LONDON (Reuters) - Unlisted property funds raised 704 million pounds in the third quarter, the largest amount in two years as investors sought higher returns in a recovering market, data from the funds showed on Tuesday.

The amount was more than double the 320 million pounds raised in the second quarter, the Association of Real Estate Funds (AREF) said.

The increase comes as UK commercial property prices bottomed in August, after a two-year downturn during which values fell by nearly 45 percent.

Redemptions in the period were 255 million pounds, the lowest since 2006, bringing net inflows to 449 million pounds, the second consecutive quarter where more money was invested than taken out, it said.

"It is not only retail investors driving the new money into property funds, partly driven by the search for yield in a low interest world, but institutional clients are also coming back into the market," AREF chief executive John Cartwright said.

AREF, which has 70 members with 22 billion pounds in net asset value, said the funds' weighted average yield for the quarter was 5 percent, against the 3.8 percent FTSE All Share Dividend Yield and 3.7 percent for long-dated government bonds.

(Reporting by Daryl Loo; Editing by David Cowell)

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