Office take-up in the M25 increased in the last quarter, despite the worsening economic climate, according to Knight Frank.

In an otherwise bleak Q4 M25 Office Report, it said that fourth quarter take-up totalled 646,216 sq ft equating to a 10% increase on the previous quarter – the first quarterly increase since mid 2007.

But total take-up for 2008 was still 15% below the 10 year average.

The report showed that demand had fallen by 16% in the fourth quarter to 4.91m sq ft – having already fallen 20% in the third quarter .

The construction and engineering sector was hit with an especially heavy drop in demand of 43%.

The M25 vacancy rate increased from 7% in the third quarter to 7.4% in the last quarter.

Knight Frank attributed this to the completion of 350,000 sq ft of new space including the 169,000 sq ft Building 9 Chiswick Park, developed by Schroders.

Knight Frank warned that take up in 2009 could reduce to 33% below the 10 year average to 2.2m sq ft. It also forecast up to 25% falls in headline rents in 2009 alongside a rise in rental concessions and vacancy rates.

In the investment market, 2008 transactional levels were down 67% on 2007 with little prospect of improvement in 2009.

In the fourth quarter, there was just £64.9m raised, with an average lot size of £9.3m and an average initial yield of 7.34%, reflecting an increase of 71 basis points in the three months since the third quarter.

It advised that although prime yields in the South East had reached attractive levels, City assets still offered greater value at similar pricing – therefore ‘further correction in the South East office market will need to occur,’ before buyers found the bottom of the market.

A Knight Frank spokesman said: ‘Yields will continue to move out, although more acutely for secondary property and locations than for prime.

'A differential remains between valuations and market pricing but, as this narrows, an increasing number of loan covenants will be breached and Knight Frank expects to see the number of distressed sellers rise in the early part of 2009.’