Message to Shareholders
CHAIRMAN’S MESSAGE
I present my Chairman’s Statement for the financial year ended 30 June 2024, and also outline my views on the way forward for the Company.
The current financial year has seen the Company make further progress in delivering our divestment programme through successful sales of 13 units at The Waterside, with three additional units sold following year-end. Sales have been delivered against the backdrop of ongoing market challenges, very thin demand for luxury property – the market segment to which we are exposed – and, more recently, from heavily discounted sales by developers under pressure to meet bank loan repayments. These conditions have hurt our returns and impacted our year-end property valuations.
The sales achieved during the year enabled the Company’s gross borrowings with banks to be reduced from US$105.6 million to US$82.8 million. With further sales completed after year-end, the Company’s borrowings have fallen to US$68.9 million. The repayment of loans and the reduction of associated debt service levels has been a key objective during the year. We have been consistent in our targeted approach, and have remained pragmatic in our pricing to deliver divestments in a very tight market. We are mindful that sales velocity has been slower than we anticipated, but would stress that working within, rather than against, the market is the only means by which we can maximise returns in this environment.
Market sentiment remains cautious with buyers generally being opportunistic in nature with demand coming principally from local Macau residents and Macau resident card holders. The economic difficulties faced by China – especially in relation to the real estate sector – together with a mixed economic recovery in Macau, have further weighed on sentiment and impacted banks’ risk appetite for property lending. This has affected both existing property-related debt and also borrowing by prospective property purchasers. The Manager has continued to work closely with the Company’s lenders, who remain supportive of our investment strategy and understand our considered approach in the current market circumstances.
As previously announced, during the final quarter of our financial year, we saw a significant step by Macau’s government in relaxing or removing many property ownership restrictions and property-related taxes. These measures were long overdue, and very welcome. These policy changes reflect the lacklustre condition of the property market, especially amid the post-COVID recovery. Paradoxically, in the near term, these changes have distorted the market, as primary property developers with significant inventories have come under selling pressure due to their debt levels. This has seen a significant increase in post-announcement sales volumes compared with very low numbers earlier, but at enforced lower prices, which has fed into near-term valuations. It also had a short-term impact on our loan-to-value ratio, which we expect to improve following year-end, when further property sales complete.
The Manager’s advice to the Board is that, in contrast to Hong Kong, where a similar relaxation of property market measures took place, the supply pipeline of high-end property in Macau is extremely limited. Moreover, there have been significantly fewer new developments in recent years, which has had the effect of reducing the overall inventory of available property when compared to Hong Kong. This can be seen reflected in transaction volumes, with secondary property transactions in the luxury sector numbering below 20 units in Q4 2023.
Fundamentally, therefore, we see greater scope for improvement in property values and higher numbers of transactions in Macau, and hence there is reason to sense some optimism. Any further measures to support or stimulate the market would be welcome. Throughout the past financial year, debt service has been a high cost that the Board is determined to reduce, aided by the welcome easing of interest rates by the United States that is feeding through into rates in Macau.
Navigating external factors and the changing market dynamics in Macau has required flexibility and agility. The Manager has achieved sales against a challenging backdrop and continues to keep the Board fully informed on a regular basis so that sensible, pragmatic, timely decisions can be made on pricing and sales. This is important when seen in the context of wholesale disposals that some primary developers have been forced to make. Hong Kong’s experience suggests that a return to more normal sales volumes will materialise over time. Clearly, any measures aimed at steadying and stabilising Macau’s property market would be welcome, and would help to build confidence, which is the key to moving forward with an increased pace of sales.
A key assessment for the Board in respect of the Annual Report and Accounts has been to carefully consider our Going Concern Statement, which is set out in detail on in the Directors’ Report. The methodology adopted is similar to that of previous years but takes account of the reduced levels of debt and the ongoing sales that have been achieved including post year-end sales. We recognise market difficulties but, in our judgement, the record of our Manager in delivering sales amid challenging circumstances is an important consideration. We have also identified market risks and have factored these into our medium-term tactics for delivering our debt reduction and divestment programme.
We have additionally considered the effect of market dynamics, which lead us to believe that we are unlikely to achieve a full disposal of the entire portfolio in 2024. It remains our view that the interests of the Company are best served by continuing our carefully managed divestment programme through a further one-year extension of the life of the Company. The dramatic effect of bank-enforced sales by developers and the associated near-term erosion of valuations reinforces our view that triggering a wholesale disposal of our remaining portfolio would have a detrimental effect on shareholder value. Quite simply, the market does not have the capacity to absorb a higher volume of transactions at anything like the price levels that we would need to apply, and it is not clear whether such a sudden disposal would deliver a return of capital to shareholders. Accordingly, at our Annual General Meeting in December 2024, the Board will be seeking approval to extend the Company’s life for a further year.
As prefaced in our Interim Report and separately announced on 26 June 2024 the Board and the Manager have agreed a revised fee basis for the Manager’s compensation. This agreement now runs for the remaining life of the Company and continues the flat fee of US$100,000 per month. It allows for a reduction in the base fees payable from calendar year 2025 onwards, based on performance, a revised basis for any incentive fees, and is capped in any event at 5% of market capitalisation. Full details are set out in the Directors’ Report. We believe that providing certainty and suitable incentives is key to managing our remaining assets and debt to return the maximum amount of capital to shareholders.
Detailed updates on our portfolio are contained in the Manager’s Report. However, in summary form, the following should be noted:
The Waterside
The Waterside retains a distinctive position within the high-end residential market segment, as demonstrated by the sales and prices that have been achieved compared with rival developments. 29 units remain available for sale, including many on higher floors that have greater intrinsic valuations.
We have agreed that the Manager should terminate the active leasing of units as we prepare the remaining properties for sale. However, a number of attractive leasing opportunities continue to present themselves with terms that are carefully managed. The level of leasing is marginally higher – just above 70% occupancy and it remains an important contribution to debt servicing.
The Fountainside
Negotiations continue on potential sales of Fountainside units, although transactions have yet to be achieved. The four available villas are large in the context of the market and are challenged by the current environment, particularly in respect of mortgages for prospective purchasers.
The smaller remaining units have been prepared for sale. A series of frustrating procedural obstacles and steps have been imposed by government departments, delaying the release of the units onto the market. We remain of the view that once the required approvals have been achieved, sales will follow quickly, because there is clear and evident demand for units of their size and in their location.
Penha Heights
Challenges associated with selling this very special property remain. We believe the market will need to see a further recovery and increased confidence, even though the Manager has been engaged in innovative marketing of the property. It is to be hoped that its higher profile among a wider market of ultra-high net worth individuals will support the enhanced marketing that is to follow.
Macau and China
Macau’s economy has continued to recover, with double-digit growth. A return to its pre-COVID size is forecast for 2025, and although this is encouraging, it is later than previous economic forecasts. However, it may represent a more realistic and sustainable level of growth.
Confidence is the key component, from our perspective, and in this context, improving gaming and visitor numbers are important. Nevertheless, an evident slowdown in the non-gaming sector, which we have noted in earlier reports, remains a concern. It is a matter that requires government attention, notwithstanding that unemployment has been significantly reduced in the past year and further stimulus measures are being seen.
China’s economic data has remained poor and significant stimulus measures have recently been announced, although it is too soon to fully understand the effects; however, we note that equity markets have reacted positively. External confidence in China is now lower than during the immediate post-COVID era. The sector most relevant to our Company is, of course, real estate, and measures to stimulate the Chinese market have had only a limited effect. There has been a knock-on impact on lending institutions – especially amid continued signs of stress at some of the bigger property developers – that has played a part in the way banks have handled their loan portfolios, including in Macau.
Debt Management
Interest rates remained unhelpfully high throughout the reporting period. Debt service remains our highest cost, and a reduction of debt levels through sales remains a key near-term focus.
Banks have remained cautious and generally risk-averse as economic conditions and the real estate sector have worsened in China. We have benefited from open, constructive engagement between our lenders and the Manager, in which support for our considered, market-sensitive approach – including phased debt repayments to coincide with sales – has been helpful. This stands in marked contrast to the sell-off dynamic affecting primary developers in Macau.
There are signs that interest rates are finally easing, having potentially peaked amid developments in the United States. This will not only provide welcome relief to the Company, but it may also further improve market confidence, which will aid our divestment programme.
Financial Performance
Amid a credit squeeze in the property lending market that has dampened investment sentiment and transaction volume, our portfolio’s valuation declined 8% from 30 June 2023. The Company’s adjusted net asset value (NAV) was US$66.1 million as of 30 June 2024. This is equivalent to US$1.07 (85 pence) per share and represents a decline of 26.9% (27.1% in sterling terms) compared to the previous year. NAV, which records inventory at cost rather than market value, was US$0.75 per share (59 pence), down 29.4% from the previous year.
The Company has remained in compliance with its debt covenants. Its shares closed at 35.6 pence at the end of the reporting period, a decrease of 39.1% over the year. The share price discount to adjusted NAV increased to 58% as of 30 June 2024, up from 50% the previous year, detailed information about adjusted NAV is shown in Note 18. The recent weakness in the share price, which may be driven partly by broader market sentiment, has been noted, together with trading volumes, which remain very low.
Environmental Social and Governance
Our approach to the very limited but necessary maintenance and minor works across the property portfolio has focused mainly on end-of-lease remediation at The Waterside and continues to comply with our detailed ESG policy.
Governance remains at the core of how we approach our responsibilities, and our three-person Board has the necessary mix of diverse skillsets, gender and ethnicity. We continue to hold the view that in this very late stage of the Company’s life, changes to the Board would be counterproductive.
Non-executive Director Alan Clifton has exceeded the normal tenure guidance set out in external corporate governance codes. He continues to demonstrate independence through action, and his experience is important in the context of our broad functions. This, coupled with the challenges of finding a suitable director for what will be a comparatively short tenure amid such challenging market circumstances, is why we are proposing that Mr Clifton continues to serve as a director.
Our strategy is clearly defined: our objectives are to deliver a reduction and then elimination of debt followed by a return of capital at the earliest practicable opportunity, a strategy that will be delivered in the context of prevailing market dynamics.
Outlook
Looking beyond the near term factors that have affected the property market in Macau, the impact of easing restrictions and reduced property taxes, lower interest rates and signs of further economic stimulus measures provide a more encouraging medium term outlook and a basis for market confidence and sentiment to improve.
We will navigate through the near-term market challenges and continue looking for every opportunity to achieve our divestment objectives to repay debt and distribute capital back to our shareholders. This will continue to require a tactical approach to the market and to the sale of what remain high quality assets. This is especially the case for The Waterside where the reducing number of units available makes for a scarcity which we will look to exploit.
We believe that Macau will continue its post COVID recovery and see further economic growth with a return to historic levels of prosperity which will, in turn, support our strategy.
MARK HUNTLEY
CHAIRMAN
MACAU PROPERTY OPPORTUNITIES FUND LIMITED
27 September 2024