Think Macau; think the hottest gaming spot this side of the Pacific – and the most profitable one in the world. Flush with massive money from the mainland and an unparalleled expansion trajectory, the former Portuguese colony off China’s southern coast is bursting with opportunities. Despite reports of a growth slowdown in May, there are absolutely no signs of anything remotely slowing down. Casino kingpins continue to trip over each other, vying to construct their next projects on the Cotai strip, the newest, flashiest stretch of the gaming capital. Joining the Venetian, the City of Dreams and the Galaxy, resort company Las Vegas Sands opened its new $4.4 billion casino on the strip in April this year. Luxury resort Wynn Macau, meanwhile, received approval from the government to develop a 51-acre resort in May, with casino operators MGM and SJM Holdings still awaiting their green lights to build their Cotai casinos.
While the gaming industry is the main driver and focus of Macau’s economy, there is much more happening behind the glittering scenes of the casinos. For instance, the government has spurred on infrastructure construction and development to facilitate transportation for locals and the millions of tourists it welcomes each year to support the region’s ambitions. According to data from the Macau Government Tourist Office, there were nearly 2.34 million visitors in April, an increase of 6.3 percent from the year before. There were 28 million visitors in 2011, up 12.2 percent from 2010, with people from mainland China accounting for up to 25 million of all arrivals. Combine these figures with the local Macanese population of about 500,000, and the need for efficient, modern infrastructure is conspicuously evident.
CONSTRUCTION
Infrastructure
Construction of the Delta Bridge – which will connect Hong Kong, Macau and Zhuhai - has been underway from the mainland China side since the end of 2009, and the complete project is expected to be completed in 2016. The Y-shaped bridge will be the longest cross sea bridge in the world at almost 50 kms in length, with 35 kms built over the sea. It will be a six-lane expressway and is estimated to cost more than $10 billion, a sum which will be shared by authorities on the mainland, Hong Kong, and Macau. Upon completion, travel time from Macau or Zhuhai to Hong Kong is expected to get reduced to half an hour compared to the current three hours.
Macau-based lawyers tell ALB that from the Macau side, the project is proceeding smoothly and the reclamation area the bridge is due to land on will likely be completed ahead of schedule. Although there were delays last year in the bridge’s construction on the Hong Kong side due to a legal challenge that was brought on by an elderly Hong Kong resident regarding the structure’s environmental impact, the building of the bridge is officially slated to begin in the coming months. On June 6, French construction company Bouygues announced it had been awarded a EUR1.25 billion ($15.6 billion) contract to build the first section of the bridge in a joint venture with Chinese construction company China Harbour. The joint venture will build a 9.4 km section of the bridge from Lantau island in Hong Kong to the boundary of Hong Kong’s territorial waters. According to Bouygues, the deal is the largest ever design-build contract in Hong Kong.
Within Macau, the most important project is that of the Light Rail Transit (LRT) system. At present, most tourists rely on taxis and hotel and casino shuttles to get around Macau. With more and more visitors expected each year to the area, a mass transit system is necessary to meet the crushing transportation demand. The LRT is destined to become Macau’s main mass transportation system, and reduce commuting time by 63 percent. An added bonus would be that the use of private vehicles would drop, leading to less greenhouse gas emissions and energy consumption.
The foundation work for the first phase of the mass transit system finally began on Taipa island in February this year with the LRTS now aiming for a first phase launch by 2015. The project was first approved in 2007, and was initially expected to be operational by 2011. However, due to numerous delays, the launch date kept getting postponed. A Macau Daily Times (MDT) article from March 2012 said that the construction work for the initial LRT route in downtown Taipa should be ready by May 2015. This route will be two kms long and will cover five stations.
The MDT quoted Union Gaming Research analysts as saying that most casino customers have “an ingrained preference for rail travel, as well as a tolerance for longer journeys in exchange for saving money on transportation costs”. The Transportation Infrastructure Office (GIT) commissioned a study this year that found that the LRT system would boost Macau’s economy and raise the population’s GDP from MOP 15.8 billion ($1.98 billion) to MOP 16.4 billion ($2.05 billion) in its first decade of operation alone.
Gonçalo Mendes da Maia, a partner at MdME Lawyers, confirms that civil work tenders for the LRT are underway, and that Japan’s Mitsubishi Heavy Industries is the rolling stock and system supplier. Tenders to build several interchange stations are slated for launch later this year. Mendes da Maia says that one of the most important tenders that many overseas companies are waiting for is that of the operation and maintenance of the LRT, which various sources have hinted will occur in early 2013.
Other projects that are ongoing or scheduled to start shortly include the airport’s expansion, a new ferry terminal in Taipa, and several water and waste treatment facilities. Macauhub.com.mo is a good source for investors or companies looking to participate in tenders occurring in Macau – of which there are new ones announced every week. “There are so many direct opportunities in the market open to any investor with the capabilities and qualifications to bid for a particular project,” says Mendes da Maia.
Public housing
Alongside the breakneck pace of casino and high-end real estate construction is another type of construction that is spiking ahead and reshaping Macau’s landscape: that of social housing. Largely ignored by foreign media, the scope and development of these public housing projects is a big deal for local residents, the government, and Greater Chinabased construction companies and developers. Public housing in Macau refers to two kinds: Social and economic. Bruno Nunes, the founding partner of BN Lawyers, explains that “social housing is leased to people who cannot afford to buy homes and have very low incomes, while economic housing is sold at a slightly higher price by the government to residents who have more income”.
The need for public housing has been spurred on by the locals’ discontent over rocketing property prices, out-of-reach rents, and inflation. According to the MDT, the government launched a public consultation in May this year on possible strategies for developing public housing. The consultation includes a recommendation for reserving newly-reclaimed lands for public houses that will be smaller to suit the needs of a declining number of family members and an aging population. The consultation additionally recommends the establishment of a public housing development fund to finance the construction, repair, and maintenance of public houses.
The Macau Housing Bureau estimates that in the next five years, about 45,000 new public and private flats will become available and that a new round of applications for economical houses might open next year, with social housing applications taking up to a maximum of four years to get processed. Nineteen thousand units are scheduled to be finished by the end of this year, and the Housing Bureau has said that it has secured land for 6,300 new units of which 3,850 flats are already in the planning stages of development. The construction of these 3,850 units will be tendered at the end of this year, and are expected to begin early next year.
At the moment, part of the Ilha Verde zone public housing project is under construction. This is “Area Three”, which comprises 770 apartments and is scheduled to be completed by the end of this year. Areas One and Two will contain 2,356 apartments, and are close to being planned. The tenders for the constructions of these areas are likely to be launched in the third quarter of this year, according to MDT reports.
A 32-storey public housing building with 346 units called the Mong Ha Social House, which will be located along the Rua de Francisco Xavier Pereira, is expected to be completed by the fall of this year.
Unlike in China, where affordable housing construction is shunned by private construction companies and developers due to low profit margins, the tenders for the construction of public housing in Macau are highly competitive. The projects are fully financed by the government – which always has a budget surplus – and are often lucrative for players involved in their construction. “It can be very profitable because the government pays for all the variations, all he changes, and all the extra costs that are required to complete these projects in a timely fashion,” says Carlos Duques Simoes, a partner at DSL Lawyers. “I suspect the contractors handling these projects are making very good money as the government does not have a very tight budget. What is important to the government is completing the housing on time.” Nunes agrees that not only can construction companies benefit money-wise, but also that the public housing tenders create opportunities for local and smaller players. “The big companies are all involved in either one of the big public tenders, so they are very busy. This opens up possibilities for small- and medium-sized construction companies to work on these projects, and it is profitable for them.” Mendes da Maia, however, is slightly more skeptical about profitability and feels that doing this type of work cannot compare to private proj ect construction or casino building. Despite this, he agrees to the fact that he works with clients who have won public housing tenders and confirms that it is extremely competitive. “On construction works, we are talking about 18 to 20 companies bidding per tender and very close pricing,” he says.
Real estate
In particular, all the lawyers ALB spoke to mentioned that the real estate sector was currently very hot, and that it was so in a good way. For instance, there are land parcels up for auction at the moment, and all around the region, commercial and residential building sales are moving with various projects being built. Mendes da Maia points out that there are opportunities for mid market retailers and for shopping mall developers that cater to mid class or high mid class brands. “Here, we see only luxury malls or low-end street shops; there is not much retail in between,” says Mendes da Maia. He additionally notes there is a gap in the hospitality market, as everything is luxury five stars or on the low end of three, four stars. “There are opportunities for mid-level retail, hospitality and there is a huge need for grade A office buildings,” he says.
EMPLOYMENT
A crucial concern for Macau that is directly impacting all industries, including its $34 billion gaming industry, is that of labour shortage because it keeps getting worse. The unemployment rate is hovering around 2.6 percent, which indicates nearly full employment for those wanting to be employed, and there is no indication from the government that it will relax its tough labour importation rules. Although the gaming industry has only mildly been affected, other sectors have not been so lucky. Small- and mediumsized businesses are struggling the most, owing to competition with the casinos for labour resources. Casinos are cash-rich, and offer their employees wages other businesses cannot compete with. Fung Kwan, the head of the economics department at the University of Macau, told the MDT in May that: “Labour shortage has been an ongoing problem for Macau. The recent casino developments have exacerbated the problem, and we’ve seen the casinos nabbing labour from other sectors. Labour costs for the whole of Macau are rising.” Macau-based managing director of the Union Gaming Group, Grant Govertsen, supports Kwan’s assertions in the MDT: “The shortage of labour will be exacerbated when the new resorts come online, particularly with respect to positions that can only be filled by Macau residents. This will put further upward pressure on wages.”
According to Nunes, current labour laws dictate that the ratio of local to non-local workers should be one to one. Previously, it used to be two locals for every overseas worker. All the lawyers ALB spoke to expressed frustration with the importation and application guidelines for overseas employees. “It’s impossible to find enough people. You submit an application for 1000 non-locals because you have 1000 locals, but then the government simply approves 300 or 500 and you do not understand why,” says Nunes. “It does not seem to be uniform criteria or it does not make sense.” Simoes says: “The government is managing the approvals process on a case by case basis, project by project and often, by profession, which is why there are so many problems and complaints.” For anyone imported to Macau, advance approval must be given based on his or her function – and the function cannot change. For example, if someone has been authorised to serve a gaming table, he or she cannot be moved to assume kitchen duties at some point. “Investors don’t want to go through this time consuming process, they just want to have the ability to bring over several thousand workers and decide for themselves where to employ them and when,” says Simoes. “The government is not flexible to the point it will allow this to happen.” He notes that even if a few thousand workers are approved for a certain project, the approvals will take six to nine months in all likelihood, and one by one, each worker will be scrutinised to ensure they are not breaking local laws or encroaching on local professions that need to be protected. “This is the struggle. The government has these procedures which are outdated, but it doesn’t want to relinquish full oversight because this is the way it maintains control over the employment market and satisfies locals.”
Frustration with application approvals stems from the opaque decision-making process of government officials. The guidelines for applying are straightforward enough, but the results are subjectively based on the whims of the approving official. “The labour approvals are somewhat discretionary,” says Mendes da Maia. “If you apply, it will go to a department head who basically makes the decision and there are some who are more flexible and others who are less so. It’s difficult for companies to plan their investments when there seems to be no established human resources policy among the authorities.” Nunes agrees: “You cannot understand the criteria; it keeps changing.
You can have two identical clients with the same application applying, and one will get approved but the other gets rejected. You can’t work with that type of subjectivity.” Partner Julia Brockman of DSL Lawyers says that “in practice, the government has internally set ratios for certain sectors, and decides approvals on a case by case basis.” Three months before the Venetian opened up in 2007, it lacked more than 5,000 workers. The government realised it needed to issue a lot of last minute work permits, and jumped into action.
In 2006, when “everyone was allowed to build” – Wynn and SJM were developing projects in Macau, and the Venetian and the Galaxy were under construction in Cotai – everything collapsed, says Nunes. However, now the government has changed its policy of granting approvals to projects to accommodate the labour issue. “Now they are approving one by one, “he says.“ For example, since the Galaxy finished construction last year, now they have granted approval to Wynn to build in Cotai. Wynn will begin construction in June, and the government will take its time to analyse everything before approving the next project, which is likely the MGM project in Cotai, then SJM’s project in Cotai. It will not allow for several concessionaires to build full scale and open at the same time in Macau.
That is the new method. It has learnt how to cope with it.”
Nunes is optimistic that the government will have no choice in the future but to grant more importation approvals. However, he says that employers will likely “have to submit to even stricter conditions” from the government. “One scenario it (government) could package the approvals is to allow the employment of foreign workers for a specific role, but then stipulate that they must train locals,” says Nunes. What about enforcement though? That, says Nunes, is a key point. The government has fallen victim to labour shortages as well, so the likelihood of it having enough resources to enforce conditions is very low.
Another issue affecting employment in Macau is its “loose and relaxed” labour regime that allows a local worker to leave any company, without liability, within two weeks. “With the current labour laws, employees are basically free to jump from company to company without any adverse consequences. This creates an enormous instability in the market,” says Mendes da Maia. At the end of last year, it was reported in the local media that numerous amendments would be made to the current imported labour law due for an update sometime this year. The timeline for the new legislation and its implementation were not made clear. Employers’ and workers’ representatives met on Dec. 30, 2012 in a closed door meeting of the standing committee for the coordination of social affairs. One of the major changes expected is that non-local workers would be free to find a new job in another sector immediately after their contracts expire without needing to leave Macau for six months – as the current law dictates. Both parties also decided that if the employer terminates the contract with just case, then the worker would have to leave Macau for six months, and only after that could he or she be granted a new work permit. The same would occur if the worker ends the contract without just cause. The current law, which was enacted in 2009, states that if a worker is fired by an employer, he or she could look for a new job without needing to leave Macau and with no legal constraints. The issue was raised by a number of employers in various sectors that some employees were purposely trying to be terminated, without just cause, in order to gain compensation, and be free to look for a new job without facing the six-month ban.
STEADY GROWTH
Media reports and analysts have been relentlessly pessimistic about Macau’s growth figures. Despite a dip in numbers however, the lawyers ALB interviewed are much more confident about the growth they see on their doorsteps. “Even if it’s not 20 or 30 percent, growth is still very good in Macau,” affirms Nunes. “Every year, analysts say the market will crash, and each year the growth statistics keep breaking all the records.”
Reuters reported on June 1 that with China’s economic expansion slowing down and high rollers from the mainland becoming more cautious, Macau saw a 7.3 percent growth in its May gambling revenue – the slowest expansion rate recorded since July 2009. A total revenue of 26.08 billion patacas recorded for May is the second-highest for a single month, but a far cry from the 70 to 90 percent monthly growth rates seen in 2010, or even the 22 percent growth in April.
“To assume that Macau gaming revenues will continue to grow at a double-digit pace, is to assume that the epic pace of property appreciation in China continues,” said Mike Turner, an analyst at Washington-based brokerage Compass Point to Reuters. Other analysts, however, remain upbeat on Macau’s future, citing a deeply unpenetrated market that will see further infrastructure development.
Analysts have been expecting growth to ease since last year, and said May’s figure was within expectations. Most remain confident that a financial collapse for the tiny territory is not on the cards. Revenue is likely to remain steady due to rising demand from China’s expanding middle class and critical infrastructure developments. Gabriel Chan, an analyst at Credit Suisse in Hong Kong, said May marked the start of a tough yearon- year comparison due to the opening of Galaxy Entertainment’s new casino on the Cotai strip in 2011. “It is not the time to get in yet; we need to wait for better entry points. I think that will happen likely in August,” said Chan. He is not yet revising down a forecast of the 24.6 percent annual gambling revenue growth due to stronger than expected growth in the mass market segment.
“I was always a bit reluctant to accept this unrestricted optimism in Macau that everything will grow indefinitely. But the truth is that everywhere you look, there are new opportunities,” says Mendes da Maia. “Real estate developments everywhere in the city, the Cotai developments, the reclaimed land projects, the light rail…I just don’t see one single sign that it’s going to slow down. Prices are going up, everything is getting more expensive, and still new foreign investors are flooding the market. Money is pouring in every day from everywhere; nothing is slowing down.”
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