Kevin Aitchison seeks out the good news in all the bad

A cursory glance at recent headlines suggests that the UK's retail climate has, over the last few weeks, taken a nasty turn for the worst. The consumer continues to face significant obstacles including low wage growth, a fragile labour market (looming public sector job cuts), surging inflation (higher taxes, utility bills and food prices), reduced welfare benefits and a soft housing market.

As a result, retailers are struggling to encourage us to open our wallets and consumer spending remains sluggish. Sadly, the impact on the retailer is already very visible with the high profile failures of recognised High Street names such as Habitat, Jane Norman, TJ Hughes and Moben & Dolphin as well as poor financial results from the likes of Comet, Tesco, New Look, JJB, Mothercare and HMV. Taken at face value, a continuing increase in insolvencies coupled with stagnating or falling profits can have only one outcome for the UK landlord – an increase in voids and a fall in the value of their retail portfolio.

In the short-term, and taken at the macro level, it is extremely difficult to see what is going to drive an improvement in the retail market. However, it is not all doom and gloom and, as with every aspect of property investment, the old maxim of "location, location, location" remains all important. No two cities, towns or even adjacent buildings on the same street are ever exactly the same. This heterogeneous characteristic is even more pronounced in the retail sector which is far more location specific than either of the two other main line sectors (offices or industrial).

Disparities not only exist locally between cities and towns, they are also evident at a regional level. Conditions are relatively encouraging in the Central London and surrounding "home counties" where the economy is not only more reliant on the global markets but the consumer also tends to be wealthier and have a higher savings rate (meaning that consumer spending has been more resilient). In contrast, regional economies are much more reliant on government spending; during the tenure of the recent Labour Government the regions saw a surge in public sector job growth which, in all likelihood, will be partly reversed by the incumbent Tory administration.

The fact that property is not a homogenous asset class is what provides the astute investor with the opportunity to identify assets where perhaps there is a pricing arbitrage or where there is potential to add value through asset management. One of the main opportunities lies in identifying places where vacancy rates remain low and yet adjacent centres are struggling with rising voids. A centre that can maintain low vacancies and a full retail offer will almost certainly cannibalise footfall from surrounding areas, meaning that even in these trying times it may be possible to enhance a centre's critical mass.

In conclusion, the outlook for retail property is actually a lot more varied than many commentators suggest. The key lies in understanding what drives supply and demand, both regionally and locally. I was once asked at a party what I did for a living. On replying that "I work in property", I was met with "Oh don't we all". Perhaps, but as far as the retail market is concerned, having the right fund manager can make all the difference.

Kevin Aitchison is CEO, ING Real Estate Investment Management UK

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