Coronavirus, Tokyo Olympics Threat May Unravel IR Plans

By Daniel Cheng

It is said that six degrees of separation is all that divides every living being from another. That hypothesis is not necessarily limited to animate objects. It might be stating the obvious that the coronavirus has now touched every facet of public and private life in many countries, not least Japan, which was thrust unceremoniously into the global spotlight when the ill-fated Diamond Princess cruise ship came calling at its port in Yokohama.

For more than two weeks, passengers on the starboard side of the Diamond Princess were afforded a view of a decrepit-looking pier during their involuntary incarceration. It’s the same pier that is promising to dramatically transform the skyline of the city with a rash of suitors bracing to pony upwards of US$10 billion for the right to build and operate an Integrated Resort. The IR issue dominated the headlines and polarized opinions nationally, until the cruise ship stole its thunder.

But another, even costlier, victim threatens to fall prey to the rising pandemic. The Tokyo 2020 Olympics is a seventeen-day summer extravaganza with a sticker value higher than even the IR cost, estimated to be in excess of US$13 billion.

As Japan became the example of what-not-to-do in the handling of the viral epidemic, the unabated spread of infections and fatalities foreshadowed a prolonged crisis. The Olympics began to come into the crosshairs of the pandemic as major sporting events elsewhere in the world were postponed or cancelled.

The Olympics and IRs are meant to be the jewel in the crown of Japan’s longest-reigning prime minister, Shinzo Abe, to usher him into the sunset in a blaze of glory come next fall. Olympics Minister Seiko Hashimoto, who also happened to be an IR proponent, has kept a brave front thus far, but time is not on her side.

An Olympics cancellation entails an enormous political and economic cost for Japan.

For the real estate sector, it is a double whammy. The prospect of no summer Olympics and an IR limbo will feel like a vicious uppercut-left hook combo knockout blow. A Nikkei Asian Review article on March 14 elucidated how the local real estate companies and the Olympics are joined at the hip.

Close to a dozen Japanese real estate companies had bet substantial capital in the development of the Olympic Village with a view to flip it in the market as private condominiums for a handsome profit after the Games. With the uncertainty, investment analysts have been quick to downgrade the companies’ earnings forecasts. Lost too was the eagerly anticipated so-called “Olympics showcase effect” which would have buoyed property related equities trading.

The same real estate firms were the leading local brides-in-waiting to form a union with international casino companies for IRs in Japan. A protracted bloodbath in the equities market might put a large dent in their capital position, and unnerve them from jumping into another high-capital intensive venture.

Leading the local brigade is Orix Corporation, which is technically not a real estate company but a diversified conglomerate. An international behemoth in its own right, with over a third of its profit derived from outside Japan, Orix is no shrinking violet when it comes to big ticket investments. The company shelled out over US$10 billion in investments in the last fiscal year, of which the largest slice went to a 30% equity stake in Irish aircraft lessor, Avolon, for US$2.2 billion. The company dwarfs its Osaka IR partner, MGM Resorts, ringing over almost twice the top line of the Las Vegas firm. But it is also a union of large debtors, with MGM still saddled with over US$11 billion of debt, and Orix a whopping US$42 billion of liabilities, albeit mostly in long-term securities. Collectively, both companies still have over US$5 billion of cash in their war chest, but how much that will dwindle depends on how long the coronavirus stays around.

In comparison, the professed local stalwart for Yokohama is Keikyu Corporation, a minnow relative to Orix. Transportation and real estate constituted three quarters of its US$3 billion annual revenue, segments that are among the hardest hit by the coronavirus. With only about US$500 million in pocket change, Keikyu might have to taper, or even reassess its IR aspirations.

The hardest hit local IR candidate has to be Tokyu Land, whose stock price suffered over a more than 40% loss in value in the past month. The company may have to consider refinancing its US$12 billion debt, or dig into their under US$2 billion of cash reserves, if the repurposed and renamed Olympic Village, the Harumi Flag, gets literally flagged by the postponement of the Games. It is a scenario that might diminish Tokyu Land’s bargaining power with the casino companies eyeing Yokohama.

The travails of these Japanese Big Cs will be another under-the-belt shot out of the blue for the already much beleaguered Japan IR ambition.

The World Health Organization has declared the coronavirus a global pandemic, and its spread has not even spared the famously resilient casino sector. Gambling is the only business known to thrive regardless of a good or bad economy, but its much vaunted immunity met its match in the coronavirus. As equities everywhere went into a tailspin, casino companies were among those that bore the greatest brunt. MGM Resorts had shed over 70% of its market capitalization in the short span of one month.

This is the sole bidder left to build an IR in Osaka. The others were not spared as well. Wynn is down 60%, Sands slipped 40%, and Melco and Genting Singapore slid 35% in the same period. The various levels of lockdowns and travel restrictions around the world also meant none of their executives are visiting Japan anytime soon.

This culminating situation in Japan is shaping up to be a perfect storm to foil Prime Minister Shinzo Abe’s going-away party. This new thread arising from the coronavirus threatening to bind the Olympics and IR plans into a dead knot might require more than a Boy Scout’s honor to disentangle this time.

Daniel Cheng is a hospitality industry professional, and formerly held senior executive positions with Hard Rock International and the Genting Group.