Buy-to-let lender Paragon has posted a sharp fall in first-half profits but said demand for rental was set to increase in an uncertain housing market.

The Solihull-based firm's funding was hit by the crunch in debt markets last year - cutting its lending levels by more than half to £987.6 million - but said it expected a return to market stability "in due course".

The firm said: "We expect tenant demand will continue to increase as uncertainty about the housing market and the economy generally augments the broader social and demographic factors which have been behind the increase in rental demand over the longer term."

Professional landlords will increasingly look to pick up bargains to take advantage of weaker house prices and higher rents, it added.

Profits for the six months to March 31 fell 39% to £26.4 million, although this includes the costs of a £287 million rights issue the firm needed to ward off its funding problems.

The group was forced into the cash call on shareholders in January to repay a £280 million bank facility, but has since entered the second half of the financial year in a "strong financial position".

Paragon added that bad debt charges as a percentage of customers remained at 0.3%, the same level as last year. It added: "The loan books continue to be carefully managed and the credit performance remains in line with our expectations."

The upbeat comments from Paragon come after a turbulent year for the business as investors feared the firm would suffer a similar fate to Northern Rock due to its reliance on crisis-hit money markets.

Shares in the company have fallen from highs above 600p to less than 100p over the past year. But the company said it remained confident in the "enduring strength of its franchise" and maintained that long-term prospects for the private retail sector were healthy.