I present my report for the first six months of our financial year and the second half of the calendar year to 31 December 2023.

We witnessed continued progress during the period, as Macau transitioned out of COVID-19 restrictions. The territory’s economy gained significant momentum compared to the COVID period, driven by strong gaming revenues and increased visitor numbers. Although its economic indicators have not yet returned to pre-COVID levels, the final six months of 2023 suggest that a stronger performance is likely in the current period.

Despite this broadly positive backdrop, the property market — especially the higher-end luxury segment — has yet to respond as favourably as other areas of the economy, as a degree of caution remains. The twin factors of a sluggish Chinese economy clearly experiencing major issues, including in its own real estate sector, coupled with higher interest rates, continue to affect investor appetite for high-end real estate and have also increased our on-going debt service costs.

Despite these challenging circumstances, we have made further divestment progress at The Waterside, where more than one-third of units have now been sold or contracted for sale. Momentum is also building in the form of increased interest in The Fountainside and, to an extent, Penha Heights, which remains a unique opportunity as one of the very few prime detached properties for sale in Macau.

During H2 2023, seven units at The Waterside were sold during the six month period ended 31st December 2023. Sale prices reflected a discount to valuation, demonstrating our pragmatic approach to delivering continued divestment by pricing to maximise necessary sales amid changing demand patterns and challenging market dynamics. More valuable higher-level units are being prepared for sale in what we believe will be an improving market. Sale proceeds continued to be applied to reducing our current levels of debt, with the balance deployed to support working capital.

In a welcome development, Macau’s government announced a series of measures to provide relief to the property sector that came into effect in January 2024. These are fully explained in the Manager’s Report and constitute a much-needed sign of support for the real estate market. We have also seen continued stimulus applied by mainland Chinese authorities to address the economic situation in China. It remains to be seen whether further targeted stimulus measures will follow in Macau. Such measures would provide long-sought support after many years of difficulty in the property sector and anti-speculation real estate market measures that are no longer required. In the meantime, the Lunar New Year period has slowed sales activity, making it too early to assess the near-term effects of the changes. Nevertheless, they can be seen only as helpful following years of stifling restrictions.

For the first time in four years the Board was able to hold a meeting in Macau. We saw at first-hand the territory’s vibrant, dynamic gaming and hospitality sectors, which is now perhaps even more vibrant and dynamic than it was pre-COVID. It was helpful to hear commentary directly from our valuers and other experts, and to witness the significant growth that has taken place in the casino and hotel sectors. Investment in infrastructure continues within the region, where it has become clear that fast rail travel will be widely available and increasingly important, alongside improvements to facilitate border crossings. The bridge between Zhuhai, Hong Kong and Macau is clearly driving visitor numbers, and the expansion of Macau’s light rail system will bring improved transportation in the territory. We spent time with the management team, whose resilience after the hardships of the COVID period is commendable, as is their continuing commitment to delivering our divestment plan.

The Waterside retains a superior position relative to both other towers in One Central and to other luxury developments. This has maintained a relative premium pricing differential that is helpful amid market conditions in which very low transaction volumes persist. Leased units now represent 50% of available space at the development, and our leasing strategy aims to ensure higher rental levels. We plan to scale back leasing to make units available for sale as we progress through 2024.

Sales enquiries relating to The Fountainside have increased as a result of broader marketing strategies explained in the Manager’s report. It is expected that the development’s converted small units, valued at lower lump sums, will be available for sale after the approval of additional alterations.

Penha Heights has attracted an increased numbers of viewings, but it is clear that sale opportunities will improve as and when more confidence and momentum appears in the Chinese economy. This unique detached property is likely to require more time and careful continued marketing to find a buyer.

As our portfolio consolidates and our debt level is reduced, we remain alert to opportunities whereby we might achieve a whole-portfolio sale, although market conditions are not currently offering any such prospects.

Macau’s economy continued to show signs of a very positive recovery from the low ebb seen at the end of the territory’s COVID restrictions, with the key gaming and tourism sectors driving robust year-on-year expansion. During our visit, we were able to witness first-hand the increased activity reported in both gaming and tourism. The phenomenon of “revenge tourism” was much in evidence, with the mood among visitors appearing cheerful and retail outlets solidly supported, which bodes well for further progress.

The economy still has some way to go before it recovers to pre-COVID levels, but the direction seems clear and broadly positive. Unemployment has declined, although some parts of the economy remain subdued, affected in part by easier cross-border travel that has allowed local consumers to access goods and services in mainland China at lower prices than at home. Whether this prompts Macau’s government to introduce further stimulus and support remains to be seen.

Mainland China is Macau’s key market, and the performance of the country’s economy remains lacklustre. China’s economic woes have prompted authorities there to continue to apply stimulus measures, including moves to support both the finance and real estate sectors. Recent statistics suggest that Chinese manufacturing has also continued to expand, albeit at a slower-than-normal pace, and the services sector has also shown improvement. The significant rebound expected following the end of COVID restrictions did not materialise, and China’s overall recovery has been somewhat subdued.

In China’s real estate sector, measures introduced to impose de-leveraging on property developers have translated into a full-scale down cycle. Real estate constitutes an important component of the Chinese economy and it has a wealth effect across the population. The key concern is that the longer consumer sentiment is affected, the more sluggish China’s economy will remain. However, it should be remembered that Macau occupies a unique position as the only Chinese territory in which gaming is legal, and with such a large population to target, the impact of current and growing visitor numbers on Macau’s economy should continue to be positive, especially given the significant investment in connectivity and infrastructure that is taking place.

An improvement in the Chinese property market is regarded as the potential first stage of any turnaround, and it may already be under way because new developments are not breaking ground at the pace seen previously. It will take years for China to absorb its current real estate inventory, and direct and indirect measures are being applied to provide support, including official government-led encouragement of relocation. There appears to be an official willingness to support the stock market and property sector, and any improvement in confidence will aid similar sentiment in Macau.

As at 31 December 2023, the Company’s unaudited adjusted net Asset Value (NAV) was US$81.7 million, equivalent to US$1.32 (104 pence*) per share, which represents a decline of 10.5% over the period.

The Company’s shares closed at 40.6 pence at the end of the reporting period, decline of 31% over the six-month period. The share price discount to Adjusted NAV had increased to 60.9% as of 31 December 2023, from 49.5% over the six-month period.

Our share price is monitored daily, and its recent decline follows a broader issue experienced across the entire investment fund sector that has affected real estate funds in particular. Both the Board and the Manager recognise that delivering a distribution of capital is key to closing the current discount between the Company’s share price and its adjusted NAV. This remains our core focus for 2024, although in the near term, repaying and reducing our debt levels and debt service costs is critical. With demands on available cash focused on debt repayment, any measures to buy back shares cannot be implemented at this time.

The Board appreciated the overwhelming support for extending the life of the Company provided by the vote at the Annual General Meeting. We remain convinced that a managed, orderly divestment of assets will achieve the best return for Shareholders.

Revised remuneration has been agreed in principle with the Manager that will cover the remaining term of the engagement. The monthly management fee remains unchanged, but starting in 2025, the Board retains the right to reduce the management fee to US$80,000 per month by providing one month’s advance notice to the Manager. This would be subject to an affirmative vote to continue the life of the Company, and it recognises the clear intention to deliver meaningful progress on divestment in 2024.

The Board has also agreed with the Manager to amend the thresholds for the realisation fee, subject to divestment hurdles being met in 2024. Further details on the Manager remuneration will be announced in due course. The Board believes that the terms are firmly aligned with the Company’s stated divestment objective of ensuring a complete portfolio sale is achieved with the associated return of capital to Shareholders.

Both the management fee and realisation fee are subject to an overall cap of 4.99% of the Company’s market capitalisation. If the Company’s life is extended into 2025, the notice period for termination of the management engagement will be reduced to three months.

The economic recovery we have witnessed in Macau is both encouraging and significant in the context of our divestment strategy. However, the robust nature of the growth in gaming and tourism has yet to translate into a meaningful improvement in our segment of the real estate market, which remains challenged by very low transaction volumes.

Continued careful management is required as we move ahead with the divestment of our remaining assets following two extremely difficult years; 2022 was Macau’s worst year for real estate transactions in 40 years, while 2023 was only a little better.

The relaxation of stifling and largely unnecessary constraints on property market activity has yet to translate into increased demand. Property developers continue to lobby for further measures to stimulate and support the higher-end market segment. Such measures might include a “golden visa” programme linked to property purchases above a certain value threshold, which would mirror a similar incentive in operation in Hong Kong that is designed to revive the territory’s status as a financial centre and boost its revenue. The removal of the foreign investor property purchase stamp duty of 10%, which acts as a disincentive to overseas investment in Macau’s property sector, would be another helpful measure. Hong Kong has just announced the removal of such extra stamp duties on all residential transactions.

Were such improvements to be implemented they would undoubtedly aid market sentiment. However, we must be mindful of the need to manage the company within current constraints. This is how we must continue to operate in order to achieve the disposal of our portfolio, to reduce and repay our debt obligations, whilst maintaining our core objective of delivering the earliest possible return of capital to our Shareholders.


Mark Huntley


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