Financial markets in the Far East may have gone down with the 'flu several months ago, but the commercial property market in London is still trying to work out if it has caught the cold. Certainly tremors have been sent through office investment markets in recent months as some deals have fallen through and, in particular, concern has been raised in the City.

In the West End of the city, high-profile developer Patrick Despard and his company, City & West End Estates, pulled out of four development and funding deals saying it would be "irresponsible" to speculate in view of the global financial uncertainty.

However, in central London overall, according to Stephen Newbold, research partner at Knight Frank, the investment market is healthy and heading for a record year. He says any concern is more speculation than reality. He says investors have already spent £4.02 billion - or 90 per cent of 1997's total investment in central London offices with three months of the year to be recorded. At the peak of the last cycle in 1989, the figure for the year stood at £3.5 billion.

"Demand remains strong, despite a slight softening of prime yields over the quarter," says Mr Newbold. "The key shift is that UK property companies and purchasers are driving the investment market and accounting for nearly 85 per cent of the money spent in the third quarter (of 1998)."

The reason for this is that there has been less stock of the larger lot sizes and prestigious, "trophy" properties - £100 million and over - that foreign buyers, especially acquisitive German funds, are attracted to. "It is not because these funds are pulling out, though," says Mr Newbold. "There is a lot of concern because of the international economic situation but I think that is more speculation, than reality."

In particular, of concern in the City itself is the financial sector, which traditionally has been the bedrock of demand in the Square Mile. Key major requirements from institutions, such as Bankers Trust, for sites and new accommodation have been put on hold and Japanese bank Daiwa Securities announced that its new headquarters in the City core would be brought to the market because the bank could not commit to the scheme.

However, Mr Newbold says demand is coming from other sectors - solicitors Slaughter & May and management company Andersen Consulting have both completed deals for new offices.

But 1998 has been a record year for investment in the City of London and prime yields have moved out, according to Knight Frank's latest figures. Investment in the third quarter rose by 140 per cent to £583.3 million following several major transactions, including Greycoat, Hermes and Mercury Asset Management's purchase of the old NatWest Tower, known as Tower 42, for £226 million. As Peter Thornton, chief executive of developer Greycoat, insisted recently that when the going gets rough economically, buildings in the City let to financial institutions on long leases are as secure and efficient an investment vehicle as you can get. Earlier this year, the market was rocked by the threat of the large German open-ended funds pulling out of UK property. However, some of these funds appear to have been encouraged to stay put or, even, re-invest by the fall of the Deutschmark against the strong English pound.

Funds such as Internationales Immobilien-Institute (III), CGI, which is reportedly completing nearly £125 million worth of investment deals this year, and DEGI, which has just completed one of the biggest deals of the year are staying put.

Also, it is the high-profile deals, which have hogged the headlines. According to James Beckham, partner in charge of investment at King Sturge & Co, there is a premium for liquidity on investments of £30 million and under. "There is a consensus in the market that lot sizes of up to £30 million are readily tradable and attractive to a wide range of investors in the City market. Above this, only the larger investors are interested," he says. As King Sturge's most recent figures point out, nearly 85 per cent of City office transactions - excluding the purchase of development sites and owner/occupier purchases - cost under £30m. Over half cost £10 million or less.

But the main source of comfort for the market is that, unlike this stage in the cycle last time, there is no great overhang of un-let, speculative space. Greycoat, for one, has not extended its current supply programme beyond the end of 1999. As Mr Newbold points out, if the trend continues, this lack of over-supplied office space will stop the crash-landing of the late 1980s being repeated. "The economy is slowing, manufacturing is in trouble," he explains. "But people should be looking at the wider perspective. If rents are 2 per cent above inflation and returns are between 8 per cent and 10 per cent, that is still healthy - particularly if you take a five to 10-year view."