Knight Frank’s London Lettings Index for Q2 2010 suggests that rents in London’s prime residential locations have risen 9.2% in the 12 months to the end of June 2010. However, despite the recent upswing, rents still stand 12.4% lower than at the market peak of March 2008.

Supply and demand has driven the market, with the number of tenants rising 5%, and the supply of new rental stock falling by 25%, over the past year

Liam Bailey, head of residential research at Knight Frank, said, “A combination of a slow but steady improvement in the central London jobs market over the past year and a strong residential sales market has conspired to create the conditions for rising rents in the prime London market.

“Improvements in hiring volumes in the business and financial services sector since last summer have seen a 5% rise in the number of tenants looking for accommodation over the past year, and an 17% rise compared to two years ago.

“With the ‘forced landlords’ from 2008 finding a very receptive sales market over the past 12 months, the supply of properties to rent has dropped by 25% and 64% compared with the level a year ago and two years ago respectively.

“The strength of the market is even more marked in central west areas, with very strong rental growth in Knightsbridge (17.1%), Notting Hill (16.6%) and Chelsea (14.6%). This is a reflection of the improvement in the fortunes of the City employment sector since the nadir of early 2009.

“Despite falling rental stocks, the number of tenancies agreed has continued to rise over the past year, up 5%, contributing to a weakening of tenants’ negotiating power. The ratio of new prospective tenants to newly available rental properties rose by a third, to 4.14, in the year to June.”