Western leisure developers are joining the gambling party in Macau.
By Jonathan Brasse
‘Gaming is a social evil in China. It’s banned. But it’s also in their blood to want to gamble.’
Tom Ashworth, co-founder of Sniper Capital, fund manager of the Macau Property Opportunities Fund, says 50% of the high rollers who visit Las Vegas are of Chinese origin.
Rather than fight the national compulsion, China has embraced it by confining all gambling to Macau, the most densely populated city in the world.
It is illegal to gamble outside the 28 sq km city that is home to 500,000 people. The Chinese government has placed the money spinning pastime in the hands of three huge organisations: Stanley Ho’s Shun Tak Group, Galaxy Entertainment Group and Casino entrepreneur Stephan Wynn, who was responsible for Las Vegas’s Mirage and Bellagio resorts.
In 2001, these three mega-powers landed Macau’s gaming licence for a paltry $2.4bn (£1.2bn). A flow of big western leisure names has followed, the latest of which is Hugh Hefner who, three weeks ago, committed to opening a 40,000 sq ft Playboy resort at the $2bn (£1bn) Macau Studio City.
Learning from Las Vegas
Imagine Las Vegas 30 years ago. The casinos were in place and performing well, but there was little else. This is where Macau is now.
The average time spent in the city per person is 1.1 days compared with Vegas’s 3.3 days. This was enough to convince Ashworth and his four fellow non-executive directors to set up a fund, list on AIM and plough into a property market that has, to date, failed to support the casinos.
Macau Property Opportunities Fund targets commercial and residential property. The company listed last June, issuing 105m shares at 100p. This spring the share price rose to 124.50p, giving a market capitalisation of £131m. The company is geared at 60%.
The fund has 560,000 sq ft of gross floor area, amassed since the listing. Of the £100m raised at the initial public offering, about £75m has been committed, leaving a spending armoury of up to £225m over the next 12 months and it must be spent.
Ashworth says Macau’s gaming makes up 98% of its economy. This figure needs to be reduced to allow for other supporting businesses.
‘We believe the big growth areas are retail, residential and hotels,’ he says. ‘Hotel occupancy is 80% compared with Vegas’s 98%.
There are 13,000 rooms in Macau. Vegas has 140,000 rooms.’ The casinos of Macau line the newly constructed Cotai Strip, a stretch of former marsh land that links the city’s two main inhabited areas of Taipa and Coloane.
‘Property is still at an 80% discount to Hong Kong. The driving force behind rising prices will be an increasing number of expats and a wealthier population: 80% now own homes here compared with 40% in Hong Kong,’ says Ashworth.
Most work in the gaming industry and their wages have soared on the back of the $35bn of overseas investment that has come into the area since 2001. This led to greater demand for better homes.
‘Croupiers, for example, earn $1,000-$2,000 a month now,’ he says. ‘There has been massive wage inflation up 30% in the last five years.’
Ashworth says equity is not scarce, providing investors such as Macau Properties with the resources to upgrade their homes many of which are run-down, but in the Portuguese colonial style visible throughout the city.
‘Forty per cent are more than 30 years old,’ he says.
Ashworth says he began investing in Macau in 2004. ‘We launched a small fund of about $10m, but from that we kept seeing opportunities grow and so our network also grew.’
The fund has 300 shareholders, up from 66 at the time of the IPO. Ashworth says this is a reflection of the number of bandwagon-jumpers who agree with him.
Ashworth has attracted the likes of Invesco, GLG Partners, USS to invest in the fund. He declines to divulge exact details of upcoming transactions. The fund never uses agents and, as in any immature real estate market, conducts most of its deals off-market.
However, he does confirm that the fund is in various stages of negotiations on nine sites: one retail, one industrial, one he labels simply as ‘commercial’, and six residential. The combined floor area of these sites is 8.5m sq ft.
Among the fund’s portfolio is a 50:50 joint venture with Shun Tak on a mixed-use scheme that features 300,000 sq ft of retail, a Mandarin Oriental Hotel and 700 flats.
Super luxury
On the residential, Ashworth says: ‘We’re avoiding the mid-market and are going either for the super-luxury or affordable entry-level homes aimed at the young.’
He says typical residential prices have risen from $550/sq ft to $800/sq ft. The average price of entry level homes has also risen from $200/sq ft to $240/sq ft.
With a construction boom seemingly trying to match a gaming industry that rivals Las Vegas, trying to pinpoint how much to invest in the surrounding built environment might be impossible.
‘Here you have a Vegas in the making on the Chinese doorstep,’ Ashworth says.
How do you quantify the needs of a nation addicted to a pastime they are banned from doing, bar one congested area on the southern tip of the country?