According to Knight Frank’s Prime Central London Rental Index Q4 2008, London rents fell by -9.6% over the last three months of 2008, by far the largest drop since the index was set up in 1995.

Rents have now fallen for three consecutive quarters, by a total of -12%, taking rents back to the level last seen in March 2007. Despite the sharp fall in rents, capital values are falling more rapidly and consequently rental yields in prime central London are continuing to rise, now standing at 4.2%, compared to 3.9% a year ago

Liam Bailey, head of residential research at Knight Frank, said: “While there has been an increased demand for rental property, the result of many people choosing to delay house purchase, this has been outweighed by the sheer amount of new stock coming onto the market, much of it from ‘forced landlords’ unable or unwilling to sell their property in the current market.

“This has combined with downward pressure on corporate and personal budgets, pessimism over the short-term future of the economy and mounting job losses in the key financial services sector to markedly drive down rents.

“Tightening budgets and reduced corporate expenditure also means that demand is strongest for properties at lower price points, which are overwhelmingly flats. Over the past quarter in prime central London, rents for properties priced at under £500 per week have fallen by only -2.4%, while those priced at over £1,500 per week have seen a drop of -15%. Rents for houses, meanwhile, have dropped by -17%, compared to just -8% for flats.

“As a result, the owners of higher value properties – which are disproportionately houses - face either long void periods or a dramatic adjustment in their expectations of what rents may be achievable. However, there is some good news for landlords. Rents may be falling but base rates are at unprecedented levels, and those with tracker mortgages may find that their costs drop and margins increase.

“It is also worth pointing out that rents saw a substantial amount of growth in 2007 and were still rising at the beginning of 2008. These dramatic falls have not yet completely eroded these gains. In prime central London, rents are only -10.8% lower than a year ago and have only returned to early 2007 levels. In prime outer London, rents are -12.2% lower and have returned to late 2006 levels.”