Macau Gaming Law series part 11: 10-year concessions hamper investment in Macau

Welcome to the eleventh in a series of articles on the Macau gaming law IAG is publishing throughout the month of March and early April:

One of the biggest changes to the Macau gaming law has been the shift from 20-year concessions to 10-year concessions. The Macau government put forth arguments to justify this in its report on the gaming law public consultation released on 23 December 2021, saying, “the current investment environment and land resources differ from the situation of the public tender held in 2002.” The report also cited a view that “[since] the casino equipment and facilities will revert to the Macau SAR at the end of the current concession period, new concessionaires may not need the time to build casinos, so the period of concession after the revision of the law should not be too long.” It’s almost as if the government is saying that Macau is built, so we don’t need to build anymore.

However, this view misses three key factors.

The first of these is the inexorable shift to the mass market. Even before the demise of the junket industry we have been witnessing over the past few months, the structure of Macau’s GGR has been shifting from VIP towards premium mass and mass play. This means more visitors (but less gambling by each visitor), which in turn means more demand for hotel rooms. More hotel rooms means more hotels, which means more investment.

Las Vegas has, depending on precisely how you define the city limits, around 160,000 hotel rooms. At last check Macau has just over 40,000 – only a quarter of its US counterpart and certainly way less than we need for a purely mass-driven market.

The second key factor is the need for ongoing refurbishment. For Macau’s IRs to continue to offer the world-class five-star offering they do, hotel rooms and other property hardware needs to be kept modern, fresh and up to date. The typical life cycle of a five-star IR hotel room offering is around seven years. After that time, hotels and other public spaces need to be refurbished to keep their wow factor. Once again, this means more investment in the form of capex – on an ongoing and cyclical basis.

The third factor to consider here is the reality of the “lost COVID years.” Both 2020 and 2021 were write-offs for the Macau IR industry, and 2022 is shaping up that way too, with Q1 GGR down 77% on the first quarter of 2019. Morgan Stanley recently noted that industry debt has risen from around US$5 billion pre-COVID to US$20 billion at the end of 2021. These “COVID years” are simply being lost from the concession period – with the concessionaires booking ongoing losses that need to be recouped in the presumably better years to come, before they can finally start thinking about turning a profit once again.

Far from Macau’s capex investment cycle being over, the shift to mass with its demand for more hotel rooms and the need to constantly refurbish means the concessionaires need to continually invest. But with only a guaranteed 10 years to recoup investments – and with likely three years of the 2020s lost to COVID – is this long enough to act as a real incentive for the concessionaires to make the investments Macau needs?

The historians amongst you will remember the two monopoly concession periods prior to the current concession period were 40 years apiece – so over the past century the three concession periods have averaged around 33 years in length. The reduction to 10 years is yet another factor making Macau less attractive to commercial gaming operators.

The next article in this series will be published in the next few days.

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