By Alex Frew McMillan
MACAO: This once sleepy former colony now resembles a single large construction site, as it recasts itself as the Asian version of Las Vegas.
The boom in its gambling industry has driven a booming property market, with secondary home prices more than doubling in less than four years and demand particularly strong for high-end properties. As a result, a growing number of investors and speculators believe commercial and residential real estate here has a very rosy future.
But Macao, with a population of 520,000 and an area of just 28.5 square kilometers, or 11 square miles, is a very small market. And some investors have cautioned that the rush of developers may flood it.
"It is very easy to get bleary-eyed about Macao's prospects," said Tom Ashworth, portfolio manager of the Macau Property Opportunities Fund, incorporated in Guernsey. "When it comes to property, it all comes down to location, value and positioning."
In the fund's plans, One Central, a luxury development put on the market last year, fills those requirements.
The project, due to be completed in 2009, is rising on a prime spot on the Macao peninsula, between the site that is rapidly becoming the MGM Macao and the newly opened Wynn casino. It is a joint development by Hongkong Land and Shun Tak Holdings, two of Hong Kong's best-known developers.
One Central's commercial section will feature a 210-room Mandarin Oriental and a luxury shopping complex.
But it was One Central Residences that stole the spotlight.
The development's seven residential towers, with 796 apartments overlooking the water, sold out soon after their availability was announced - with prices of 4,400 to 5,000 Hong Kong dollars, or $565 to $642, a square foot, a record at the time. (Property in Macao often is valued in Hong Kong dollars rather than the local pataca.)
Ashworth and his co-manager at Sniper Capital, Martin Tacon, bought Tower Six of the One Central Residences for their fund. The tower, which is to have about 60 apartments, cost $87 million.
They say they took the step because One Central is one of the first developments in Macao being built by top-end Hong Kong developers, who, like their counterparts around Asia, had ignored Macao until recent years.
"The Hongkong Land branding and location and quality of the project will set that apart," Ashworth said.
Since then, One Grantai, another new development overlooking the Cotai Strip, broke that record when it commanded an average of 6,000 Hong Kong dollars a square foot when it went on the market this year.
Still, that is a far cry from neighboring Hong Kong, where a luxury apartment on the Peak may well cost 48,000 Hong Kong dollars per square foot.
Still, Ashworth and Tacon say they are confident that the right investments in Macao will do well. Their fund spent $148 million on Macao property in October and November 2006 alone, buying into two other residential projects as well as the One Central investment.
Coupled with a more recent commercial acquisition, it has put $191 million of the $200 million it raised to work in the city.
"There is no doubting the long-term prospects for Macao growth," Ashworth said. "This is a long-term story. This is not a five-year story. This is a 20-year-plus story, just like Vegas has grown for something like four decades."
Las Vegas is never far from the discussion of Macao's surge. The former Portuguese colony passed the Las Vegas Strip in terms of gambling revenues for the first time last year, with Macao's casinos bringing in $6.9 billion, up 22 percent from 2005. And the number of gaming tables in Macao is due to jump to 9,000 from almost 4,000 now by 2010.
Macao has a lotus on its flag, but since the 2002 deregulation of gambling and the end of the monopoly held by the local magnate Stanley Ho, the construction crane would be a more fitting emblem.
The first Las Vegas-owned casino, The Sands, opened in 2004. Since then, many of the world's top casino and hotel operators - Wynn, Crown, MGM, the Four Seasons, Shangri-La, Sheraton and Hilton - have started construction of their own sites or plan to do so.
The city has 13,000 hotel rooms and estimates suggest there will be 40,000 by 2010.
The new casinos and hotels and the thousands of engineering and construction jobs have brought boom times to Macao's job and real estate markets and attracted several thousand foreigners, who are filling managerial roles at the new businesses.
"Clearly the demand for property has increased substantially, and people's ability to pay for property has increased substantially," Rob Hart, a gambling and property-market strategist for Morgan Stanley based in Hong Kong, said when Macao's take surpassed that of Las Vegas. "On the other hand, you have higher supply coming up as well, so you have to balance those out."
Hart noted that the region's initial large increases were growing off a very small base. But, he added, "going forward, I think you will have pretty strong demand because the labor market is so strong."
Macao's unemployment rate is hovering at a little more than 3 percent, which would be considered full employment.
But Macao is not without its problems. The colony has long had a reputation as a haven for drugs and prostitution, and that has not gone away.
And now, people worry that high school graduates find it easier and much more lucrative to work as a croupier, which pays around 15,000 Hong Kong dollars a month, than it would be to get a university degree.
There also has been rising social unrest. The casino boom has not advanced all segments of society equally, and some of the poorest people are complaining that they are being left behind - and finding prices of everything from day-to-day goods to property out of their reach.
The government of Macao, which became an autonomous Special Administrative Region of China when Portugal relinquished the colony in 1999, has generally faced less criticism than its counterpart in Hong Kong, which became an administrative region two years earlier. But twice this year, there have been public demonstrations against various government policies.
Macao is also gripped in its biggest government scandal, as the former transport and public works secretary, Ao Man-long, stands trial on 76 charges. They include claims that he took millions of dollars in bribes to treat developers favorably in land deals and to speed casino projects.
Despite all those challenges, market watchers say the economic odds still are overwhelmingly in Macao's favor. But Ashworth, who previously was managing director of the hedge fund brokerage KE Absolute and worked at Morgan Stanley before setting up his property fund, is not placing all his bets on luxury property.
Macao is littered with empty apartment buildings delivered during its last property boom, in the late 1990s. Most of those were shoddily made and, after prices plummeted, have ended up unmarketable or unprofitable, or both - part of the reason the region's current supply of luxury residences is so limited.
Xavier Wong, the head of research for greater China with the Knight Frank real estate offices in Hong Kong, noted, "For the existing developments, there is no child care, no playground for children, no swimming pool, few of the amenities required by the foreign professionals who are moving in."
And, although many projects being sold now are touted as high-end, Ashworth fears they may not live up to their billing.
There are 6,500 apartments being built in luxury projects that are under construction, according to Knight Frank, and 89 percent of them have sold. Between 2007 and 2009, 9,400 apartments are due to be completed.
"In one, two or three years' time, when these projects are completing, are your projects going to stand out from the rest?" Ashworth asks. "The word luxury is abused in Macao. Most of these so-called luxury developments are in the mid-market area."
Other than One Central at the luxury end, all the investments for the Macau Property Opportunities Fund are redevelopments. It has bought into a mixed-use commercial development; the two other residential projects are a mid-rise, middle-income project and a multi-story, mass-market building.
Ashworth is eager to invest in more modest apartment buildings that will sell to locals moving up the housing chain, instead of to speculators.
"When all these projects complete, there is going to be competition, and our opinion is that in certain segments of the market there is going to be overdevelopment," Ashworth said. "You want to be sitting on assets that you know will shift."