Germany’s Union to fund rare UK spec development

The funding by the Frankfurt am Main-based fund manager is for a 350,000 square foot development in Manchester by London-based real estate developer Allied London.

Union Investment is expected to fund the first speculative development in north England since the global financial crisis, according to multiple reports in the UK media.

The Frankfurt am Main-based fund manager is reportedly in advanced talks to forward fund the development of a 350,000 square foot office building at Spinningfields in Manchester, developed by London-based developer Allied London. Union’s investment is expected to be more than £150 million (€170 million; $242 million) which would represent a discount to the building’s cost at completion.

Traditionally a core investor, Union invests on behalf of institutional investors including banks, pension funds, insurance companies, corporations as well as foundations. It is also well known for its investments on behalf of open-ended retail funds.

A sale at 1 Hardman Square would signal a vote of confidence in one of the larger UK office markets outside of London, where few transactions of scale have been completed. Indeed, the vast majority of commercial real estate transactions have occurred in the capital city, driving an increasingly wide gap between yields there and in the UK’s regions. According to research by Richard Ellis, prime yields in Manchester in the first quarter of the year were in the mid 6 percent range, well above those reflected in central London deals.

Union’s belief in letting Allied London’s development would also sound a positive note for Manchester’s relatively stagnant leasing market. CBRE said Manchester’s office market saw 127,501 square feet leased in the entire first quarter of 2011, which was less than half the take-up of the previous quarter and the lowest quarterly take-up in two years since the first quarter of 2009.