The Japan Gaming Congress held earlier this month was the first major conference to bring together all the potential players since a bill was passed in December toward licensing casinos in the country.

The attendees included regional and national government representatives, casino gaming operators and suppliers; and potential lenders and investors.

By most accounts, by the time the conference ended on May 11 at the Grand Hyatt in Tokyo, the excitement was palpable at the prospects of developing casinos and related entertainment facilities in Japan.

This is perhaps unsurprising as investment bank CLSA estimates gaming revenue in Japan could surpass US$25 billion a year. Some estimates put it much higher.

Regardless of the revenue numbers used, Japan is seen as the coveted prize in the gaming industry and will be on par with Singapore and Macau, the two best markets financially today.

Fireworks explode over Parisian Macao as part of the Las Vegas Sands development during its opening ceremony in Macau, China. September 13, 2016. Reuters/Bobby Yip.
Fireworks explode over Parisian Macao as part of the Las Vegas Sands development during its opening ceremony in Macau, China. September 13, 2016. Reuters/Bobby Yip.

However, the elephant in the room at the Tokyo congress was the lack of detail to define any potential gaming investment in Japan.

The government is still working on the so-called Implementation Bill or the legal framework on issues such as casino size, gaming or corporate tax rates, government fees, regulations on construction, and programs to address potential problem gambling.

Japan’s Implementation Bill is critical for investors and it has been suggested that Tokyo study the creation and evolution of other gaming economies in Asia, most specifically Macau and Singapore.

This makes a lot of sense and provides an opportunity here to look at those markets from an investor viewpoint.

Macau & Singapore

From 1962 until 1999, Sociedade de Turismo e Diversões de Macao (STDM) monopolized Macau’s gaming industry.

As control of Macau shifted from Portugal to China, STDM lost its monopoly when two additional casino gaming concessions were granted to Galaxy Entertainment Group (GEG) and Wynn Resorts, giving Macau three licensed casino operators.

A logo of Galaxy Macau, part of the Galaxy Entertainment Group (GEG), is displayed at a news conference on the gaming resort's results in Hong Kong, China February 28, 2017. REUTERS/Bobby Yip
Galaxy Macau is displayed at a news conference on the gaming resort’s results in Hong Kong, China February 28, 2017. Reuters/Bobby Yip

GEG then partnered with Las Vegas Sands (LVS) to develop integrated resort facilities, but disputes arose between the two so Macau’s government added three so-called sub-concessions, for a total of six licensed casino gaming operators.

Those three sub-concessions have the same rights as the original three and companies such as Melco, MGM and LVS are the beneficiaries of that decision.

In Macau’s case, this particular Judgement of Solomon proved prescient in helping it develop into the world’s largest gaming economy.

In Singapore’s case, perhaps seeking to avoid the Macau drama, the government decided to limit participants to two, with LVS and Genting Group ultimately awarded gaming licenses.

LVS and Genting subsequently developed Marina Bay Sands (MBS) and Resorts World Sentosa, both well-regarded integrated resorts typically cited as a model for Japan.

Despite Macau’s initial complexities, both the Macau and Singapore integrated resort (IR) frameworks are considered superior to other Asia alternatives due to higher projected risk-adjusted returns.

The Galaxy resort in Macau.
The Galaxy resort in Macau.

The set up allowed international gaming operators to apply for licenses, and when awarded, purchase land designated exclusively for an IR. The sites were typically bought directly from the respective governments at market rates.

As such, Macau’s Cotai area will see more than $27 billion of investment, while Singapore’s two licensees have each invested almost $11 billion.

Looking at recent investment examples in Macau, the Parisian Macao and the Wynn Palace opened with development costs of nearly $3 billion and $4.4 billion respectively.

Comprised of 2,900 rooms, the development costs per room in the Parisian Macao’s case are approximately $1.0 million. With Wynn Palace’s 1,700 rooms, the development costs per room is considerably more at $2.6 million per room, the highest of any major IR.

Despite the high costs, operators are confident in the legal framework of Macau and Singapore and have committed almost $40 billion of investment capital.

South Korea

Let’s compare that with South Korea’s attempts to develop an IR industry in which local operator Paradise Group partnered with Japan’s Sega Sammy Group to open Paradise City in April this year.

An entrance to Paradise Casino is seen during an opening ceremony of Paradise City integrated resort in Incheon, South Korea April 20, 2017. REUTERS/Kim Hong-Ji
An entrance to Paradise Casino is seen during an opening ceremony of Paradise City integrated resort in Incheon, South Korea April 20, 2017. Reuters/Kim Hong-Ji

The country’s first IR comprises 711 rooms, a foreigner-only casino, and a number of entertainment offerings located near the international airport at Incheon.

Development costs are expected to exceed $1 billion providing yet another example of IR exceeding $1 million per room. Clearly, expensive bets in an attempt to catch up with Macau and Singapore.

However, while Incheon’s IR partners are investing on levels that compare with Macau’s metrics, it is not clear they can generate Macau revenues.

The South Korean IR industry also faced development delays and partnership disputes related to government restrictions on Korean passport holders using the gaming facilities.

As Paradise City is located near Incheon International Airport, presumably this helped to justify the venture’s business plan.

But given the choice of IR jurisdictions, investors clearly favor areas with less restrictive gaming legislation. For example, when the Sands Macao opened in 2004, it proved so popular that LVS famously recovered its initial $265 million investment within nine months.

Arriving late

The point being for Japan is that Macau has clearly demonstrated its first-mover advantage, while Singapore has countered with its well-regarded IRs. Seven years later, South Korea has opened its first IR.

If Japan’s government can pass its Implementation Bill within the year, its first IR would likely open no earlier than 2021 and face significant regional competition.

To counter this, Japan will need to offer a more flexible legislative framework and this is not immediately evident in the bill already passed.

A Japanese woman wearing a kimono makes a V sign while she checks her make-up during the Coming of Age Day celebration ceremony at an amusement park in Tokyo, Japan January 9, 2017. Reuters/Kim Kyung-Hoon
Looking good in Japan? Photo: Reuters/Kim Kyung-Hoon

For example, in the Japan IR application process, operators will be screened by both local and national governments. Operators will first need to select and partner with a preferred local prefecture.

After the prefecture qualifies the applicant and presumably after a development site has been selected, only then will the operator be allowed to apply to the national government for a license.

This implies not only competition between operators for preferred prefectures, but also competition between prefectures trying to attract gaming operators. Arguably a longer and more complicated process.

A prefecture partnering with a gaming operator that wins a license will see significant benefits from construction contracts providing jobs, as well as additional employment and considerable revenue and taxes once the IR opens.

This should be an incentive for prefectural governments to simply its foreign-operator investment platform.

The risks

Japan has long been viewed as the next untapped market for IR development, but there does appear to be developing some jurisdictional comparative disadvantage given what is taking shape as a more complex investment structure.

Given Japan’s penchant for public-private partnerships, how long would a joint-venture agreement with a potential foreign operator take to negotiate, develop and ultimately sign?

IR development is an expensive and risky business, contingent upon operators having the resources to invest substantial amounts of capital over a number of years. IR financing would require a majority of capital sourced from capital markets at premium rates.

Additionally, operators would be simultaneously exposed to substantial political, construction and execution risk. Furthermore, IRs are exceedingly complicated ventures requiring significant experience in order to plan, develop and bring to market.

Hence, investors will view government IR legislation in Japan in the context of existing regulation in other jurisdictions.

If the Japanese government imposes restrictions or criteria that are unduly harsh, gaming operators will view their potential commitments accordingly and limit their investment exposure to management contracts, franchise agreements or simply decide not to participate.

Look again at South Korea, where LVS, MGM and Wynn Resorts decided it is not economical to enter the market, a rather stinging indictment of foreigner-only casinos.

For Japan to attract the foreign direct investment necessary to develop IR projects that will stimulate the country’s regional economies with jobs and tax revenue, it’s necessary to create a framework that is understandable, flexible and most importantly, investable.

(David Bonnet worked in hotel management and investment banking before spending more than 10 years in the gaming industry, which included stints at Sands China and Galaxy Entertainment in Macau. He can be reached at dbonnet1120@gmail.com)