MACAU – The house wins

If you find yourself on a jetfoil between Macau and Hong Kong and don't know which direction you're going in, just take a peek at your neighbors: if they look like charged-up conquistadors, you are headed for Macau, but if they tremble with the weight of loan sharks on their shoulders, you are almost certainly Hong Kong-bound.

Like the house cashier trading chips for cash, Macau's Gare Maritimo exchanges a ferry-load of conquistadors for a ferry-load of sad sacks every quarter hour at peak times. For some out-bounders, the journey home provides one last hour to polish scripts to explain to family and friends how it was they came within a nanometer of taking the house – before they were taken for thousands, tens of thousands or even millions of dollars.

It is this arithmetic which compels casino operators to keep building more gambling palaces in Macau, where GDP in 2004 grew 28% year-on-year. "The Portuguese," explains a hotelier recalling this special administrative region's pre-1999 days, "never really liked the idea of gambling."

"But the new administration, instead of trying to be big in banking or something else Hong Kong always did better, said, 'let's be big in what we're really good at – and become a great entertainment city.'"

And so this SAR, under Chief Executive Edmond Ho, marches in lockstep towards that goal. Construction cranes are everywhere – towering over sites filled with Hong Kong construction workers building more casinos and hotels. Even the landmark circus where forgotten Portuguese heroes once sat rigid on noble bronze steeds (before the statues were prudently removed ahead of Macau's handover) was sealed off so a new hotel in the shape of a tulip can rise.

It was here that traffic streamed on and off the peninsula, the great meeting point at the foot of the original two-lane bridge linking Macau proper with the SAR's other islands, Taipa and beyond that, Coloane. This last, in Portuguese times, housed one of modern Asia's last surviving leper colonies – which figured on some tourist maps like a must-visit theme park.

That the role of this great connector could be suspended by town planners is partially explained by the fact that a newer and much larger bridge has been handling most of the inter-island connecting job for several years now. But the organization needing the timeout to build a hotel had to have some clout – for it was the Stanley Ho empire, which till three years ago held the monopoly on all gaming, funneling back Macau's biggest single source of tax revenue.

The Grand Lisboa will rise right next door to Ho's original Hotel Lisboa, one of Asia's more famous landmarks, mostly famous in a visual sense for scaring one end of what was arguably one of Asia's handsomest waterfront tree-lined prayas. (The length of that has since been boxed in by a highway fittingly named after Stanley Ho, who is no relation to Edmond.) The Lisboa, which houses his flagship casino, is an exuberantly eccentric complex that looks like it was pieced together from bits bought at a builder's sale, making it a worthy departure point for setting to work on a building shaped like a tulip.

Ho, now well settled into his eighties, took over the gambling concession from the Fu family (who later built the late Furama Hotel in Hong Kong), and out of that his four-decade gaming monopoly, Sociedade de Jogos de Macau (SJM), sprang.

But since the industry was opened up to competition in 2002, business has exploded, stirring a frenzy of construction, and driving residential property prices through the ceiling – which in turn started a building boom across the border, in the city of Zhuhai, where Macanese, frozen out of an ever pricier market at home, are increasingly migrating.

The pace truly staggers. Venetian Casino Resort of Las Vegas opened its Sands Macau casino just a chip's throw from the Macau ferry terminal. Opening a year ago, it paid for itself by New Year's Day 2005 – on revenues of US$2.6m a day. Sands President William Weidner was moved to observe that while it took 75 years to build Las Vegas into what it is today, his aim was to replicate Las Vegas in Macau in three.

In one sense, the projection looks conservative: daily revenue at the company's flagship stateside casino is only a third that of Macau Sands, according to a Bloomberg report, citing a Macau gaming authority official. And it is easy to see why, says a hotel executive: "Las Vegas casinos are empty on weekdays – here they're always packed, and the bets are bigger."

More extravaganzas to come
Sands also announced plans to duplicate its make-believe-it's-Venice 3000-suite resort in Las Vegas. The US$1.8bn Macau Venetian Casino Resort is scheduled to open in early 2007. Of course, that's peanuts to what lies ahead. Sands in March announced that it was joining InterContinental Hotels and Four Seasons Hotels to create a $12bn Vegas-style strip in Cotai, a reclamation area that now joins Taipa and Coloane islands. Las Vegas-based Winn Resorts, still to open its Macau venture late next year, just last month announced it was expanding on the original plan for a 600-room hotel and 100,000 sq ft-casino for 200 gaming tables and 350 slot machines, plus the usual plus-plus-plus features: seven restaurants; 28,000 sq ft of retail space; a spa; a salon; and entertainment facilities. The expansion will add more casino space for 150 more table games and 500 slot machines, plus more restaurants, a theater and what is described as "a dramatic front feature attraction at the entrance."

Ronald Cheung, CEO of Macau operations for Hong Kong-based Midland Realty, tells a story. "We were the first Hong Kong property company to open up when we came last year," he says. "People said, the system here is crazy." But despite the warning, they opened up an office, Cheung remembering that the rent for that seemed very steep. "Now it seems very reasonable," he says.

He would know: in the year since he signed that first deal, he has signed 11 more – for a total of 12 property offices. That required building a staff from essentially zero to over 130, but he noticed he was not alone on the expansion trail. "Over 300 property agencies opened in just 2004! We were just five offices of those 300," he says, explaining Midland's seven other offices all opened this year.

Eighty percent of Midland's business is residential, and much of that is in the secondary market because there is hardly any space for building anything, since most land has been hived off for hotel and casino development. This desperately tight situation might suggest it was time to develop faraway Coloane Island, but that, Cheung says, has been declared largely off limits to developers: the government has designated any part of the island that has not already been developed to be protected green space.

Cheung is a man fired up. Ask him to explain the boom and he will cut you off: "Macau is not booming," he proclaims. "It is exploding!" Going over a stack of charts, he describes the impact of the lopsided supply-demand property equation: "In 2002, new flats were selling for 600-800 Hong Kong dollars (either side of US$100) a square foot – today the price is HK$3,500."

Amazing, amazing
By next year, or soon after, the price will double again, he says. "And prices are going up in Zhuhai, too," he says.

"I've never seen anything like this," says Akram Touma, general manager of The Westin Resort, tucked away in a quiet bay on Coloane. "It's the confidence everyone has: real estate is up 200%; everyone's salary is higher; infrastructure is upgrading; it's everywhere. We're almost doing 600 conferences a year!"

If the business keeps growing at 20% a year, the conference count will go up to two a day. "We hold more conferences than any other hotel in Macau – we have companies coming back every year, again and again."

But will Westin's (and Sheraton's) parent Starwood settle for only 208 rooms in a market where some chains are planning hotels with 4,000? Not very likely: Touma says he cannot get into details but notes that discussions are proceeding on at least two new properties, "and maybe more."

Lee Peng Hong, president of the Macau Trade and Investment Promotion Institute (IPIM), said investment had been pouring into several sectors: cultural, recreational and gaming, banking and securities, and industrial sectors. "With the liberalization of gaming licenses, we would expect figures of inward foreign direct investment from the US to increase significantly," he said through a spokesman. "Because of the booming economy, there are more and more new companies in Macau. In 2004, there were 2,215 companies incorporated, out of which 695 were foreign. The sources of FDI are mainly from Hong Kong, mainland China, Portugal, UK and the USA."

Could one of the American investors be Wal-Mart? Midland's Cheung hints that at least one big superstore chain has hopes of setting up shop in the SAR, but will not be drawn on which one. "The problem is it is very hard to find that much space," he says, explaining the unnamed company is looking for up to 300,000 sq feet. At least one Japanese retailer is shopping for space, too, he says.

Cheung predicts Macau will look very different in a few years: modern, glitzy, packed with world-class hotels and megacasinos and other fun things. "You will see a lot of white, black, gray, yellow, whatever, people because the weather is so good and the hotels will be so cheap because there will be plenty of supply," he says. "That will attract tourists from the US and Europe, too, because the casinos, whether MGM Grand or Venetian, will be well-known brands." The Stanley Ho empire should take care of the rest – those coming from Hong Kong, mainland China and the distant corners of Asia.

Indeed, the tycoon just unveiled his latest plans last month to build a US$795m entertainment and residential development called Oceanus, scheduled for opening in 2009. That should help drive up Macau's visitor count even more, although it would hardly seem to need any help: last year's 16.7m visitors were 45% up on 2003's – just a tad ahead of growth in gaming revenue, which climbed 43% year on year, according to Macau SAR government data.

Stanley Ho's organization, now overseen by daughter Pansy on a day-to-day basis, is still the biggest gamer in town – with a lock on the VIP market. That elite looks small only when you count heads – 4,000 reportedly. But each spends an average US$1m on each run to Macau, that pile alone accounting for 70% of gaming revenues in 2004.

Still, one Hong Kong analyst cited by Bloomberg said its grip on the industry was slipping. The analyst projects its revenue by 2009 should slip to 60% from 86% in 2004. But not to cry for Stanley: by then the pie should be considerably bigger.