Birmingham Council launched a children's trust in April in a bid to improve standards within children's services, which have been rated "inadequate" since 2009.
In its first monitoring visit since it was launched, the inspectorate focused on assessing support for care leavers, finding that they are all allocated a personal adviser.
Inspectors also welcomed the Birmingham Children's Trust setting up of a specialist leaving care team to support unaccompanied asylum-seeking young people.
Staying Put arrangements, whereby looked-after children can stay with their foster carer until they are 21, were also found to be well used.
In addition, care leavers in need of mental health support benefit from a newly created therapeutic support service.
"There has been progress since the last inspection in services for care leavers," states a letter from Ofsted to the trust following its visit last month.
"Young people leaving care are all allocated a personal adviser and there has been further investment made in establishing a fifth 18+ leaving care team to support unaccompanied asylum-seeking young people."
The letter adds: "A significant number of young people benefit from Staying Put arrangements with former foster carers and also continuing support while completing higher education."
However, inspectors said they are concerned that no personal education plans for care leavers over the age of 18 were seen during their visit, despite this being a policy of the trust.
The letter goes on to welcome efforts to support care leavers who are Neet (not in education, employment or training), including a specialist post to oversee and track this group of young people. But inspectors note that this had not yet effectively reduced the number of Neet care leavers.
The inspection team also looked at long-term arrangements for children who have been in care for two years or more. In almost all cases this group of children are in stable, long-term placements and their plans are reviewed regularly.
But inspectors have warned that this stability is being threatened by failures in overseeing contact with birth families.
While contact with extended birth family members is promoted, these arrangements are not being properly evaluated or overseen by managers and independent reviewing officers, and in some cases are seen as a disincentive to foster parents applying for special guardianship orders.
Inspectors also found that in some cases children do not want frequent contact with their birth family, but their views are being ignored.
"Contact with birth family is promoted, but in too many cases where multiple arrangements for contact are made with extended family members, there is a potential of increased instability and a greater risk of placement breakdown," states Ofsted's letter to the trust.
Inspectors noted that services for looked-after children are improving. Those in care are seen regularly by social workers and their support is "planned, thoughtful and effective", according to an Ofsted letter to the council.
But the letter adds that progress overall is "too piecemeal and fragmented". Ofsted raises concerns over the quality of planning when children first come into care. This is leading to delays in matching older children with long-term foster carers and infants with possible adoptive parents.
Only around a quarter of care proceedings are completed with the 26-week target and inspectors note that the proportion of children placed out of the area had increased, despite a successful recruitment campaign for local foster carers.
Birmingham and Reading councils have been contacted for comment.