Macau earns more from gaming than Las Vegas - one reason why investors into Asia should look beyond the main powerhouses, as Paul Benjamin reports

After the huge fireworks and the tears of the last governor as Hong Kong moved under
Beijing's control in 1997, the handover of Macau two years later was a far quieter affair. The Portuguese gave the Communist Party a sleepy, charming enclave, nothing like the powerhouse of Hong Kong, with a few established but low-key casinos and a gangster problem. Fast forward 10 years and the difference - even by Asia's standards - is bewildering.
Between the islands of Coloane and Taipa a 550 acre stretch of reclaimed land named the Cotai strip has now become the Vegas of the East. Relaxations in casino legislation after 1999 broke the longstanding local monopoly, shifting the centre of Macau's gambling out to the Cotai strip, where the big US developers swiftly moved in. When they got there they found the odds were stacked even more heavily in their favour.
Here's why: of the billion-plus Chinese in the region enjoying a steady rise in disposable incomes, a marked proportion are keen gamblers, but they have few outlets for their vice. Gambling is illegal in mainland China and heavily controlled in other Asian states such as Korea and Thailand. The Chinese also spend more at the tables than their Vegas counterparts and half the world's population lies within a five-hour flight.
Paul Hart, executive director with Knight Frank in Hong Kong, says: "The vision for Macau is the Vegas of the East, there's no doubt about it. But the challenge is to get people to stay longer; a lot of people don't stay in a hotel and instead gamble through the night. It's a hardcore gambling scene at the moment and the authorities want to attract the more recreational gambler."
Gaming revenues in Macau now outstrip those of Las Vegas, and are forecast to grow further. But overnight visitors on average spend only 1.2 nights in Macau, against 3.6 nights in Las Vegas. To boost visitor stays, the authorities and investors are building more shops, conference spaces and leisure facilities in the hope of emulating Vegas's broader appeal.
Hart adds: "Historically the retail experience has been poor and accommodation choices very average. Once the full extent of the new facilities comes online, people will be able to stay in better hotels and benefit from a far superior retail experience."
The first US investor, Las Vegas Sands, recouped its investment in a year and is set to treble to 33 its casinos by 2010. The Venetian Macau came online last autumn, and this year the City of Dreams will follow.
For all the success and ambition, Macau is dangerously dependent on gambling and in Q4 2006 PBL Melco stated that the gambling to non-gambling revenue split was 99:1%. In Vegas it is 50/50. If the Beijing government were to change its mind about prohibition of mainland gambling - though that seems unlikely - it could easily stem the flow of travellers over the border and starve Macau of custom.
Macau has a population of half a million on only 29km2, including the quainter older quarters with their colonial buildings, and it is more difficult to reclaim land here than in Hong Kong. Consequently future plans are spilling over into the neighbouring area of mainland China known as Zhuhai. Here the authorities are planning leisure parks and residential projects to house the influx of foreign workers needed to staff the hotels and casinos.
Expat numbers are expected to rise by 93,000 by 2010, and consultants Jones Lang LaSalle thinks 25,000 residential units will be needed in the coming three years but that only 19,256 will become available. This shortage of supply in the medium term seems a safer bet for foreign investors, and has attracted the likes of RREEF.
Hart says: "It's a very porous border and we see Zhuhai becoming the residential market as a place to live and commute. Hengqin theme park should attract a lot of visitors and there is a huge hinterland that can be built up.
"Residential demand should remain strong in 2008 due to rising income levels among locals and government subsidised schemes to be launched this year, which help first-time buyers. Also, long-term investors are attracted by the rental yields of 3.5-4.0%, which are higher than the mortgage rates of 3.25-3.5%.
"The uptrend of residential prices should remain intact in 2008 but the growth rate will be constrained by relatively abundant supply of about 5,000 units in 2008, which will be higher than the 10-year average of 4,000 units.  Residential prices are expected to grow by about 15% in 2008 after increasing by about 30% in the previous year."
Macau has added sustantially to its exhibition and conference space to try to broaden its appeal to international visitors. But despite all the gains, there is a sense of scepticism about how successful Macau can be. It still has significant social problems, a poor education system, and woeful transport infrastructure.
Hart added: "The jury is still out on how successful it has been from the retail side, but the footfall has been very high. There are some concerns that, with the amount of retail space coming through, there may be some oversupply. It has to be well focused to succeed."

Nearby Vietnam, a nominally communist but in reality unashamedly capitalist regime, offers the international investor another high-growth prospect.
This long strip of a nation, with its strong north-south poles of capital Hanoi and rival Ho Chi Minh City (formerly Saigon) at its southern tip, is east Asia's fastest-growing economy after China, with GDP estimates of around 8% this year and next. Unsurprisingly, and despite a sharp drop in the local stock market, investor interest is very strong, and shows no sign of slowing in the wake of the credit squeeze and rumblings of a US slowdown.
Rik Mekkelholt, manager with CB Richard Ellis in Vietnam, says: "Interest among investors remains at a very high level. We see a variety of investors coming through the door, mainly from Korea, Singapore, Malaysia, Japan and Taiwan. And we also see increased activity from the Middle East region, Scandinavia and Israel. Sourcing good locations and good projects is the issue, not money.
"Quality domestic developers, with some notable exceptions, are in short supply - foreign developers are well experienced and take the lead. Developers like Keppel Land, Guoco Land and Capitaland from Singapore are very active, as well as some big Korean developers like Kumho and Keang Nam."
One of Vietnam's key selling points is its youthful demographic, which ensures that, in some respects, the best is yet to come. Of a total population of 85m, Vietnam has Asia's second-youngest population and the third-highest number of female workers. These factors suggest growth is likely to be strong over the coming years and that rising affluence will fuel retail and residential growth among this higher-spending demographic. But this country of extremes also has Asia's lowest urbanised population, and is set for massive urban expansion as the younger rural populace heads for the cities.
Ho Chi Minh City is considered the economic centre as it has a larger population base and numerous larger-scale building sites can be found there. It is a similar picture in Hanoi, which is catching up rapidly. Although Ho Chi Minh City is not by definition preferable to Hanoi, in some cases, particularly retail, investors often decide to start their operations in Ho Chi Minh City first before expanding to Hanoi and other cities.
In secondary cities such as central Danang, there are a large number of projects underway, and there is some interest in leisure, hotel, and second home offerings in premier beach resort Vung Tau. A shortage of hotel space is expected in Ho Chi Minh City in the coming years.
Vietnam once had a reputation for maddening bureaucracy, but it has become easier to do business in recent years and, unlike in China where restrictions are tightening in many areas, Vietnam seems to be continuing to open up.
Mekkelholt explains: "The Vietnamese government is addressing the issues step by step toward a more transparent and thus workable framework. Challenges include a lack of transparency and poor infrastructure with crowded roads, ports and airports. Also more multinational players are coming to the market fighting for the same development spots or so-called ‘golden sites'."
Two recent government decrees have made it easier for foreigners to develop land and set benchmark capital requirements for certain projects. There are also now penalties for late completion and restrictions on advance payments from buyers.
Looking at the sectors, all are characterised by a shortage of quality opportunities, and Mekkelholt says that, as supermarkets replace traditional wet markets and sales of fast moving consumer goods rocket, the retail sector deserves more attention:
"AT Kearney ranked Vietnam as fourth most attractive retail opportunity in the world. Retail would generate on average the highest US$ return per m2, which is more than office and residential space. But when we assess investor interest in developing purely retail we see rather low activity. This is odd, seeing the potential high returns and certainly seeing the factual high demand for retail space and the corresponding shortage of supply," Mekkelholt says.
He adds that developers mainly concentrate on the office and residential sectors, which are also enjoying high demand. Residential projects can convert into quicker returns as units can be sold off plan, once the foundations have been built. Recent government decrees have boosted confidence in residential ownership, while rising rents in the office market, including grade B and C developments, also give high returns.
In 2007, 32 residential projects were launched in the Ho Chi Minh City market; in 2008 this should hit 50 projects. The city's CBD is fragmenting, and office development is spilling over into three satellite areas, where it is easier to start afresh on larger plots. Some multinationals look for non-CBD areas to occupy a large space and keep rents down. Unilever took this approach through a 10,000 m2 out-of-town site.

Growth has been steadier but nonetheless assured in the two southeast Asian countries of Indonesia and Malaysia, which despite their differences in population size (25m in Malaysia against the 235m of the archipelago) share a common language and dominant Muslim culture.
Over the past two decades Indonesia, it is fair to say, has not enjoyed the same strong economic development as the ‘Asian Tigers' of Singapore, Taiwan and others. But in the past three years growth has been more positive and inflation has been brought down from a worrying 17% in 2005 to around 6% today. The recent commitment by the government to open full free-trade zones on the islands of Batam, Bintum and Karimum should spur investment, particularly from neighbouring Singapore, and reflects a more open attitude towards international trade.
Rising disposable incomes drove retail expansion last year, and this is set to continue. Yields for prime retail ranged from 10% to 13.5% in 2007 Q3, according to CB Richard Ellis, and the entry of Harvey Nichols into the country was seen as a mark of confidence.
Office developments that concern international investors are mainly centred in the capital, Jakarta, and several CBD projects have recently gone live, which will force down occupancy levels in older buildings. Knight Frank believes the latter will have either to renovate or lower rents to retain tenants.
The automotive sector has been successful in attracting major investment, with a new factory and the expansion of existing facilities for part makers PT Moric Indonesia. Increasing demand for industrial land has pushed prices up 5-6% quarter on quarter.
On the residential front, the outlook for condominiums is steady but is tipped to weaken slightly for apartments. Hotels, particularly mid-range options, enjoyed improving occupancy rates last year, while the resort island of Bali retains its crown as the nation's prime area of hotel development, although it is still slightly tainted by the 2002 bombings.

Activity in Malaysia was similarly strong in the second half of 2007. In the capital, Kuala Lumpur, whose Petronas twin towers have become an internationally recognised emblem, office yields have improved steadily while retail spend has grown, partly off the back of improving visitor numbers. Tourism is key in this tropical country blessed with white sand beaches, though it is not as significant as it is over the border in Thailand.
The old colonial centre and island of Penang is a draw for international sunworshippers and, more importantly, the government has marked it as a growth hub for the northern states. The relaxation of rules that goes with such a designation, along with the extra commitments to improve infrastructure, are expected to feed retail, office and residential demand and supply. The balance is a fine one, and condo buyers will find themselves more spoiled for choice.
Likewise the completion of more shopping centres will drive competition and put downward pressure on yields, though the area has escaped the slump in consumer confidence that has affected retail projects in Thailand.
Another area of interest to international investors is Johor Bahru, a soulless sprawl just over the bridge from Singapore. Here too, government pledges to improve infrastructure and drive the Iskandar Development Region have lifted interest among developers. The government needs to keep these initiatives up because, with options like Macau and Vietnam alongside the giants of India and China, investors across Asia continue to be spoiled for choice.