IN A desperate bid to help rid Macau of its glut of unsold flats, the Macau government has been offering first-time buyers attractive 4 per cent subsidies on their mortgages as of August 1. In case of a flood of demand, the authorities decided to cap the offer to the first 5,000 successful applicants so as not to burst their budget. Yet as of Friday, just 180 applications had been received. Such is the weak state of affairs, even with such sweeteners few will dare dip in their toes in the market for fear of being scalded. No one knows exactly how many unsold or sold but empty flats there are in the Portuguese-administered enclave, only that the situation is bad - in fact, very bad. Estimates vary from 30,000 to 60,000 flats, depending on who you ask, in a territory with a population of 424,000. In a bid to get a clearer picture, the government asked Macau's electricity company to conduct a survey of completed apartments not tapping their supply. As of the end of June, it estimated there were 31,000 apartments vacant, says Maria Marques, Macau Housing Department vice-president. Anthony Frazer, the chief executive of Hongkong Bank in Macau, estimates there are about 40,000 to 45,000 vacant flats in the enclave. Not even the Real Estate Association of Macau (Ream) knows for sure. It is currently conducting a survey. However, with no stock markets, analysts, or international-style property consultants to supply or demand hard figures, there are no official or reliable independent figures for current or future new supply. A quick drive around the enclave will show a frightening number of new residential and office blocks under construction, suggesting the situation is going to get worse before it gets better. The islands of Taipa and Coloane are being blanketed with high rise apartments. The giant Nam Van Lakes development on reclaimed land off the Macau peninsula alone will increase the enclave's land mass by 20 per cent and provide 130 hectares and 16 million square feet of real estate upon completion. Some developers are in a dilemma whether to finish these projects. If they delay or do not complete the developments they stand little chance of paying the government its hefty land premiums. But if they do, they may recover some money from sales to help cover costs, but they will only add to the massive over-supply problem. Sadly for Macau, most have opted to carry on building unneeded tower blocks. Developers with leasehold sites have found it hard to mothball projects because of time constraints. The government is owed billions of dollars in unpaid or late premium payments and has been negotiating new terms with developers rather than forcing them to go under. Along with gambling taxes, real estate premiums have become the Macau government's largest revenue earner. Consequently any major problem in the real estate sector damages the enclave at its core. Ms Marques says residential prices have fallen 30 per cent in the past two years having climbed 40 per cent in the two years before that. But developers and the man on the street claim the rise and fall to be far more dramatic. Property prices are said to have halved in some buildings and districts. The housing market has been worse hit. But judging by planned future supply, the office market is heading for bigger trouble. Ream vice-president Lau Ngai-leung estimates the vacancy rate for new office blocks is already 50 per cent, but compared to new residential developments this is considered acceptable. 'Many of these offices were sold to investors who left the units empty and are waiting to sell when the market recovers,' says Mr Lau. The situation is said to be most critical in the new Nape office area of the Macau peninsular, near the Mandarin Hotel and World Trade Centre, where there are so many virtually empty office blocks it is known as the 'ghost town'. Older office blocks, particularly near the waterfront, have faired better. Everyone knows what to blame for the current dilemma - hot money from China - though no one appears to have any concrete ideas about getting Macau out of the mire. For almost 450 years Macau was a sleepy backwater. It developed into an entrepot for Chinese trade with the West in the past century, but its success paled in the shadow of Hong Kong. Life was comfortable, the economy slowly but steadily grew, and the population was largely content. Then, less than 10 years ago, billions of dollars started pouring over the border from China. As the bamboo curtain fell and mainland corporations opened up to trading with the West, many found themselves with large sums of foreign exchange earnings they were loathed to repatriate. If they took the money back to China they faced compulsory exchange into the weak yuan. Hedging their money off-shore in the highly liquid property markets of Hong Kong and Macau was seen as an attractive, if somewhat unpatriotic alternative. In Macau, a building boom with a fever somewhat akin to a gold-rush ensued. With mainland money, contractors rushed to build, build, build. Locals jumped on the bandwagon, confident they could quickly pre-sale a project within a few months providing the means to pay off premiums and other costs and reap big profits. The Bank of China and its many associates in the enclave lent freely. They were happily making big returns. Many people became very rich, very quick. 'A lot of people paid a fortune for land sites at the top of the market,' Mr Frazer said. Speculators snapped up space, even though they had no practical need for it. Then in 1993 China's vice-premier and economic tsar, Zhu Rongji , spoiled it all, announcing his famed austerity measures. The hot money stopped and the Bank of China in Macau, quick to respond to an expected decline in the property market, dramatically slowed the pace of its lending. Bankers say the Bank of China was right to protect itself with such precautionary measures, but they say the speed of its withdrawal only heightened the crisis. Hongkong Bank claims it took a more conservative approach from the start. Today the enclave has millions of square feet of completed or semi-completed space with no practical use. It is hard to see where the demand is going to come from. One solution would be to increase the enclave's small population. Developers argued recently for relaxed passport controls for Hong Kong Chinese buying property in Macau. Others argue for the cap on mainland Chinese immigrants to be relaxed. 'If there are 30,000 flats empty, you are going to need 60,000 people to come [to Macau],' says Joao Domingos, president of the Macau Trade & Investment Institute. 'That's not very easy in a year or two-year period to cope with the immediate problem in hand.' There have been suggestions of trying to double Macau's population to one million to help cope with the real estate supply demands and sustain economic growth. But then there would be a negative impact on social welfare, education, hospitals and overall quality of life, Florina Chan, deputy director of Macau Government Economic Services, said. There had been high hopes that Macau's new airport - opened earlier this year - would spark another boom. But to date, it has been largely a damp squib. Only flights from Taiwan are said to contain respectable passenger loads. Visitor arrivals are static, as is gambling (which accounts for 60 per cent of all money in circulation), and the manufacturing sector is small. With the construction of new hotels, occupancy rates slipped from their heyday of more than 80 per cent to 63 per cent. There have been proposals for an extension to Macau's new port, but this has been held up amid a dispute among operators. Even so, many people question the need. Being shallow water the port cannot take large vessels, only transfer breakdown and transfer containers to Hong Kong. Even then, there are major new container and deep water ports across the border in Zhuhai which defeat the point of using Macau as an entrepot. Vitor Ng, president of the Macau Import and Export Corp, said: 'Big projects are all very good for Macau, but how to utilise these projects for Macau is another question.' When China's hot money stopped pouring into Hong Kong's real estate market, the sector was robust enough to cope without it. In Macau, there was virtually no genuine end-user demand. There are many problems and few answers. The Governor is scrapping interest payments on late premium payments for some developers to prevent them from going under. Developers are cutting corners and using cheaper materials to complete projects at minimum cost. The government is also offering subsidised mortgages. But many still criticise it for being apathetic. It still takes 12 months for the government to formally register new flats and until this is done banks cannot grant mortgages to first-time buyers. Many get round this restriction by coming to special bridging agreements with favoured developers. Registration takes place in dusty old offices without computerisation. Some Portuguese administrators are said to be happy to live with the situation rather than rock the boat so close to their free ticket home in 1999, when Macau reverts back to China. Gross Domestic Product is still forecast to be about 6 per cent this year, but Macau could be heading towards a slowdown, warns Hongkong Bank's Mr Frazer. 'This is a town that has never seen a recession before,' he says. Mr Ng cannot wait for the arrival of the new Chinese administration, hoping Beijing will throw it a lifeline. 'The Central government won't let Hong Kong and Macau down,' he says.