Sharlene Goff

Estate agents are seeing booming demand for rental property as first-time buyers and foreign workers defer buying homes amid continued uncertainty over prices.

Agents around London and the south-east in particular are seeing up to 25 per cent more activity in their lettings businesses compared with a year ago. Many have waiting lists of tenants and are finding that new lets take just a few days to fill.

Much of the demand is coming from young professionals and City workers who are not prepared to buy into a weak housing market.

Lucinda Richardson, lettings manager at the Westbourne Grove branch of Winkworth, says last month was the best January ever for lettings. "Volumes of business are about 20 per cent up on this time last year," she said. "There is huge demand for good corporate one and two-bedroom properties - they are going incredibly quickly."

Lettings agents at the Surrey Quays branch of Kinleigh Folkard & Hayward, which covers the Canary Wharf area, also reported a "fantastic month". "We're having a huge boom," said Glynn Judd, head of lettings.

Hamptons International said its rental divisions had been very busy. Mark Anderson, managing director, said strong demand was coming from employees who had been seconded to London by their companies and were wary about buying in the current climate. "Those coming for two to five years are not buying," he said.

He added that a number of homeowners who sold up at the tail-end of last year when prices were still robust, were planning to rent until prices started to come down.

Landlords are also managing to secure significant rent increases. Richardson at Winkworth said tenants renewing their agreement were typically paying 5-10 per cent more per year, while new occupants were having to pay as much as 20 per cent more than they would have done a year ago.

Judd added, however, that tenants were becoming increasingly aware that their landlords might put up prices and were trying to secure longer-term lets of 18 months or two years.

A number of small landlords have sold properties in recent months because of higher borrowing costs, but for the less heavily geared, the outlook is sunnier.

Rents rose at their fastest rate on record last year, as demand started to pick up. Agents believe price growth may start to slow this year but yields - rents as a proportion of a property's cost - are still expected to look more attractive than they have in recent years.

Liam Bailey at Knight Frank expects rents to rise 4-5 per cent in London this year after strong growth last year. Rents rose 15 per cent in central London in 2007, But continued price growth meant gross yields were squeezed from 4.4 at the end of 2006 to 3.86 at the end of 2007. Bailey said they could move back up to 4-4.5 per cent this year. Paragon Mortgages is more bullish. The group, which this week gained approval for a £287m rights issue, said gross national yields rose to 6.2 per cent in December, and rental incomes increased 2.5 per cent last month alone.

Improving yields, combined with expected falls in interest rates this year, means a double boost to profit margins. "The savvy and longer-term landlords will absolutely see an opportunity [to buy]," said Anderson. "They can get a better return if they buy well."

Auction houses are reporting a surge in repossessed property, and it is the buy-to-let investors who are waiting to snap up a good deal. Lenders have tightened criteria, however, so investors may need a cash deposit of at least 10-15 per cent to secure a loan at a competitive rate.

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