Offices on some of London's most desirable streets will revert to their original use as homes as developers cash in on rising luxury house prices, leaving deep-pocketed hedge funds to dominate the shrinking supply of more costly commercial space.

Prices for the best central London homes have risen sharply on the back of strong overseas demand from individuals seeking an investment to shield their wealth from the euro zone debt crisis and Arab Spring uprisings, property experts said.

Residential values are now more than 3,000 pounds per square foot in the upmarket Mayfair and St James's neighborhoods versus about 2,000 pounds for offices, property agent H2SO said.

One recently converted property is the early nineteenth century terrace 3-10 Grosvenor Crescent, which was turned into a block of luxury apartments by the Duke of Westminster's property company Grosvenor Group.

It was originally residential, then became commercial as the head office of the British Red Cross and then converted back after they moved out in 2005, said Ian Morrison, director of London estate development at Grosvenor.

About 3.2 million square feet of office space in London's West End district, which includes Mayfair, St James's and Belgravia, was converted into homes between 2000 and 2010, H2SO said.

The areas are also popular with hedge fund managers who set up offices there to distinguish themselves from the traditional investment banks, located in the City and Canary Wharf financial districts, that many of them came from. The district's high-end shops and restaurants are an added attraction.

Although total office space in the West End was an estimated 80 million square feet, the trend for conversion of offices to homes would accelerate markedly based on planning data, H2SO said.

As office rents in Mayfair and St James's rise on the back of a shrinking supply, all but the most deep-pocketed commercial tenants would be forced into outlying areas, said Paul Smith, a partner at H2SO.

Hedge funds, private banks and wealth managers began pricing others out of the area about five years ago, Smith said. Those still hanging on will come under growing pressure from shareholders asking them if they really need to pay 100 pounds per square foot in rent, he said.

(Reporting by Tom Bill; Editing by Erica Billingham)