For Macau hotels, the hits just keep coming

Macau hotels are once again paddling against economic currents and there is no sign of a significant turnaround any time soon. 

This turn of events has blindsided Macau’s hotels and resorts. Several billion-dollar developments are going to bring thousands of rooms to market at a time when demand is extremely weak.

New Supply Coming
This year alone, Wynn Palace, a new MGM property and the over-the-top ultra-luxurious Louis XIII will open their doors to guests. Melco Crown Entertainment's Studio City opened in October, with the Studio City Hotel adding 1,600 rooms to Macau.

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By December 2015, the city had 29,725 rooms spread across 73 hotels. The Macau government anticipates that three new hotels opening this year and the next will add another 6,300 rooms.

Their timing couldn’t be worse.

“With five-star hotel rooms currently going for less than $100 per night, this will merely add downward pressure on the room rates, which in turn will pressure the other categories below that,” said Ben Lee, managing partner at Macau-based IGamiX Management & Consulting.

The timing of the Louis XIII, which embodies the type of opulence that has become toxic for mainland Chinese officials, as well as executives at state-owned or state-invested companies, is particularly bad. The most expensive suite at the development is listed at 1 million Hong Kong dollars (roughly $130,000) per night.

The $1-billion project is the brainchild of former Hong Kong investment banker Stephen Hung, who is not worrying publicly about opening during a major downturn in an economy that once seemed an unstoppable juggernaut. Louis XIII does not need mainland business, Hung has argued, as it is offering a ultra-high-end lifestyle experience to a global market. Lee is less optimistic for the development’s prospects.

​“Louis XIII is a classic case of a wrong product at the wrong time,” Lee said.

Ersatz Hope
After months of declining gaming revenues—and hotel occupancy rates—Macau’s luck seemed poised to improve last October. Visitors flocked back to the once-buzzing casino town, inspiring investors to reconsider their pessimism toward one of the world’s worst-performing economies in 2015 and reversing a long downward slide by casino stocks. The October rebound was especially welcome coming only weeks after China’s unexpected 3-percent devaluation of the renminbi against the dollar in August. 

But its promise has proven illusory, and Macau’s tourist-dependent economy—95 percent of the territory’s GDP was represented by the casinos in 2014—is adrift once again.

As recently as summer 2014, tiny Macau had been doing seven times as much business as Las Vegas, but the combination of an economic downturn in China and a vigorously prosecuted nationwide anti-corruption campaign drastically reduced the flow of visitors and money to the former Portuguese colony.​

“With the VIP segment severely constrained by China's anti-corruption and anti-ostentation campaigns, the market for the ultra-premium product has just about disappeared,” he said. “Even Wynn, which has long dominated that high-end segment of the market, has been forced to reposition themselves lower to protect their volume of business.”

For more than a year now, Beijing has urged Macau to evolve from a casino-based economy into a more mass-appeal tourism destination that attracts families, with the hope of filling rooms once more.

​The result has probably been less than desirable as seen by declining visitation numbers to Macau, coupled with a trend of decreasing spend on retail as well, Lee said. Gaming revenues dropped 27 percent in the last quarter of 2015 and dropped again on January to mark 20 continuous months of drops. Hotel occupancy rates dropped 6 percent through 2015 to 80.5 percent according to data released last week by the city's Statistics and Census Service. Five-star hotels performed best but with occupancy ratios of just 82.2 percent, down 5.3 percent year on year. 

“Macau is losing its allure as a must-visit destination for the mainlanders, and the gaming industry has not exactly helped itself by not marketing at all within the region and globally,” he added. “There is very little creativity demonstrated by these operators, both in their concepts for their new properties and their outreach to new markets other than China.​”