Prime London rents rose by 2.7% over the third quarter of 2010, taking year on year growth to 12.3% and leaving rents just 3% off their peak of March 2008, according to Savills latest research.

However the average hides much geographical variation. Prime central London rents rose by just 0.5% over the quarter (6.2% year on year). Growth of 4.3% in the first six months of the year was supported by a lack of properties available to rent at a time when increased demand for rental property, particularly from corporate tenants, was recovering. The third quarter has seen corporate and relocation demand soften, and a discrepancy emerging between applicants’ requirements (smaller 1 bed properties) and available supply (2/3+ beds).

The lower tiers of the prime London rental market have seen the strongest growth over 2010 as caution among tenants and reduced corporate allowances have concentrated demand. As a result, prime North London, including Hampstead and Islington, is currently seeing strongest rental growth at 4.2% over the third quarter, an increase of 14.4% in the year to date. However, this growth is coming from increased demand from City tenants for smaller properties, while increased supply and static demand for family housing is now stalling growth at the upper end of the market.

In prime South West London, Savills say that the particularly strong sales market this year has reduced the supply of rental properties as accidental landlords returned properties to the sales market. Additionally, needs-based family demand for rentals has continued, pushing the achieved rents on houses up by 11.2% in the first six months of 2010. However, the rate of price growth slowed in the third quarter as demand from young professional sharers as well as families became aligned with supply over the summer months.