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I just don't see it happening.
First off, if it does happen, the car won't be called an "M1". I believe the folks at BMW are too smart to mess with their brand history like that.
Secondly, I think it would be technically difficult to do an M1. I bet it was hard enough getting the balance and handling right with the N54 in the 135i, I can't imagine how they could stuff a bigger, heavier engine into the car and still maintain the driving dynamics.
There's a saying in the aviation industry that every airplane is a set of flying compromises. You can make it go faster by putting a bigger engine on it, but then you need more fuel for that thirstier engine. More fuel means a bigger wing, which means more drag. And more drag means the airplane slows down, negating the gains of the bigger engine. Every change you make to positively effect one aspect of performance tends to have a negative effect on another aspect of performance. Same holds true to a certain extent for cars. A lot of people are already worried about how much the car will weigh. Put a heavier engine in it, and some of the increased power is wasted simply by having to pull around the increased weight of the engine. Put a bigger, heavier engine in the little 1er, and you have to start moving stuff backward to balance the car out. The car is only so long, and pretty soon you run out of room. That's not to mention the increased rotational inertia of the heavy engine out front; that needs to be counteracted with new suspension. If that new suspension is beefier, it's heavier. More weight.
The effect that increases in mass have on a car are more magnified the smaller a car is. And worse, the effects of the performance tradeoffs are increased as well. I remember driving a mid-90's era Accord with the four cylinder engine and thinking "this is a fun little sedan". Then I drove the six cylinder version and immediately said "no thanks". The plodding, plowing understeering of that nose-heavy six version just wasn't worth the couple of tenths it gained in 0-60 speed.
Sometimes, smaller, simpler and lighter really IS better.
Thirdly, I think that the 1er is intended to be a lot of people's "first BMW". The 128 is the entry level car. The 135 is the first taste of BMW's performance tuning. It's supposed to leave people asking for "just a little bit more". And that's what will drive them to the 3 series, and then on to the M3 a their paychecks grow. If BMW made an M version of the E82, I don't know if they would ever sell another M3.
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