By William Kemble-Diaz

LONDON (Reuters) - British commercial property funds have sold some of their best assets to meet a surge in investor withdrawals as nervous buyers avoid lower quality real estate, evidence that prices may have further to fall.

According to data from Investment Property Databank (IPD) covering 80 percent of Britain's property funds by value, disposals in the first quarter at 3.6 billion pounds were the highest since its records began in 2001.

Last week, the Association of Real Estate Funds (AREF) said net capital outflows reached 500 million pounds in the first quarter of 2008, down on the previous quarter but still showing investors continued to flee the sector after a commercial property boom hit the buffers last summer.

Almost 3.5 billion pounds has been withdrawn from AREF-registered British property funds since the middle of 2007.

So which assets are being sold by funds to meet redemptions?

"What is selling is the better quality stock that is fairly priced," Greg Nicholson, chairman of capital markets at global property services firm CB Richard Ellis, said.

"As in previous market downturns it is the good quality stock that finds a home while secondary does not, unless it is at significantly ... higher yields than previously," he said.

Nicholson's view is backed up by the data. Equivalent rental yields, a measure of asset quality that moves inversely to price, were 6.3 percent on buildings that were kept, compared with 5.8 percent on those that were sold, according to IPD.