Macau bucks traditional economics with $27 Bln investment in casino hotels

Last week, Hotel Management reported Macau, China recently became the Asian market commanding the highest room rates, rising 64 percent year-over year to reach $202. And despite another report from STR Global finding that ADR in the Asia/Pacific dropped 5.9 percent year-over-year to $111.16 (as well as a minor 0.3 percent drop in occupancy), Macau is about to make a big bet on the development front.

According to Bloomberg, all six of Macau's casino operators are currently in the midst of developing new resorts to the tune of $26.6 billion. The first of the new resorts is on track to open May 27, headed by Galaxy Entertainment Group, while Melco Crown Entertainment will finish another resort later this year. Sands China is also opening another facility.

But with supply on the decline in the region, is adding more rooms really the answer? 

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"Galaxy's openings will be the first major test for the industry on whether new capacity will drive visitation and gaming revenue recovery," Jamie Zhou, an analyst at Macquarie Securities, told Bloomberg. "The question now is what kind of customers they will bring and how much gaming revenue are they going to drive. That's what on everyone's mind."

Aside from casino resorts, Macau has a large hotel construction pipeline. Macau Business Daily reported that as of Q1 2015, Macau had 18 hotels under construction and 25 undergoing government approval. This adds up to 25,600 new hotel rooms coming into a market that, as of March, had 67 operating hotels.

So is Macau on its way to Las Vegas-style overcapacity? Zhou told Bloomberg he doesn't think so, citing Macau's 84-percent occupancy average over the past 10 quarters, and the practice of giving casino high rollers rooms for free. Jim Murren, CEO of MGM Resorts International (which is building a $2.9-billion resort in Cotai scheduled to open in late 2016) said Macau operators are better positioned than Las Vegas operators were during the recession.

"There is no chance of that happening in Macau," Murren said in a May 4 interview. "The room supply is not significant. We have 500 rooms at the MGM Macau. We’re renting rooms every night at the Mandarin next store. Vegas had a large base and we all added in the teeth of the recession. We had a global meltdown."

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