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VIVA MACAU

China’s Las Vegas draws Western developers and retailers

By Curt Hazlett

Take an urban area one-sixth the size of Washington, D.C. Add a huge nearby supply of some of the most avid gamblers on earth. Toss in a healthy handful of Las Vegas gaming companies hungry for new business. Tote it up and you have Macau, a former Portuguese colony less than 40 miles by ferry from Hong Kong.

Since reverting to Chinese rule in 1999 as an autonomous district, Macau has become the hottest venue on earth for new casinos, helped by the fact that it is the only place in China where casinos are legal.

Casinos and resort hotels — an estimated $12 billion worth — are sprouting all over the crowded district, transforming it from a seedy backwater to what investors are already calling the Las Vegas of Asia.

“The first thing visitors see is a lot of tower cranes and a lot of construction sites everywhere they look,” said David Hui, who heads the Macau operations of the Colliers International brokerage. “The popularity of Macau is much higher than it was, so it is attracting much more investment from overseas. This place is becoming much more eye-catching.”

It has certainly caught the eye of the retail world. Attracted by the torrent of development, international retailers are rushing to tap into this largely still-undeveloped market.

Saks Inc. struck a licensing deal in April to develop a Saks Fifth Avenue store in Macau. Soon afterward Las Vegas Sands Corp. announced an agreement with 135 luxury retailers to open stores in its gigantic Venetian Macau, a $1.8 billion resort whose first phase is scheduled to open next summer on the Cotai Strip, an area of land downtown that has been reclaimed from the sea. Eventually, some 350 retailers are expected to sign leases in the Venetian’s 1 million-square-foot Grand Canal Shoppes.

Not bad for a place that until now has had only one mall, the New Yaohan, and a few High Street shopping districts.

Gambling is the engine powering this growth, and it is deeply rooted in Macau’s history. When the colony’s leaders legalized it in 1847, they gave Macau both a durable industry and a sinister reputation as a place where desperate gamblers, gangsters and prostitutes felt at home. Gambling became a monopoly there in 1961 when Macau’s government awarded the franchise to the Sociedade de Jogos de Macau, an organization controlled by one of Asia’s wealthiest men, Stanley Ho.

By the time the Chinese took over in 1999, Ho’s group ran 10 casinos. But Beijing, apparently seeing the benefits of competition, ended his monopoly in 2002 and awarded three licenses, one of which went to Ho. Eventually, the number grew to six, and Macau was off to the races.

In 2004 Las Vegas Sands became the first U.S. company to open a casino in Macau — the $240 million Sands Macau, which recouped its construction costs in just a year. In September Wynn Resorts will open the first phase of its Wynn Macau resort on 16 acres near Ho’s landmark casino, the Hotel Lisboa. Next up is the 2007 opening of the MGM Grand Macau, a partnership between the MGM Mirage Corp., of Las Vegas, and Pansy Ho, Stanley’s daughter.

Not to be outdone, Stanley Ho is planning a $780 million mixed-use project called Oceanus, which will contain offices, a hotel and a casino. And Ho’s son, Lawrence, is teaming up with James Packer, Australia’s richest man, to build a $1 billion resort called City of Dreams near the Venetian on the Cotai Strip. The pair is looking at taking the project public.

All of which raises a question: Why are so many companies willing to bet on Macau? The answer is simply the massive and unrequited demand for gambling in China.

Gambling has been illegal in China since the communists came to power in 1949. The government has long viewed it as a cause of official corruption and has blamed it for a host of other problems, including embezzlement and theft.

Chinese gamblers have been largely undeterred despite the government’s best efforts. Last year the government began what it called “a relentless crackdown” on visits by Chinese to casinos just across the borders of Laos, Myanmar and Vietnam, forcing 84 of them to close.

But the anti-gambling crusade doesn’t extend to Macau, although officials of the government, the Communist Party and state-owned businesses aren’t allowed to gamble there. (The deputy mayor of Shenyang, in northeast China, was executed in 2001 after he gambled away some $4 million in public money during visits to Macau.)

The numbers point to Macau’s potential. Some 3 billion Chinese live within a five-hour flight and 100 million within a three-hour drive. In the first quarter, visits from the mainland were up nearly 20 percent from a year earlier.

And visitors don’t just come to watch. Analysts say the gaming tables in Macau generate about seven times as much revenue as those in Las Vegas.

For retailers the presence of such high rollers represents a potentially big payoff. Colliers International’s Hui notes that most of the incoming retail will be in the casinos themselves rather than in stand-alone malls. “The casinos are not purely casinos,” he said. “The concept is to provide a mix of uses.”

Much of the local talk centers on the retail component of the Venetian, Hui says. “The Venetian is a very big project,” he said. “The last phase will be completed in 2010 or 2011, so you can imagine the scale of the construction.” Like its namesake in Las Vegas, the Venetian Macau will feature an indoor likeness of Venice, complete with canals and gondolas. Once finished, the project will contain 3 million square feet of retail.

William Weidner, president of Las Vegas Sands, told analysts in May that the company’s leasing agreements for the Venetian Macau involve some 500,000 square feet of space, at an average base rent of about $130 a square foot. The company says some of the resort’s canal-level stores are renting for more than $400 a square foot.

The space already leased “represents over 40 percent of the approximately 1.2 million square feet of available space in the Grand Canal spots and the adjoining mall at the Four Seasons in Macau,” Weidner said. The 600-room Four Seasons will have an attached fashion mall.

Weidner says the steadily rising sales per square foot figures reported by Hong Kong retailers point to a bright future for retail investment in Macau. Noting that mainland Chinese are drawn to the “special administrative regions” of Hong Kong and Macau by a 30 percent tax break on luxury goods, he added that the results “continue to validate our strategy of developing valuable, noncore assets” like retail.

How much the average Macanese will patronize the luxury shops in the casinos is still unclear. (Many of them will be in the neighborhood, since an estimated 7 percent of the work force work as dealers.) Most likely they will continue to shop in the major High Street areas of Senada Square, Avenida de Almeida Riberio and Avenida de Horta Costa.

But Hui says the boom has already had a big impact on their lives. For one thing, there is not enough space for all the projects on the books, and that has meant a boom in Macau’s once moribund real estate market. “From 2004 to 2005 people got big profits from selling residential properties, and prices have gone double,” Hui said. “It’s an instant benefit.”

Vegas, meet Macau.

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