Demand for rented property continued to rise in the three months to January although growth was slower than in the previous quarter, reflecting a more stable housing market, said the Royal Institution of Chartered Surveyors today.

RICS's residential lettings survey showed rents continued to increase, although the pace of increase has also slowed since the last quarter amid more subdued demand conditions. New instructions from landlords, including buy-to-let investors, showed a modest rise.

Growth in instructions has been lacklustre over the past nine months, and rising at a significantly slower rate than in 2002 and 2003 when investor activity was booming.

While new investment activity has slowed there are few signs that existing landlords are bailing out of the sector. There was little change in the proportion of landlords opting to sell their investment properties where tenancies had expired in the January quarter, and is below that reported in late 2003.

Rental returns to investors have stabilised due to an improvement in rents and a slowdown in the housing market. However, the regional picture was varied with gross yields in London rising for the third consecutive quarter while yields continued to decline in the North.

The recent strength of the UK economy has underpinned the positive outlook for wage growth and employment. However, the high valuations of property in relation to earnings and the prospect of interest rate means that house price inflation will remain subdued.

As such, tenant demand is unlikely to fade and will continue placing upward pressure on rents and rental returns for investors in the next year.