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Transcript
Today we are going to look at what a good real estate investment looks like. In today’s example we are going to focus on growth potential. When you buy real estate for an investment, you need growth potential. So here we are in Macao, China.
Macao is the historical Portuguese settlement in China and its reputation for being the next Vegas is growing. The amount of China’s population with disposable income is growing year after year. Any business positioned to entertain these people will experience large growth. China’s population is the biggest in the world; 1.3 Billion people. That is a big market! China also has a policy that encourages bringing the poor earning farmers into the cities where they can earn more money. Macao is managed independently from the rest of China so they are able to focus on nurturing the entertainment sector to flourish in a sustainable way. The development here of the Cotai Strip is the most exciting in the region, and one could argue, maybe even in the world.
The Venetian Macao is the anchor for this development, it is the fourth largest building in the world by usable floor space. It has 10.5 million square feet of floor space. It is without question the largest casino in the world. You could stay within the walls of the Venetian and never have to leave. You can enjoy yourself comfortably in its theatres, its convention rooms, its high end shops and restaurants. I forgot to mention it also has a casino and hotel.
Others are joining this development at the Cotai Strip as well with their own casino, hotel and boutiques and theatres. Some of the buildings that are already completed are the Grand Waldo Hotel, the Four Seasons, and also the City of Dreams consisting of the Hard Rock Hotel and Casino, the Grand Hyatt, and also the Crowne Towers, a six star hotel. More are still being built right now and others are planning to join this exciting development.
With all real estate investments there is two ways to make money. One is through the growth potential, and the second is cash flow. This development is an extreme example of growth potential. The owners of the Venetian paid 2.6 Billion dollars for the land and structure, their plan is to wait while the Chinese people develop their economy and have more and more money to spend on entertainment. They will increasing ly come to Macao to spend their money on the shows, casinos, hotels, restaurants and shops. Then this structure will have paid for itself many times over.
Growth potential is important! In this case, the cash flow component is not as critical. The project is still in its infancy. They are currently receiving an annual return of 5% on their investment. For China, an investor would not be happy with this as there are other growth opportunities in China at the moment that one could take advantage of that would tower over the 5% ROI. This development is focused on the growth potential, the future. When you have a high growth potential you could almost justify taking a loss in the cash flow side of the equation. Your growth potential will make up for it in the long run.
Most of us understand growth potential as increasing your equity. So to summarize, the strategy behind growth potential is to build a structure for 2.6 Billion dollars, and sell it in the future, once the market has matured for 260 Billion (a figure I just made up – don’t quote me on this!) Even if you lost a billion dollars a year it doesn’t matter. In this case, they are actually making money, they are making about half a billion dollars per year profit.
So remember this example when you are buying real estate for an investment. Look for growth potential. You want to buy something in an area that is being developed. You don’t want to buy in an area that is already developed, because there is no growth potential. This is a deep subject that we can discuss together and we can take into consideration your specific case and circumstances and goals. So when you are ready to invest in real estate, give me a call and we can discuss it.
Could you speak a little bit about real estate bubbles. is toronto in one is china in one? what is going to happen in the next couple years?
No, its not right! you are encouraging people to buy real estate in other countries, U.S, mexico and now china, what about here? we have the best market right here! you should tell people to buy here!
This blog helped me explain real estate to my son. Thanks
but what about land ownership? do shareholders really own the land? or is it still owned by the government? they are communists you know.
Yes, currently, foreigners (people and corporations) are permitted to purchase and lease property anywhere in China.
very wise and grateful you are. i invite you come china again. we wecome you we thank you for visit.
the real cause of all this is that we have too much debt, and china has a surplus of cash. investors are going to go where there is money. and its not us who has it. its a shame.
you have made a complex subject very easy to understand. i can see now why we are losing jobs to china. i am going to go learn manadarin i think.
they are having to lay some workers off now at this casino arent they?
China may have a deflation in real estate eventually too just like the rest of the world.
China’s housing market is different than us. It has ballooned into a bubble because, there are no property taxes in China, so the costs of carrying empty homes is very low. Also, property values have risen for decades, so the average Chinese household considers real estate a much safer bet against inflation than the stock market which crashed in 2006
The only thing that is different about us, is that in China they actually have cash, while we have credit. That is the reason there will be no crash in China. Cash vs Credit makes all the difference.
Your video is amazing. You see connections between things I never imagined. Nice hat BTW.
Casinos are evil! Can’t they think to build something more useful to society? Even a roller coaster would have been better.
Amazing article it is starting to make sense to me! Don’t bash the casinos! They are the real entrepreneurs.
I think that the influence of the united states is on the way down, I have to agree with your earlier article. This is just a very specific symptom of the decline.
I am moving to singapore. thats where the action will be, not north america
If you buy in any of these emerging markets china, india SE Asia, it doesnt matter, if you buy here, you will do well. These are the only places in the world with real growth.
You should read this weeks economist, there is a great report that elaborates on your artilcle. It talks about how a lot of the innovation in the world is being done in China and this is what will really drive their economy.
If you keep you real estate property well maintained, it will grow in value. that is the real secret. Maintenance.
I don’t think any of us can truly comprehend the massive task that was required to build this facility and what will be required to continue the development. This is a true wonder of the world a great achievement.
So does this apply to a house I want to buy? I should buy/build in an area that is being developed? How will I know my children will go to a good school? All I see in these areas are signs saying ‘you wont have a good school’
These crazy countries don’t have the laws like we have in the United States. The best real estate is still in America!
Growth potential is the only reason to buy real estate. Why else would someone buy something so difficult to sell?
Does anyone know why all these developing countries are doing so well? The growth rates are crazy high! I am sure they will have a bubble too.