Macau’s retail market to ‘follow suit’ on the shift in gaming

September 16, 2019 / By  

Macau’s economic growth is predominantly driven by gaming; GDP performance broadly coincides with gross gaming revenue (GGR) trends. In 1H19, Macau’s GGR totalled MOP 149.9 billion (USD 19 billion), static from 1H18, but surpassing previous first half results over 2015-17. This is an encouraging sign of Macau’s revival to its 2013 peak, when GGR reached USD 45.2 billion, almost seven times that of Las Vegas – “What Vegas can do in a week, Macau can do in one day.”

Historically, GGR has been driven by high-rollers and making the performance of the segment highly dependent upon this.  The decline from 2013’s peak was triggered by Beijing’s determination to address corruption, which impacted Macau, resulting in more than two years of GGR declines. GGR showed signs of recovery in 2017, before moderating in 2H18, as a result of deleveraging efforts in the mainland and US-China trade tensions.

Evidently, Macau is highly susceptible to economic, financial and policy developments in the rest of China. Consequently, Macau’s government has been looking for an unassailable solution – Diversification away from VIP towards mass-market gaming and non-gaming tourism. Some progress has been made with VIP gaming now contributing 49% of GGR, down from 66% in 2013. In tandem, junket operators, which provide unique complementary services to VIPs, have experienced significant consolidation.

Mass-market shift and visitation to impact retail landscape

Cotai retail stock currently sits at approximately 4 million sq ft. The market experienced a supply glut 3-5 years ago in which many higher end brands over expanded, impacting performance. Subsequently, already-established retailers may have reservations regarding expansion, especially in an over-saturated luxury market, and macroeconomic uncertainty may augment retailer caution. Several integrated resorts have also extensively reshuffled tenant mixes: The Parisian and the City of Dreams have been quick to ensure that their retail offerings better address the balance of additional midmarket consumers.

International retailers have continued to enter casinos, where regulations are less stringent in comparison to street-level shops over 120 sqm in Macau’s historical area, where prospective occupiers are required to wait for construction permit issuance. Some retailers have been unable to open, despite signing leases and paying deposits, as they did not adhere to such regulations, which supports further diversification of tenant mixes on Cotai due to retailers’ preference for space within the resort malls.

According to Macau’s Statistics and Census service, visitor arrivals increased by 20.0% y-o-y, reaching an impressive 9.9 million in 2Q19; two thirds were from mainland China – by far Macau’s top source market. However, total visitor spending declined 4.8% y-o-y over the same period, which demonstrates the need for retail offerings to better challenge consumer frugality. Entertainment and F&B has been a blueprint for success throughout Asia Pacific in recent years and mall operators should adjust offerings appropriately to cater for the structural shift from luxury to mass. Studio City, for example, has opened the Legend Heroes Park, a tech-based entertainment park that combines cutting-edge virtual technology with the physical world for an unparalleled immersive experience. Typically, the best performing mall is The Four Seasons – normally within the top 10 globally – and located at the fulcrum of the strip; The Venetian and Galaxy follow with diversified tenant mixes.

Infrastructure and new hotel supply to provide support

The Hong Kong-Zhuhai-Macau Bridge opened in October 2018 and has proven to be a hit, surpassing inbound sea and air passengers in 2Q19. In addition, the high-speed rail in Hong Kong has also increased Macau’s attractiveness and boosted mainland visitor penetration. These infrastructure projects have increased connectivity and launched visitation to record highs. As a result, market-wide hotel room occupancy is to the point where hotels are often fully booked.

As at YTD June, Macau’s hotel room inventory stood at 37,900 with around two thirds in five-star hotels (Statistics and Census service). New Cotai hotel supply is due to come online in 2020-21 which would relieve some of this pressure and increase capacity. The Lisboeta Macau – with 820 rooms split across three hotels – will be the first integrated resort in Macau without a casino and instead, will be home to Macau’s first theme park. Galaxy Phase 3 is also expected to open in 2020, with a strong focus on non-gaming activities such as MICE, entertainment and family-related attractions; its 1,500-key hotel is delayed until 2021.

Despite global uncertainty, record-high arrivals, mass gaming and non-gaming tourism will be the main drivers of growth, and the more-volatile VIP segment will be more subdued providing more stability. Along with this shift in gaming, a continued shift in the retail market will persist; and mall operators who are at the forefront of addressing consumer preferences with diversified offerings as well as evolving to capture broader consumer demographics and source markets with differentiated family-oriented attractions, conventions, entertainment, MICE and unique experiences.

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