Although rents are falling in some pockets of London, it is not all doom and gloom. Hannah Brenton reports

Slowing sales growth has grabbed most of the headlines in prime central London in recent weeks.

But with a growing pipeline of luxury homes coming forward, particularly in such areas as the South Bank, the City and Mayfair, could rents also be feeling the pressure?

The latest figures from Knight Frank show that rents have fallen in a number of key markets. In both Mayfair and Riverside — the area stretching between the London Eye and Battersea Power Station — rents fell 3.9% in the year to September, remaining flat over the past three months.

Rents have also slipped 1.1% in Fulham in the past 12 months, although they have grown 0.6% in the last quarter, while rents are down 1% in Knightsbridge over the year, versus 0.4% in the past three months.

However, South Kensington, Kensington, St John’s Wood and Marylebone have all seen rental growth of above 4% over the past year, according to the research. Marylebone in particular has seen a significant surge, achieving 8.6% growth.

The picture was not bleak even for markets that had seen rents decline, said Knight Frank residential research associate Tom Bill, arguing that rents had actually levelled out after a period of decline. “The market over the past 12 months has almost had a slight reversal of fortune — in the sales market, growth is slowing; prices aren’t yet falling but growth is slowing down.

“Typically, when that happens you’ll see the rental market go the other way, which is what we’ve seen, although some pockets are still catching up with that trend.”

Five-year data from Knight Frank showed the decline in rents in Mayfair and Riverside had begun levelling off this March.

Bill added that yields had actually begun to rise as the sales growth had slowed and rents started to climb. Across prime London, yields currently stood at between 2% and 3%.

But David Salvi, director of City specialist Hurford Salvi Carr, told Property Week rents had been bolstered in recent months by the summer sales period and a lack of completions.

He said 70% to 80% of new homes in the City of London and its fringes were bought by UK and overseas investors, with most of the homes then finding their way into the rental market, putting downward pressure on rents and yields.

“We have a prolonged period since the Olympics of rents decreasing, but we’ve had a particularly good summer in central London and in the City market particularly,” he said.

“But this is the tipping point, and from here all the way through to March the market will be very soft.”

Research due out later this year from Hurford Salvi Carr is expected to show that yields on a one-bed resale flat in the City have dropped to 4% from 4.5% at the end of 2013. For new home sales this is expected to be even lower at 3.5%.

However, investor activity had not yet dissipated in the City, added Salvi. “We think there may be a tipping point at which investors lose interest, but we haven’t reached that yet,” he said.