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16.07.2007 - A New Generation of Gaming Towns ("Commercial Real Estate") Las Vegas, Macau and Atlantic City – the names of these cities are well-known to everyone today as being among the world’s gambling capitals, and specifically because of their prominence blockbuster films. Many people have heard the story of Benjamin “Bugsy” Siegel, popularly believed to have been the impetus behind large-scale casino construction in Vegas and as immortalized in several movies about mobsters, or the tales of Chinese bureaucrats squandering state funds at the opening of casinos in Macau. Naturally, the Hollywood-fueled fantasies have little in common with reality. Indeed, Sin City in the 1990s became a respectable destination for families to rest, while, contrary to popular belief, games of chance are permitted in 36 U.S. states, and profits generated from gambling in Las Vegas comprise only one tenth of the city’s entire budget. Developers were the first to notice the new trends, thus a completely new type of commercial real estate – holiday resorts and casinos – was unveiled. Consequently, all of the afore-stated large gaming centers can already boast such projects, with Mandalay Bay and Winn being the most famous among them. The new generation of casino combines lodging, entertainment, retail and restaurants all in one location. Shopping centers, famous-name restaurants, conference halls, outdoor and indoor swimming pools, billiards halls, spacious children’s play areas, golf courses, show theaters, beauty centers, health spas, banks as well as medical centers and facilities are only a few of the obligatory features and attractions today at holiday resorts and casinos. From Houses of Ill Repute to Family Hotels Similar large-scale entertainment projects could also appear on the Russian market in the near future. In accordance with federal law No. 244, by 2009, the gambling industry will be banned throughout the country, with the exception of only four gambling zones located in the Kaliningrad Region, on the border of the Krasnodar Territory and Rostov Region, as well as in the Altai and Primore territories, respectively. Experts are certain that this does not entail gambling towns, but, rather, lively entertainment centers which will first of all attract tourists rather than gamblers. “Clients of gambling zones today are regular people who have decided to spend some of their money on entertainment, and one of these forms of entertainment could be games of chance, which is a large section of the clientele. The stereotype of gambling zones being places whose only means of revenue is generated from high-class gamblers frittering away millions is an incorrect image created by TV and Hollywood,” claims Neil Murphy, development director at Sun International. The first step to establishing successful gambling zones is readiness to adopt Western experience, but this does not seem to be an issue here. “We believe the Russian real estate market is ready to accept the new trends in the gambling industry, and we have even ceased calling Vegas and Macau “gambling zones,” as these locations today are for family rest and relaxation, with many areas of entertainment, one of which is gambling,” says Natasha Varnica, vice president at the international architecture firm IdeAttack, which specializes in designing recreational complexes. IdeAttack has already designed a plan for the Kaliningrad gambling zone. The plan envisages dividing the area into 10 thematic zones, including a dock for cruise ships, an aqua park, sea aquarium, spa zone, hotels and casinos, such as the Czar’s Court, Sea Yard, Neon Plaza, the Elite tower, Celestial Hotel and others. The project’s designer has estimated that the overall amount of investment will be $20 billion; however, the authorities are not willing to be so lavish. Indeed, German Gref, Minister of Economic Trade and Development, the project must be redesigned, while local authorities called the project too exuberant. ADM Group – which has signed an agreement with the Rostov and Krasnodarsk regions’ administrations, respectively, on cooperation in conducting the required market research and concept design for the southern gambling zone – also plans to invite world-renowned architects to design the Krasnodarsky-Rostovsky zone. “We are confident that international architectural companies with experience creating similar projects should be invited to design the concept for the gambling zone rather than local architects. We should concentrate on creating a full-fledged tourist complex with a complete entertainment infrastructure, and if everything is in-line with international standards, the leading gaming operators and investors will join the project,” confirms German Krashenninikov, general director of ADM Group. Furthermore, Evgeny Kovtun, vice president of the Association of Gambling Industry Representatives, is certain that Russian projects should have their own features, given that even quality hotels and casino will not draw gamblers from Monaco and Macau. “In terms of Russia, we must pay attention to the future participants in the gambling zone, and this entails developing the gambling zone as a whole, not in separate sections, as simply a hotel and a casino nearby, of course, will not draw a lot of players. A non-standard solution must be found for construction and the other features in terms of this zone. In other words, we need an ‘ace,’ without which there is no zone and there will not be one.” Who’ll Bet on Russia? An important question is whether investors will follow the architects and consultants. Indeed, large investments require quick returns on investment and solid guarantees first and foremost from the authorities. “The goals and policies of the legislative bodies must be clear first of all to begin investing in the gambling industry. If their intentions are to increase tax revenues and develop tourism, this is one matter, but, if the ultimate goal is simply to gather all casinos in one location to assist in fighting organized crime, this is another kettle of fish altogether. Investors must be positive that the authorities will not change the rules, that the government’s position is firm and that the legislative bodies can effectively protect against regulatory corruption,” says Murphy. However, practically everyone doubts that this matter will be settled legally within two years, as, even according to the most optimistic forecasts, only individual projects will succeed in entering the market by 2009. “It took six years to build the first casino in Las Vegas, where there was already electricity, manpower, the railroad and infrastructure, yet, in Russia, you may receive permission to purchase land and approval for a project in only two years. Also, the territory has not been surveyed, so it is not clear how the zones will ultimately be mapped. So, two years is absolutely not a reasonable timeframe to build new towns in these locations, and, in the best case scenario, there will be plots to buy, register and receive project approval. An important nuance is that the law stipulates that a zone is set for 10 years and then could be altered. Namely, a person could invest hundreds of millions of dollars in a project which could fold in ten years without the persons participation, so this is a huge risk,” confirms Lavrenty Gubin, press secretary at Storm International B.V., one of Russia’s largest gambling operators. “So far, there have been many bold announcements, but a developer will only invest billions of dollars if he finds another party willing to foot the bill. There is a significant number of financial organizations today that are interested in investing in projects and delivering promising forecasts, but they only wish to earn money from consulting, so far,” believes Murphy. Each Vegas Gets Its Own Desert The locations designated by the government for the future sin cities have given rise to numerous questions. “If the Krasnodarsk Territory will house a zone, why should it be in Port Caton and not Sochi, where the project would be significantly more successful financially? Or, why Russky Island in the Primore Territory rather than the Khassansky district, where the Chinese border is only half an hour by car? In my opinion, the Kaliningradsky Region and Altai Territory are not good choices, and it would be better to substitute these two areas for the Moscow and Leningrad regions, respectively. The Krasnodarsky-Rostovsky zone has the best prospects today, I believe, if the project is completed in an intelligent manner,” says Kovtun. However, local players believe the Krasnodarsky-Rostovsky zone is not in the best location, and the regional association of gambling industry representatives in the Southern Federal District has already sent a letter of appeal to the Rostov Region administration, suggesting the transfer of the zone from Port Caton to the Tsukerov district in the Azov district. Indeed, the appeal letter reads as follows: “There are not any federal sources for financing the construction of the southern gaming zone; thereby it is advisable to transfer the borders of said zone to the Tsukerov district located on the border of the Azov district of the Rostov Region and the Kuschevsk district of the Krasnodarsk Territory. Accordingly, expenditures from the regional budget for construction of the gambling zone infrastructure will be reduced several-fold and the facility will be delivered for use in the timeframe as set by the law. The Moscow-Sochi federal highway passing by the gambling zone would be practically the only road in southern Russia to guarantee a year-round supply of tourists, thereby significantly increasing the investment attractiveness of the project for the southern gambling zone.” Additionally, the climate plays a big role. “The sun shines year-round in Las Vegas, while there is little chance of being particularly satisfied in Kaliningrad in November,” says Gubin. However, Western specialists are not so pessimistic. “All four of the zones in Russia have good prospects. We believe that the key to success for each one is taking advantage of the local features. The Kaliningrad and Krasnodarsky-Rostovsky zone have the best chances of becoming Russian versions of Las Vegas and Macau, while Altai and Primore will very likely not attract a large number of visitors, so it would be better from the very start to have the gambling zones here be more exclusive,” says Varnica. Far and Away from Civilization Russia’s Vegas’s must arise from a clean field, as putting the beautiful idea into practice will require multi-million-dollar investment in the infrastructure. “First of all, investors look at the condition of the infrastructure – the roads, communications, gas, electricity, water and telecommunications. However, the designated gambling zones in Russia are practically devoid of developed infrastructure – there are not any roads or airports; therefore, under these conditions, the local authorities must work closely with the developers to build up the infrastructure, which will require significant investment. Moreover, the authorities must establish relations with the airline companies, given that it is obvious that most of the visitors will be flying in from large cities, particularly from Moscow. I repeat – nobody will develop the gambling zones if there are not clear guarantees on the part of the government and/or if illegal gambling flourishes in large cities,” confirms Murphy. Russian experts note that contrary to the established belief that Las Vegas, the main symbol of the gambling industry, grew in the desert, the idea of building casinos far and away from main population concentrations, in places where man has barely set foot, flies in the face of international experience and practice. “The less-than-favorable aspect of the Russian projects for constructing the gambling zones is that such zones will be established outside populated areas, when international experience shows that all prosperous gambling zones have been set up in populated areas. Indeed, utilities, manpower and the tourist industry are all established in populated areas, specifically a supply of clients, without whom business cannot survive. The development of the gambling zones is not possible without a functioning tourist infrastructure. In Vegas, profits from the gambling industry account for only one tenth of the city’s overall budget, so it is attendant rather than dominant. However, just the opposite is envisaged, with the gambling zone being created in the hinterlands and then the tourist industry growing. Modern economic development puts the possibility of fulfilling this idea in serious doubt. I believe that it is not worth breaking the mold established by other countries, especially experience from the past century, ” confirms Nikolai Oganezov, director of the Regional Association of Gambling Industry Representative in the Southern Federal District. Not a Soul to Shoot Craps Most gaming industry operators have already announced that they will not enter the gambling zones, irrespective of how picturesque they may be. “In the best case scenario, a few people will be willing to go see the new zones out of interest or curiosity. The Krasnodarsk Territory most likely will be attractive in the summertime for citizens of Moscow, but the summer is only three to four months long, and this is not enough time for an establishment to recoup its investment and realize a profit. The far-east zone is geared for the most part toward foreign visitors, such as those from China; however, one must keep in mind that Russia has a rather strict visa policy, and, moreover, China is taking serious steps to prevent money from being taken out of the country for games of chance. Kaliningrad is aimed at the countries of Eastern Europe, but, first of all, they already have their own gambling establishments, and, secondly, there are more accessible and attractive Eastern European countries right next door for tourists. Moreover, a trip to Altai is more expensive than traveling to a European resort. In other words, according to our estimates, all of the gambling zones in Russia are going to be vacant,” reckons Gubin. Ritzio Entertainment Group, the largest gaming industry operator in Eastern Europe, also finds it difficult to envision the prospects of operating in the new gambling zones. Larisa Shishkina, the holding’s press secretary, states: “The main impression is that the major goal is not to develop the gambling zones, but, rather, simply to eliminate the gambling industry from the cities. So far, the situation has changed each month, so it is difficult to make any long-term forecasts.” However, Krashenninikov is certain that the gaming operators will come on board just as soon as they see the projects in operation. According to him, their skepticism today is based on nobody wishing to abandon established locations in Moscow. At any rate, if the new zones are not in operation by 2009 (which is a strong possibility), experts believe that most likely semi-legal operators will fill the vacated niche. In this case, or without it, risks will increase for order and management. Rules of the Game Although Russia’s gambling zones could not compete with the likes of Las Vegas and Macau, experts believe that these zones do have a future. “The necessity of obtaining a visa, the climate as well as the language barrier will put off most clients immediately. However, I believe that the correct strategy and sensible policies on the part of the authorities will allow several of these zones to open large casinos which would interest even international operators,” says Murphy. But he does have reservations: “I believe that each zone could host two large casinos, at the most, with 100 tables and around 1,500 slot and gambling machines, each. It is crazy to think it is possible to build another Vegas or Macau overnight, especially since Vegas needed fifty years to become the city it is today. In Atlantic City, there are only a few casinos so far, and they are located nearby the largest and richest cities in the U.S. Considering everything previously stated, I doubt that Sun International would be interested in the Russian projects.” The authorities must make the utmost effort to ensure that the gambling zones are successful; however, a number of issues have so far not been resolved at even the legislative level. Advertising of gambling establishments is still not permitted, so delivering information to clients on the new gambling zones will not be easy. Moreover, the status of the zones is established for only 10 years, which is even less than the forecasts for return on investment. The issue of border regulations on the territory of the Azov district, adjacent to the Gulf of Taganrog water zone, has still not been resolved. Furthermore, it is not clear how relations will be established with the owners of the land plots situated within the boundaries of the future gambling zones, as well as with those owners of the neighboring plots. In the meantime, the timeframe allotted for construction is quickly coming to a close. The government seems to be held captive by the image of Las Vegas, as created by popular cultures; however, although this image is colorful, it does not fit well with Russia’s realities, experts lament. “Those who have suggested creating these zones, based on the successful model of Las Vegas, must ignore the legend of Bugsy Siegel standing in the desert and proclaiming, ‘Sin City will be built here.’ Instead, these people must seek the advice of professionals who know the history of the gambling business in every country, the legislation for promoting the development of such projects as well as many other factors,” confirms Kovtun. “Believing in legends is not worth it, especially since everything happed differently. The creation and, most importantly, the future successful operation of large-scale holiday resorts and casinos is a complicated political, public and economic task. I am certain that this can happen in Russia, but not in the short-term prospect.” It will soon be clear whether exuberant holiday resorts will replace today’s bucolic villages. In the meantime, experts believe that if solid investors do not appear in the very near future, then it will be fully justified to say that the legislators have erred and that it is time to find a way to correct the error. Pavel Chernyshov Source: Commercial Real Estate, #14 (74) |  |  | 
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