A healthy balance between supply and demand in the private rented sector in most parts of the country is reported in the latest Association of Residential Letting Agents survey. ARLA believes this could lead to a shortage of rental property before long.

Over a third of ARLA members' offices reported more tenants than properties available. Only 37% of all offices reported more properties than tenants.

Warned ARLA chief executive, Adrian Turner, "This very healthy balance between supply and demand could well indicate that it may not be long before there is a shortage of property in the private rented sector. If we cannot maintain a degree of surplus capacity, the rental market could need additional property very urgently."

Overall, a sharp increase in the average capital values of rental property over the last three months, reported by ARLA member letting agents, has led inevitably to a marginal decline in rental returns.

The value of houses on the rental market increased by 3.8% overall, while flats rose by 5.8%. Rental flats in prime central London gained an impressive 12.9% rise in their capital values.

Although tenant demand and capital values have both increased, letting agents believe that most landlords (74%) are continuing to mark time over their net investment property portfolios.

Agents throughout the country report significant increases in rents achieved, particularly for flats in prime central London. These have come through despite the continuing oversupply of property in the best areas of the capital.

In prime central London the proportion of respondents saying rents have risen has increased from 30% to 34%. In the rest of the South East the proportion has increased from 29% to 31%.

However, in the rest of the UK, the proportion of agents reporting an increase in rent levels remains at well over a third, even though it has fallen back slightly from 37% to 35%.

"We believe these figures indicate that it is good quality property that is in demand and letting well," said Adrian Turner.

Although there is still a marked over-supply of property in prime central London, supply and demand is broadly in balance in the rest of the South East and demand is outstripping supply in the rest of the country.

The average number of new tenancies arranged in letting offices was up 10% from 30 to 33% during the slow summer quarter, even though the average void period has remained the same at 27 days.

Continued Adrian Turner, "This quarter's report confirms what we expected, rising values in good quality rental property and rising tenant demand. This reflects both the softening of house prices and the shift towards renting. More people see renting as the socially acceptable flexible alternative to owner occupation.