Hong Kong Disney: Growing pains in the Mouse's smallest property

On Tuesday, Disney announced that Hong Kong Disneyland, which opened in 2005, will receive a $468 million makeover. The remodeling, which is intended to improve the park's disappointing attendance numbers, will vastly expand the number of rides and significantly increase the size of the park.

On one level, this is a familiar problem for Disney (DIS). After all, the company's premier attraction, Walt Disney World, was partially the result of high property values. While Anaheim's Disneyland was convenient to Los Angeles, the high price of California real estate made expansion difficult: today, the park occupies 160 acres, which are tightly boxed in by a plethora of cheap tourist traps.

When Walt Disney decided to open his East Coast park, he looked for a space that was convenient for public transportation and had an almost unlimited supply of cheap, unattractive land. After deciding on Orlando, he used a collection of dummy corporations to purchase 27,400 acres, or 43 square miles, of land. This impressive amount of property enabled Disney to pursue an almost unlimited building program.

Unlimited land is not an option in Hong Kong. In terms of real estate, it is the fifth most expensive city in the world, with apartment space going for $4,507 per square foot. By comparison, property in New York -- America's most expensive city -- averages out to $4,320 per square foot. In context, then, building a theme park in Hong Kong would be slightly more expensive than building a theme park in Manhattan.

Part of the reason that Disney was able to afford the park lies in the fact that it is built on a reclaimed toxic waste dump. While not exactly cheap, the property was more reasonable than other spaces, and Disney was able to snatch up 310 acres. However, at 100 acres, the park itself is Disney's smallest, which helps account for its unimpressive attendance. Thus far, Hong Kong Disney has attracted between 4 and 5.2 million visitors per year, to a target of 5.6 million.

Another factor is the emergence of Shanghai's Disney park, which is slated to open in 2014. Although Shanghai real estate isn't exactly cheap, it is far less expensive than land in Hong Kong, which suggests that the new park will be a lot larger than its offshore cousin. More importantly, although Hong Kong has been part of the People's Republic since 1997, there is still a great deal of competition between the little city and the rest of China. To put it mildly, Hong Kong isn't interested in coming in second to Shanghai.

In some ways, it already looks like Hong Kong's government is separating itself from the park. Currently a 57 percent shareholder, the government is selling 5 percent of its stake to Disney. Also, it is reducing its loans to the company to around $1 billion by converting some portions to equity.

It remains to be seen if Disney's new, improved park, with 23 percent more space and 30 more attractions, will bring in the visitors. Then again, with vacation expenditures in decline around the globe, Hong Kong Disney's problems may simply be a demonstration that it is, indeed, a small world after all.
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