In recent years the property market has been flush with investors who have borrowed heavily, but in the past few months insurers and pension funds have been outbidding rivals to buy key London buildings, says a report by German specialist real estate bank Eurohypo.

"There is increasing anecdotal evidence that institutional investors are outbidding geared investors, driving yields lower in the process," it says. "This is making life increasingly difficult for the geared investors."

According to a survey by estate agent Knight Frank, yields from London offices have fallen from 7,8% in 1999 to a low of 5%,

The current thirst for commercial property is all the more striking given the high number of empty buildings vacancies are running at about 16% in financial district offices and the low levels of rents.

Demand can be explained by the upward shift in allocation towards property by institutions, which have up to £10bn to spend by the end of the year.

Recent interest rate rises have swung the balance further towards them and away from indebted buyers.

Commercial property sales in London's West End were at a record high in the second quarter, say observers, while there has been a sprinkling of high-profile financial-district deals.

"People are starting to pay higher premiums because of the anticipated rental growth in the city office market," said Pierre Rolin, chairman of Strategic Real Estate Advisers.

The Knight Frank survey found a quarterly rise of 1,1% in rents the first increase for three years which could help prop up yields.

But Chris Laxton, head of external funds at the property wing of Morley Fund Management, said: "We do have to take a deep breath at the moment because you are having to pay more for assets than you were three months ago."

Oppenheim, the German fund manager, recently bought 111 Strand, WC2, at a yield of 5,5%. Deutsche Bank Real Estate paid £100m for Helicon, South Place, EC2, at a yield of barely 6%, while DGI has bought Tower Place, in EC3, for £215m, a yield of 5,6%.

"These funds are paying with cash and paying 5% to 10% more than the market, the same way that private investors used to pay over-the-top premiums three years ago," according to a leading property player.

Average yields for commercial property in general have fallen from 7% to 6,5%, Credit Suisse Asset Management said this week in a research note.

John Richards, CE of listed property group Hammerson, said there was a persuasive argument that some bidders were paying too much for buildings.

If a company bought a shopping centre for instance at a 3% yield, the newspaper headlines would call its behaviour "lunatic", he said.

But, he said, "if you take a building that should be sold for 8%, if you pay 6% you are still paying too much but you don't get the crazy' headlines."