Rents in London’s prime residential market are on the rise, up 9.2% in the 12 months to the end of June 2010, a new report shows.

The improving picture for landlords continued into the second quarter of 2010, with a rise of 2.6% in the three months to June, according to the latest Knight Frank London Lettings Index.

Despite the recent upswing in the market though, rents still stand 12.4% lower than the recent market peak in March 2008, the report also shows.

Demand and supply dynamics have driven the market with the number of tenants rising 5% and the supply of new rental stock falling by 25% over the past year.

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

‘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,’ he explained.

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

The strength of the market is even more marked in central west areas, with very strong rental growth in Knightsbridge, up 17.1%, Notting Hill up 16.6% and Chelsea seeing growth of 14.6%. ‘This is a reflection of the improvement in the fortunes of the City employment sector since the nadir of early 2009. These areas are all characterised by strong City demand,’ said Bailey.

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,’ the report also shows.

‘For many tenants renewing a lease in line with the RPI has been an easier option that searching for a new property as stock levels have dipped significantly with 62% fewer properties on the market this quarter than last,’ said Liz Harrall, head of lettings at Knight Frank Fulham.

Knight Frank’s Chelsea and Fulham lettings offices have seen 94% of current tenancies renewed in June in comparison to 68% this time last year.