New investors continue to stream into the London property market, attracted by capital growth, which has topped 20 per cent in some parts of the city this year. At the same time, some older investors are taking advantage of high prices to sell up: Hamptons International reported in August that the number of investors "cashing out" was up 158 per cent on last summer.

Nevertheless, the supply of properties available to rent has continued to grow - up by nearly 50 per cent on summer 1998. This has not led to further falls in rents, as the number of tenants has also risen; this is partly seasonal - reflecting the start of the academic year - but transactions are also up 10 per cent on the same period last year.

Berkeley Homes, London's leading developer, reports that around one-third of its new flats are going to investor buyers. The firm is also selling strongly to investors in its city centre schemes in Leeds and Manchester.

At the bottom end of the market there has been no change in rental levels, as there have been far fewer investors buying second-hand properties and demand has remained strong.

Young people taking a room in a shared house are still paying around £100 (sterling) a week in most London suburbs.

Demand is growing from new graduates starting their first job with student loan debts to pay off. There are also growing numbers of students from Eastern Europe coming to London who cannot afford more than a bedsit.

The middle and top end of the market has been hardest hit by problems of over-supply. Two and three-bedroom flats and expensive houses have seen rents fall by as much as 30 per cent.

There has been a sea-change in the corporate market. Companies, particularly in the US, have cut rental budgets sharply, which has led to tenants negotiating harder on rents.

Cluttons Daniel Smith have just agreed a rent of £1,400 (sterling) a week on a five-bedroom property on the Hyde Park Estate, which would have achieved £1,850 (sterling) a week last year. "The top end of the market has suffered in particular," says Cluttons' Mary Hennegan.

Companies are also sending more junior executives rather than families to the UK, reducing the demand for houses in areas like Kensington and near the American school in Surrey. Beaney Pearce used to have half a dozen houses rented to American families in Holland Park. Now they have one.

"Instead of moving families at £1,500 (sterling) plus a week, companies are moving individuals at £400 (sterling) a week," Linda Beaney says. "It has also become more difficult to rent property unfurnished, as junior executives do not bring their furniture with them."

When it comes to furnishings, she is one of several agents who point out that standards have to be far higher to attract tenants in the current competitive climate. "It has to look like the interior designer moved out last week," Beaney says.

Long term, most agents believe the trend towards smarter interiors and higher standards will continue, as tenants in central London increasingly rent out of choice, rather than necessity.

The picture is not the same in all parts of the capital. Areas which have few new developments and are popular with owner-occupiers, have far more balanced rental markets. Clapham in south London is one such area, and Hampstead, which is a popular location for American families, is another.

FPD Savills had four inquiries in one day last week for family houses with at least four bedrooms and a garden. With five or six owner-occupiers competing for every suitable property, there is no room for investors, so supply remains short.

In the trendy loft district of Clerkenwell and its neighbour, the City, agents Hurford Salvi Carr expect 1,000 new flats to become available for rent over the course of 1999. This is on top of the many new schemes being completed further east in the Docklands. However, the agents say rents have firmed up during the year, as demand from tenants to live near work has increased.

Latest figures from the research division of FPD Savills show net yields for a typical central London portfolio have fallen to four and a half per cent this year. But capital growth has averaged 14 per cent, bringing total returns approaching 20 per cent - and exceeding that figure for properties in some locations. Savills forecasts that income returns will remain weak as tenant demand fails to keep pace with the rising supply of homes to rent.