ASIAVIEW: Trap for some, honey for others

Is Macao a honey trap for international investors? Last month’s Wall Street Journal report on the mess that is Macao Studio City was the latest in a line of stories emanating from the 29.2 kilometre former Portuguese colony that would suggest so.

The WSJ reported how a three-year dispute over financing between the multiple owners of the Casino resort development – including US alternative investment managers Oaktree Capital Management and Silver Point Capital – could end with the site being handed to the Macao authorities. Located on 32.3 acres of prime Cotai Strip land, the project has an estimated completion value of $2.4 billion.

Should the worst happen, the two investors face losing $250 million. According to a letter from the Macao government to the investors of the scheme and viewed by the Journal, it could move to “invalidate or terminate the land rights for the project unless a satisfactory reason is given for its delay”. Macao Studio City is not alone. The government has sent similar letters to approximately 30 other projects in the area for similar reasons.  

Non-gaming schemes backed by private equity have also hit difficulties, particularly those without secure planning consents at the time of the conviction of Ao Man-long, Macao’s former ministry of transport and public works who was responsible for planning decisions. After he was jailed for 27 years in January 2008 amid a state-wide corruption and bribery scandal, numerous schemes were hit with more onerous zoning constraints as the government reacted to the scandal by increasing hurdles to development. PERE has learned of a few such cases around the Nam Van Lake peninsula for example, with backing from other US private equity real estate platforms that are still yet to make development headway.

According to one source familiar with one such scheme, the firm in question seemingly did little wrong. Investing in 2006, its timing looked right and its sales projections “justified their investment”. But “funds are driven by IRRs”, the source highlighted. “If you don’t get it built, sold and exited in three years you start to eat into your IRRs. If you don’t sell in five years, it’s over.” Time is running out for this project in question.

But while there are anecdotes aplenty of real estate investors seeking to profit from Macao’s exponential gaming-driven growth running aground, albeit often through some kind of government intervention or another, it is impossible not to be attracted to Macao’s honey despite its numerous traps.

Its demographics suggest Macao is surely worth some sort of investment strategy. According to figures used by AIM-listed fund Macao Property Opportunities Fund in its marketing materials, Macao generated GDP growth of 8.2 percent and record gaming revenues of $15 billion in 2009. In comparison, Las Vegas generated $10.4 billion. Also last year, the Macao government department, the Statistics and Census Service, found that per capita spending of its visitors increased 9 percent. If you consider gambling is the Chinese national pastime and there is one place, Macao, where it can be done legally, it seems illogical not to allocate at least something. 

Perhaps predictably, Macao’s population has been on the increase for years. It stood at 542,000 people in the first quarter, up from 488,000 people in the first quarter of 2005. As gaming revenues increase it would be safe to assume more people will come – despite state measures over the past couple of years aimed at stemming inflows of visitors from mainland China. 

It is also worth pointing out that private equity real estate firms have been able to make full-circle investments in Macao and handsome profits along the way. Take Manhattan, the joint venture residential scheme between Citi Property Investors and local developer-cum-investor Macaoland, for instance. The partners teamed up to develop a 435,000-square-foot, two tower scheme in Taipa in 2005. Within a couple of years, the partners had sold one tower on a strata-basis to end-users and overseas investors for a typical price of HK$8 million (€800,000; $1 million) each, and the other for approximately $85 million to Leon Black’s Apollo Global Management. The exit reflected an IRR of more than 30 percent and a 1.8x equity multiple. One source familiar with that deal said the land for the scheme was bought freehold and was not subject to any more government approvals – a factor that undoubtedly aided its developers to execute a swift buy-develop-sell cycle.

Perhaps the answer is to keep it simple – fewer partners and planning certainty would certainly help to achieve that. Investments like that could help Macao be more of a honey pot than a honey trap.