Rents declined by 0.2% in November, according to the Knight Frank Prime Central London Rental index, but this second consecutive monthly fall isn't necessarily  pointing towards a sustained reversal of the ever-rising rental levels that landlords have become used to over the past two years.

The main reason landlords have been able to push rents higher over recent years has been the relative dynamism of central London's economy. We noted last month that this is beginning to weaken as the City enters a period of redundancies.

This was confirmed by Morgan McKinsey, the specialist City recruiter, which reported that available jobs across London's financial services sector were 22% lower in October compared with the same month in 2010. 

However, our key demand and supply indicators are pointing upwards at the moment. Last month we noted an imbalance between the rate of supply growth and growth in demand. To a large extent this has been reversed - with new tenant registrations rising by 20% in the three months to November, compared with last year. New property instructions rose by only 12% over the same period.

The ratio of new rental applicants (demand) to new instructions (supply) has risen from 3.18 to 3.29 over the past year. With demand holding up it would seem that the marginal rental price falls are more related to affordability pressures, with tenants either unwilling or unable to keep bidding rents higher at the current time. 

Investors in the prime London residential market have benefited from a market that has delivered strong returns since 2009. Very strong capital value growth - nearly 40% since March 2009 - has been augmented by rising rental levels, and has delivered total annual returns of around 18% over the past two and a half years. 

Rather than heralding a new phase of substantial rental declines, our view is that the recent falls will be reversed in the next few months. The fact that demand has remained so healthy, especially in the light of the current weakness in the London and global economy, underpins our view that rents will rise during 2012 as a whole and will see average annual growth of around 4% to 5% over the medium term. 

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