Friday Letter Who's afraid of UK office development?

Few people would bat an eyelid if a firm announced a speculative office development in parts of Asia. The region is synonymous with growth after all. But in a UK regional city, it would be rightly considered an event.

So it is worth noting a deal PERE has learned about concerning London-based Mountgrange Investment Management, which is currently investing its first UK real estate opportunity fund.

We hear Mountgrange has teamed up with PRUPIM, the property arm of British insurer Prudential, to buy a site at 1 West Regent Street in Glasgow for a 10-story, 140,000 square foot new-build speculative office scheme. Upon completion it is expected to be worth £60 million (€74 million; $95 million).

At the same time as completing the deal, the pair have also agreed a fixed-price, design-and-build contract with builder Sir Robert McAlpine. Demolition work is expected shortly and completion slated for 2014.

This is racy stuff because according to Mountgrange, it will be the first significant new-build, Grade A office building in Glasgow’s central business district in nearly five years.

Taken at its widest, it provides a reminder in these debt-obsessed days that UK opportunity funds are not only buying non-performing loans or distressed portfolios backed by existing assets. Indeed, some are earning their carry for ground-up bricks-and-mortar work and especially for being counter-cyclical or early-movers, taking calculated risks in the face of the J-curve.

If you doubt that speculative development in the UK is swimming against the tide, don’t take our word for it. According to property services firm, Drivers Jonas Deloitte (which this week announced a rebranding to Deloitte Real Estate), there have been just 25 construction starts in Manchester, Leeds, Birmingham, Glasgow and Edinburgh put together this year – a 36 percent drop on 2011. The firm reckons just 1.1 million square feet of office development is currently under construction in these cities, which is 74 percent below the peak of 2007.

And there is no mystery as to why there is such a dearth of activity. Economic uncertainty in the UK and across the Eurozone has made both developers and investors cautious, not to mention lenders. Yet Mountgrange and PRUPIM are taking a calculated risk in Glasgow because there are 3 million square feet of lease events in the next three years, and only 200,000 square feet of good Grade A space available. On that basis, finding tenants for the scheme should be possible.

Mountgrange’s move to begin a speculative development could even point to a trend within UK real estate in the months to come. A quick survey of the UK property press shows that news of speculative developments is beginning to slowly trickle out.

Earlier this month, for example, it was reported that LaSalle Investment Management and Bell Hammer have begun a 90,000 square foot office in Staines in the Southeast of England; Aberdeen Asset Management is also carrying out a speculative development in Staines. And just today, UK property mogul Mike Slade of Helical Bar reportedly said it was time to kick-start building.

In 12 months’ time, if speculative development in the UK becomes commonplace and the wisdom of it is wider received, remember Mountgrange and PRUPIM in Glasgow.