fund management Roger Dossett believes that the deal represented good value as the holding became disproportionately big in comparison to the rest of the fund.

More importantly however, it gives New Star the added liquidity – up from 18 to 25 per cent – to push into an area where Dossett believes the market is flattening out after an over-correction at the end of 2007.

Dossett is not alone in his belief that property as an asset class does have strong fundamentals. Earlier this year, M&G managing director of UK sales Jonathan Willcocks said that sentiment bottomed out over the Christmas period, with rental growth and an income stream both still present in the market.

Dossett says he will look to hold up to half of the group’s current liquidity in property shares, with shares currently operating at 25 per cent beneath underlying asset values. He also said the group is looking at direct UK commercial property investment with additions likely to come later this year.

He says: “There was a very big movement in the value of properties at the end of last year but property is now yielding slightly better while the income stream is strong. You are also seeing a number of buyers in the market from Germany, Ireland and the Middle East.

“Property is still a strong long-term investment that will offer a steady, sound return based on income.”

Hargreaves Lansdown investment manager Ben Yearsley says: “It looks a good move given the damage incurred on property shares, while most investors will be happy with the extra liquidity. But if markets fall again it could prove very problematic for New Star.”

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