Viva Macau

The Las Vegas Convention and Visitors Authority ran some television ads in 2004 with the tagline, “What happens in Vegas, stays in Vegas.” What has happened in Las …

The Las Vegas Convention and Visitors Authority ran some television ads in 2004 with the tagline, “What happens in Vegas, stays in Vegas.”

What has happened in Las Vegas during the past 50 years is the city’s calculated and meteoric rise to become one of the world’s most popular tourist destinations. Las Vegas is most famous for its casinos, but it also hosts conventions, shows and a variety of other events and entertainment.

But what has happened in Vegas has not stayed in Vegas. Halfway around the world, Macau is well on its way to duplicating the success of its western cousin from the Nevada desert.

Background

Like nearby Hong Kong, Macau is a Special Administrative Region (SAR) of the People’s Republic of China. Macau is the only place in China where gambling is legal. SARs have chief executives who oversee the region and its government, but defense and foreign policy is up to the central government. Macau’s current chief executive is Edmund Ho, a Macau native and accomplished businessman who is currently serving his second consecutive five-year term.

Macau was held as a Portuguese colony for 450 years before it was turned over to China as an SAR in 1999. As the last European colony in Asia, Macau has become an important trade center and a unique example of an eastern culture with some western heritage.

It is important to note that China will take complete control of Macau in 2049, especially in light of Macau’s heavy economic dependence on the gambling industry. Gambling is increasing in popularity in China in part because of China’s recent acquiescence to small doses of capitalism; how the Chinese government handles the rising popularity of gambling will be an important part of Macau’s future.

Stanley Ho, owner of many casinos in Hong Kong, was given monopoly of Macau’s casinos in 1962. In 2002, however, Macau’s government rescinded Ho’s monopoly in order to boost the economy. Shelden Adelson, owner and creator of the Venetian in Las Vegas, and Steve Wynn, owner and creator of the Bellagio, Mirage and Treasure Island in Las Vegas, have since been investing heavily in Macau.

Wynn recently opened the Wynn Macau, a $1.2 billion project. Adelson operates the Sands Macau, a $240 million project, and is planning to open the Venetian Macau, a $1.8 billion mega complex. The Venetian Macau, which is scheduled to open in the fall of 2007, will include 600,000 square feet of gaming space, making it the largest casino in world. The Venetian Macau will feature a new Cirque du Soleil show upon its completion.

Macau’s currency is the MOP or Pataca; the exchange rate at publication was around 8 MOP per U.S. dollar. The currency is pegged to the Hong Kong dollar at a rate of 1.03 MOP for 1 HK dollar. The Hong Kong dollar is in turn pegged to the U.S. dollar at 7.8 HK dollars per USD. Most business transactions take place in HK dollars. In Macau, most places accept both MOP and HK dollars.

Macau generated revenue of $21,000 USD per table in 2002, according to USA Today. Las Vegas, in comparison, has per-table revenues of $2,200. Since then, Macau’s per-table revenue has declined with the opening of mega casinos in the area and an increased stream of lower income visitors, but the $7,000 per-table revenue Macau posted in the third quarter of 2006 still substantially outperformed Las Vegas.

Macau recently passed Las Vegas as the number one city in the world in terms of gaming revenue, according to USA Today. Macau eclipsed Las Vegas’ revenue despite having less than half the number of casinos.

“I see Macau right now as being like Las Vegas in the ’50s,” Mario Pinedo, an investment, residential and commercial realtor with Intero Real Estate, said. “Macau has such a huge growth potential in front of it, and they’re going to dwarf Las Vegas at some point.”

Macau itself is actually made up of three distinct regions: Macau, which is a peninsula connected to mainland China, and Taipa and Coloane, which are islands.

“Coloane is the countryside, Taipa is the new town and Macau is the old city,” Juliet Risdon, founder of JML Properties, a Macau-based property management company, said. “All of them bring different things to the table.”

In addition, an old causeway of reclaimed land connecting Taipa and Coloane is undergoing a surge of construction; called Cotai, it is also known as the Cotai Strip because of its similarities to the famous Las Vegas Strip. It is estimated that about $20 billion in investments will be made in Macau in the next few years; $12 billion of that is expected to go into Cotai.

Advantages

One of the biggest advantages Macau has is its location; more than half of the world’s population lives within a six-hour flight. Macau’s role as the only place in China featuring legal gambling makes it a huge draw for tourists. “Macau has now become a huge focus for the rest of the world because of the casinos,” Risdon said.

“The opening up of the casino industry [is] bringing in a lot more tourist traffic,” Pinedo said.

The tourism industry is going to bring tens of thousands of jobs to an already crowded area. Land and housing will be at premiums for a long time to come. Older condos are available for less than $100,000 USD, while new luxury condos can go for upwards of $500,000. The average new condo development sells for around $250,000 USD. “You’re probably looking at about a 30 percent down financing in that market,” Pinedo said.

“The financing is relatively easy to get,” David Faulkner, regional director of Colliers International, said.

Nice condos rent for approximately $1,500 USD and up. In 2006, average rental rates increased approximately 28 percent and rental rates for luxury units increased by 50 percent, according to the International Herald Tribune. Rental rates should continue to rise as demand for available housing increases in the coming years.

This will serve investors interested in the buy-to-rent strategy—simply purchasing a property and renting it out—well. This strategy allows investors to capture capital appreciation and potentially achieve cash flow. It is a long-term strategy well suited for Macau. Property values should increase in the coming years because of Macau’s limited land and growing population and wealth, and rental rates should rise along with them.

Hong Kong, for example, has some of the most expensive real estate in the world, with housing prices of more than three times those in Macau. There is already a land shortage in Macau, and with all the new casinos and developments taking up land and bringing in jobs and tourists, demand for the available land will increase.

“With the size of Macau and the density of Macau, it seems kind of an obvious place to invest your money because of the growth,” Risdon said. “I mean, billions are being spent in Macau right now.”

The Standard, a Chinese business news publication, projects that 70,000 to 75,000 new jobs will be created at the casinos scheduled for completion by 2009. With an unemployment rate of 3.8 percent and a population of about 500,000, many employees will need to be brought in from elsewhere.

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Casinos have, in the past, typically brought in expatriate management, but that only accounts for about 10 percent of the projected job growth. The influx of expatriate workers and overall strong supply of jobs should both boost the economy and put a strain on the already tight housing market.

Expatriate workers might be drawn to Macau by the cost of living. Macau’s cost of living is approximately 13 percent lower than Hong Kong’s, according to the University of Macau. Macau’s cost of living is comparable to an average U.S. city. In addition, “tax is quite low [in Macau] compared with other countries,” Risdon said.

“There’s need for housing, both temporary housing for people on vacation doing quick trips from China, and there’s also a pretty decent expat population there,” Pinedo said. “And a lot of that requires high end, more temporary housing.”

With the increasing number of residents and tourists, housing and accommodations aren’t the only areas that will see increased demand. “Retail is really underprovided in Macau,” Faulkner said. A retail boom will be necessary to support the gaming and housing industries.

Macau is a relatively small area, “so, right now, when there is the ability to acquire some of the retail…it might be a good choice,” Pinedo said.

Risks

The gaming industry

China will assume full governing authority of Macau in 2049. This is a cause for concern because, while China has made strides toward capitalism in recent years, the changeover could still have a profound and uncertain impact on Macau. If the Chinese government decides to restrict or eliminate gambling in Macau, then Macau will lose its most lucrative feature: legalized gambling.

The gaming industry comprises 80 percent of Macau’s GDP; this over-reliance on one industry marks Macau’s economy as one-dimensional and easily endangered, should the gaming industry for some reason go under, such as by government influence. “It’s very much driven by the gaming and the hotel businesses,” Faulkner said.

Overbuilding

Overbuilding is also a significant risk. While the area available for development is limited, Macau is a hot market right now, and there might not be enough short-term demand to meet all of the projects underway. An oversupply would drive yields on rental properties down. Such yields are low to begin with because property values are climbing quickly while rental rates are rising at a much slower pace.

“You really have to look at long-term growth here in Macau. The rent right now in Macau is still quite low in comparison with the actual cost of a property, so your yield is anywhere between 4 and 7 percent, which is not high,” Risdon said.

“They’re building a lot of residential condos and residential developments [in Macau] and they probably will go through a process of overbuilding,” Pinedo said. “That might mean that the value of those units might come down at some point—they might peak and come down—or the rental rates might come down, but they will probably keep those buildings fairly well occupied.”

The influx of hotel rooms that will be coming on the market as projects are completed mean that condos will likely not be able to compete for short-term or vacation rentals, because hotel rooms will be able to offer lower prices. Condos will thus be best suited for long-term rental opportunities.

Leasehold ownership

Further, property ownership is leasehold in Macau, though some predict that freehold will emerge at some point. Pinedo said he does not consider leasehold a problem.

“The worst-case result [of a leasehold] would be, what if you have to give up the rights to that land and have to walk away from your development? Which is a possibility, I think, but it’s a very, very slim one,” he said. “In China, everything’s leasehold, so again, it’s really a non issue in that everybody’s playing that same game.”

“I think the leasehold interest is not a risk, I think the government is not a risk,” Pinedo said. “Your major issue, which is the major issue with any far away investment, is management.”

An investment in Macau would likely require “going to some meetings every year,” Pinedo said. “Your investment should be of a worthwhile size to merit the travel back and forth.”

Average length of stay

Another potential problem is getting tourists to stay in Macau longer. The average length of stay for Macau visitors is merely 1.2 days, according to USA Today. The hotel industry in particular needs visitors to stay longer in order to be successful.

Adelson, Wynn and other Las Vegas moguls intend to turn Macau into a multi-purpose destination like Las Vegas. Las Vegas is best known for its gaming industry, but it is also a popular business and convention destination. Las Vegas features entertainment and other attractions that appeal to families. As a result, the average length of stay for tourists in Las Vegas is 3.7 days. Turning Macau into a multi-purpose destination in the vein of Las Vegas is still only a goal, not a reality.

Real estate representation

Real estate agents in Macau are not regulated or licensed, so investors must research agents carefully before choosing one. Still, the lack of licensing requirements has not deterred investment in Macau’s rapidly growing real estate market thus far.

“There’s no licensing requirements in Spain, which is another place that I’ve invested,” Pinedo said. “Licensing requirements, to me, are kind of a non issue. In the United States, it’s the mirror test: if you can breathe, you can get a license. It really comes down to finding an agent who’s knowledgeable in that market and who can do the work for you.”

Climate

Macau’s subtropical climate could also be considered a concern. While Macau enjoys temperatures in the 80s year round, it is also susceptible to cyclones and typhoons. The rainy season, which can be very humid, lasts from May to September; June is the wettest month, with an average of 7.11 inches of precipitation.

Typhoon season is July through September. Macau averages six typhoon warnings per year and has an excellent warning system in place. Still, the risk of severe weather must be considered, especially in light of how Thailand’s tourism industry was devastated by the major tsunami that struck southeastern Asia in December 2005.

Conclusion

Macau is an interesting combination of high risk and high reward potential in much the same way that Las Vegas was 50 years ago. It is a market that combines several rare and lucrative characteristics in one place and time. There is, however, inherent risk in investing in Macau. The uncertainty of how the Chinese government will handle Macau when it takes the region over in 2049 is probably the biggest question mark.

“It really comes down to somebody being comfortable with the Chinese government,” Pinedo said. “I think people get rich by doing what other people don’t want to do or other people aren’t comfortable doing.”


REGIONS OF MACAU

Macau

Macau is home to most of the region’s Portuguese influence, including archetypical Portuguese architecture and other historical treasures. Macau is home to 90 percent of the region’s residents, according to the University of Hong Kong’s Asia Case Research Centre.

Macau as a whole has 16,205 residents per square kilometer, compared with 6,392 residents per square kilometer in Hong Kong, according to the CIA World Factbook. London has 4,750 residents per square kilometer, according to the UK’s Office for National Statistics.

Macau is “an old city; it has beautiful Portuguese architecture,” Juliet Risdon, founder of JML Properties, a Macau-based property management company, said. “It’s really…the downtown, central district and has the walk-across border into China.” There is also a proposed bridge to connect Macau with Hong Kong.

Most of the development activity is concentrated on the Cotai Strip, which is where the new casinos are being constructed and where the bulk of future tourists are expected to spend most of their time. But Macau itself has restaurants, shops and entertainment in addition to the historic sites.

“Macau village is probably the most attractive because it’s an established urban area,” David Faulkner, regional director of Colliers International, said. “The bulk of Macau’s population lives there. Most of the hotels are there. So if you’re looking to invest in apartments, retail, hotels or even offices, Macau village is where you need to be.”

Taipa

Travel between Macau and Taipa is convenient and growing ever easier because of continued construction and expansion. Taipa is connected to Coloane by Cotai and to Macau by three bridges.

The most recently completed bridge will allow for travel even during severe weather. It has two decks; the top deck has six lanes and is open 24 hours a day. The bottom deck has four lanes and is reserved for travel during severe weather.

There is also a light rail system being developed that will connect Macau and Taipa. In addition, Taipa is home to the Macau international airport.

“Taipa Island, I believe, was originally two islands that they developed,” Risdon said. “They reclaimed the land in between the two a long time ago and now created a much bigger island.”

Taipa currently has many projects underway, including several residential complexes along with other businesses.

Taipa’s population has been steadily increasing since the 1990s, according to the University of Hong Kong’s Asia Case Research Centre.

Taipa “is where we’ve seen a lot of development, particularly in some mid-price housing,” Faulkner said.

Coloane

While Coloane is the furthest island from Macau itself, Coloane is in close proximity to Taipa and Cotai. Coloane’s main draw, however, is not its location but its beaches.

The most popular beach is Hac Sa, an enormous crescent-shaped black sand beach. Hac Sa also features the Hac Sa Sports and Recreation Park, which has a golf course, tennis courts, swimming pool and other facilities.

“Coloane is much greener—no high rises, just one western hotel and golf club on the island, two small…local villages and two residential complexes,” Risdon said. “It’s bigger than Taipa, but less populated.”

The slower pace of development on Coloane means that available properties have higher prices because of their limited supply. “On Coloane, because there aren’t that many properties here, the price is higher simply because of the demand,” Risdon said.

Coloane is a popular destination already; as tourism in neighboring Cotai increases, Coloane will see more visitors as a result. In addition, as with Taipa, its number of residents is bound to increase substantially in the coming years.

Cotai Strip

Cotai is the reclaimed land mass connecting Taipa to Coloane; its area is approximately 5.2 square kilometers, though more land is being reclaimed. This area of Macau draws the most investor interest.

Property values on the Cotai Strip are higher than those in the rest of Macau, just as the most valuable property in Las Vegas is found on the Las Vegas Strip.

One property of approximately 23 acres was, at the time of publication, being offered for a price of more than $616 million USD—that works out to almost $27 million per acre.

The Cotai Strip has “been built into a three-lane highway in both directions. [It] now has an awful lot of casinos being built on both sides, so Coloane and Taipa are now pretty much connected; there’s not a lot of water between the two,” Risdon said.

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