Built ambition: Wider economic growth is underpinning demand

Thanks to rapid economic growth and the unleashing of rising demand, Mongolia’s real estate sector is currently experiencing something of a comeback. Centred on and dominated by Ulaanbaatar, the market has experienced a strong growth in activity as well as yields in 2010-11, with the expectation that this expansion will continue into 2012.

In the first quarter of 2011 alone, according to R2 Research, some 62 new developments were under way in the city. In the same period, average land prices in the city centre were MNT700,000 ($546) per sq metre, with older two-bedroom apartments going for MNT80m-150m ($62,400-117,000) and 100 sq metres of relatively new commercial property near the city centre going for at least MNT150m ($117,000).

That said, the market faces a number of challenges. Elections, for example, which are scheduled for 2012, could have a negative impact on the sector. Similarly, the potential for a renewed global downturn and rumblings in the Chinese real estate market have been creating concerns. Nonetheless, the real estate sector boasts strong fundamentals.

GROWTH: The market has seen solid, organic growth in demand in recent years. The mining boom is expected to fuel incomes, boost standards and expectations, and create a larger domestic middle class, which will in turn highlight the need for much more international-quality residential and commercial real estate space. At the lower end of the market, Ulaanbaatar is seeing rapid population growth due to urbanisation, with as much as 60% of the city’s inhabitants currently living in sub-standard ger (traditional tent) settlements. This issue has become the focus of significant government investment, including the “100,000 houses” project (see Construction chapter).

FACTS & FIGURES: The population of the capital has increased by over 60% in the past decade, from 772,969 in 2000 to 1.24m in 2010, according to official statistics. Many rural areas have seen a decline in population, as inhabitants have relocated to Ulaanbaatar and other cities. Meanwhile, economic growth has taken off. In the first half of 2011, annualised GDP growth was at 17%, with household incomes rising by an average of 4.5% in 2010 alone.

IMF predictions for 2011 show a per capita income of $3046. That said, income disparity is a problem – the World Bank estimated that 23.1% of the population was living at or below the poverty line of $1.25 a day in 2008, although this has likely fallen significantly since then. Taken together, these figures point to an increasingly wealthy, Ulaanbaatar-centric Mongolia. The standard of living and household incomes are set to continue to rise in the future, on the back of a mining and foreign investment surge.

These demographic and macroeconomic figures have shaped the current real estate market. Ulaanbaatar is widely considered to be the only top-tier city in the country, although second-tier cities, such as Sainshand and Dalanzadgad, have also experienced population growth in recent years, primarily as a result of the mining boom. Khan Bogd, which was home to only 1200 inhabitants in 2009, has since grown into a regional population centre as a result of mining activity at Oyu Tolgoi and Tavan Tolgoi in the south Gobi. The town has seen exponential growth in recent years, with a 2011 population of 3000 and an expected 2015 population of 15,000.

ULAANBAATAR: In 2010 alone, some 40,641 people relocated to the capital, according to the National Statistical Office (NSO). That same year, 76,497 families lived in gers and a further 97,854 families lived in ger areas in other forms of housing. Additionally, 118,548 families lived in apartments, with the average household size varying from 4.2 people in the ger areas to 3.4 in the apartment areas.

Figures for the total population of Mongolia vary widely. In 2011, according to World Bank figures, the country was home to an estimated 2.67m people, which means that Ulaanbaatar, with a 2010 population of 1.24m, accounts for around 46.4% of the total inhabitants. A recent Japan International Cooperation Agency study suggested that this percentage is due to swell to 47.1% by 2015, cross the 50% line soon after 2020 and reach 55.5% by 2030.

These figures point to steadily increasing demand for residential accommodation over the coming decades. Commercial developers are also expecting a boost, as the capital has the highest proportion of economically active people in the country – around 500,000 at the beginning of 2011, according to the NSO. The population of Mongolia is on the young side – in 2010, around 37% of inhabitants were 19 years old or younger. Thus, although the population growth rate has been falling historically, levelling off at around 1.46% per annum in 2010, there is a high likelihood of significant population expansion in the next decade.

DISTRICT TRENDS: Ulaanbaatar is currently divided into nine administrative districts, known as duuregs, including Bayangol, Sukhbaatar, Songinokhairkhan, Chingeltei, Bayanzurkh, Baganuur, Bagakhangai, Nalaikh and Khan Uul. Baganuur and Bagakhangai are satellite districts, to the east/south-east of the capital proper. The former is a mining town that is seeking to become a separate city, while the latter is built around a former Soviet military base. Also to the south-east, Nalaikh has its own administration, though technically it is still part of Ulaanbaatar. The other six districts make up the core of the modern capital.

These six areas all saw rising housing prices in 2010-11, from growth of 45.1% in Songinokhairkhan to growth of 7.1% in Bayangol. The most consistent district over the previous two years has been Sukhbaatar, which includes the city centre. The area saw housing prices rise by 6.8% in 2009-10, bucking a trend of falling house prices in the other five central districts. Indeed, according to data from R2 Research, the 2009-10 period represented a slow patch for the city’s real estate firms, with average rental prices also falling during that period, before picking up again in 2010-11. Prices in Sukhbaatar jumped by 17.1% in 2010-11.

DUUREGS: Indeed, in 2011 the sector was mostly making up for time lost during the downturn, though the luxury market fared relatively well throughout the crisis period. “Up to 2009, the real estate market had been good,” said B. Davaa-Ochir, the executive director of MCS Property. “Then there was the global economic downturn, which affected things here. Now we are seeing a resumption of the work suspended back then. It’s not so much new buildings being built but rather old buildings re-starting.” Due to its historical nature and role as the centre for entertainment as well as work, the city centre has long been one of the most sought-after areas. With traffic congestion increasingly common in recent years, living downtown reduces the amount of commuting time.

With this in mind, the city centre’s “first 40,000” apartments (a designation derived from the fact that the buildings constitute the oldest housing stock in the country, mostly built during the 1950s) command high prices. In 2010-11 rents in this area were $ 234-1600 a month, depending on the size and condition.

This represents growth of around 30% since 2009-10. The rental market for first 40,000 units is especially strong, as the apartment units are popular with foreign nationals and young, wealthier Mongolians. Properties near the State Department Store, which sits at the centre of the retail and entertainment district, command a high premium.

PEACE AVENUE: Another downtown area of note is the “50,000 houses” district, which stretches west along Peace Avenue, a central artery. The 50,000 houses were built after the first 40,000 apartments and are generally smaller. They are also further away from the central business district (CBD), which is centred on the iconic Sukhbaatar Square. The CBD has few residential options, but is the heart of the commercial real estate market in the capital.

Other important areas include the National Stadium area, located south of the CBD, which is home to the International School and the Japan Town complex. The latter development is one of many new residential projects (see Construction chapter). Olympic Street, south-east of the CBD, is at present the scene of heavy construction activity. By 2013 the area will be home to several high-end hotels and serviced residences, making it the main future high-end district.

OLYMPIC STREET: Olympic Street is also the location of the luxury, serviced Star Apartments, which is a vanguard project in terms of high-end development in Mongolia. Completed in 2001 by local developer Star Holdings, with terraced and detached housing that can be rented for $6000-17,000 a month, the Star Apartments served as a magnet for a number of luxury projects in this area. In 2011 the Regency Residence, developed by Asia Pacific Investment Partners, has also opened, representing the most upscale development to date. A Shangri-La Hotel is near completion and a Hilton property was also due to open in the area, but the project was shelved during the 2009 economic downturn. Further afield, the university district, stretching north from the parliament building, is at present low-rent, populated by students.

The district’s proximity to the downtown area means it has development potential, though it continues to be badly affected by pollution coming from the ger areas, which are mainly north of the city centre.

ZAISAN AREA: South of the Tuul River lies the high-end Zaisan area, at the foot of Mount Bogd Khan. Gated compounds here are popular among wealthier Mongolian and foreign families, as there is less pollution, although it also has fewer entertainment and retail facilities. Residents of Zaisan have been dealing with a number of outstanding building permit issues in recent years, as a large portion of the area is part of Bogd Khan National Park.

Further east along Peace Avenue, where a series of high-end hotels are located, is the Sansar district, which is a mixed residential and entertainment area, though with lower prices than Zaisan.

LAND VALUE: At the western end of the same boulevard is the Gandan area, which is clustered around a famous monastery. The 3rd District Shopping Area, which is home to a major retail facility and a variety of low-quality housing from the 1970s, is located at Gandan’s northern tip. According to MCS Property, in 2011 sales prices across the city were up around 20% year-on-year for high-end residential property, reaching around MNT2.2m ($1716) per sq metre in the most desirable locations. R2 Research, meanwhile, lists average residential prices of MNT1.38m ($1076) per sq metre for luxury units and MNT1m ($785) per sq metre for upper-mid-range properties. These prices are up by between 19.4% and 26.2% per sq metre since 2010. This jump suggests that average prices have already returned to the levels seen in mid-2009, before the economic downturn hit.

HIGHER-END REAL ESTATE: With a booming economy and a surge in demand for higher-end accommodation – a result of greater numbers of incoming foreign expatriates and higher-earning Mongolians – the luxury segment of Ulaanbaatar’s residential real estate market has seen big growth in recent years.

In 2010, the last year for which full figures were available, 248 luxury-grade apartments were built in the capital, according to research by United Projects Group. This research also revealed there were 18 luxury-class housing projects in the city for the 2010-13 period, with the average price for luxury residential houses at $1738.50 per sq metre for 2010. Some 45% of the luxury properties constructed that year were townhouses, and 55% had four or more rooms.

These projects include Sunday Group’s Gem Stone Island development, which is set to create an entire community, including some 200 luxury villas, a hospital, a school and a mall on 300,000 sq metres of landscaped area near the airport, as well as individual towers like the 16-floor, mixed-use Olympic Residence next to the city’s central park. The latter will have three floors of commercial and office space, as well as 97 luxury apartments and penthouses.

Other high-end projects include the two-tower Bella Vista Rental Suites in the popular suburb of Zaisan, in the Khan Uul district. With its serviced apartments supplemented by a gym and pool, it is specifically aimed at expatriates. Nomin Construction’s River Garden is also located in the Khan Uul district and will consist of 34 townhouses and 600 apartments. The former will all be completed by 2012, while construction of the latter will continue into 2013.

Khan Uul is also the location for Altai Construction’s Altai House complex of 34 townhouses; Standart Group’s Tenger Villa development, which also consists of 34 townhouses; and Sfeeco Property’s Zaisan Villas, consisting of 107 townhouses. All are to be completed by 2012, as is Beverly Hills’ project of 92 townhouses located north of the central stadium.

OTHER SEGMENTS: Almost all the grade-A and -B office space is located in the Sukhbaatar district. Demand for high-end, grade-A office space is at a premium, with sites such as Central Tower completely occupied and able to charge around $60 (and up to $70) per sq metre (see analysis). High-end retail space, meanwhile, faces fewer supply constraints and generally rents for around $20.85 per sq metre, according to R2 Research (see analysis). Other grade-A buildings include Monnis Tower and Blue Sky Tower, as well as the International Commerce Centre, whose construction work was 40% finished as of January 2012.

The hotel and service apartments segment, meanwhile, is also seeing pressure on the high end, as the number of tourists visiting and expatriates settling in the capital has increased in recent years. According to R2, rack rates for high-end hotels have risen by around 83% over the past four years, to $104-225 per night in four- and five-star properties.

Price levels in Ulaanbaatar and elsewhere tend to be determined entirely by supply and demand factors, given the scarcity of trained appraisers. Real estate agents usually base their estimation of property value on the going market rate, rather than relying on any specific checklist of building qualities.

ZONING: The government’s new 100,000 houses project (see Construction analysis), which aims to settle many of the city’s ger inhabitants in low-cost housing, has already affected real estate in the northern districts, where most of the gers are located. A speculative land market has developed rapidly in many of these areas, particularly those where basic infrastructure projects are already being built. “In some of these areas the price of land is now higher than it is in the city centre,” Ya. Purevsuren, the head of the investment department at MCS Property, told OBG.

This is a key challenge facing the 100,000 houses programme. Local developers often remark that outside Ulaanbaatar there is plenty of land, but little or no infrastructure, while inside the capital there is infrastructure but very little available land. As a consequence, land prices in the capital can often be extremely high. Before 1990, under the old Soviet system, all apartments, houses and other buildings in Ulaanbaatar were owned by the state.

The law on immovable property, allowing for the privatisation of state property, was passed in 1997. Since then some 94,000 apartments have been privatised. Additional legislation put in place after 1990 allows for land privatisation in certain areas and specifies amounts. Grazing land, for example, remains the property of the state, but every Mongolian can register for ownership of 700 sq metres of land for personal use, with this given a nominal value of $8000 by the government. Many inhabitants of the ger districts have taken up this right, using their 0.07 ha as a family dwelling as well as a place of business.

The government is faced with having to buy back larges swathes of this land for the 100,000 houses project, or else engage in what would likely be a politically challenging process of compulsory purchase and expropriation. The state has suggested repurchase prices of between MNT150,000 ($117) and MNT250,000 ($195) per sq metre, adding additional expenditures to the up-front costs of what is intended to be a low-cost housing project.

RULES: For foreigners, purchasing land is only possible via a joint venture with a Mongolian citizen or entity, with the foreigner able to hold no more than 49% of the venture. This is not the case for apartments, however, which can be 100% foreign-owned.

As for zoning within the city, regulations are often weakly enforced. In January 2011 new rules on height limits were introduced, requiring buildings with more than 18 floors to have additional fire safety features, such as emergency lifts and helicopter pads.

Industrial areas are legally required to be at least 30 km from the city centre, yet the absence of infrastructure that far out in many areas means that codes have sometimes been bypassed. Thus, a broad mix of land uses is evident in many areas of Ulaanbaatar.

NEW STARTS: The international economic downturn had a visible impact on real estate projects in the capital. The Mongolian Construction Association suggested that as many as 450 developments were halted due to financial issues during the crisis. Nonetheless, construction of residential apartments in Ulaanbaatar hit an all-time high in 2010, with 11,650 built during the year, up around 50% on 2009’s total of 7806.

Indeed, the government’s statistics body has revealed that 2010 saw spending of MNT350bn ($270.3m) nationwide on construction, a rise of 25.6% year-on-year, while the World Bank has noted the building sector registered 38% year-on-year growth.

This poses some important questions for the sector, as the population of the city continues to swell. A recent key discussion among real estate players, and one likely to continue in the years ahead, is how to provide a better market mechanism to encourage a closer match of supply and demand.

AFFORDABILITY: Another major ongoing issue is to develop ways of ensuring that more Mongolians can afford to buy. On the latter point, something of a shift in values is also required, as many Mongolians see their home as a permanent family asset, rather than something that can be bought and sold as one moves up the ladder. Mortgages can thus be difficult to sell, particularly as interest rates have historically been high and included short payment terms – 1.2% interest per month on a 15-year mortgage is not uncommon.

One initiative that addresses these issues is a 2000-unit residential scheme being developed by MCS Property, a company dealing predominantly in the luxury and high-end residential segment. The project, called MiniGer, consists of small starter apartments that come fully furnished and start at $20,000 for a 20-sq-metre studio, moving up to a maximum size of 50 sq metres. A $2000 deposit secures a unit. It is hoped that the project will encourage a new generation to enter the mortgage market and sell up when their incomes improve, thereby boosting demand for steadily larger apartments in the coming years.

In 2011 MCS also started constructing a giant development project to bring affordable but high-quality housing to the capital, targeting the young professional market. All apartments in the development will be fully furnished for a price of around $1000 per sq metre, ranging from 25-50 sq metres.

OUTLOOK: The Mongolian real estate sector boasts strong fundamentals. Ulaanbaatar and a number of new industrial towns growing alongside the mining sector are likely to show good returns in the coming years. Meanwhile, local developers face many challenges. The lack of infrastructure outside built-up areas continues to be a major issue. If utilities and roads are incorporated into the price of private sector developments, then these projects can potentially end up being high-end only, in order to recover costs.

Government investment in infrastructure looks set to increase substantially in the coming years. The real estate sector stands to benefit from the major road and utility construction projects that will soon be under way. Meanwhile, developments in mortgage financing, including the recent establishment of a secondary market, should make it increasingly easier for ordinary citizens to enter the market. With these changes in mind, the local real estate sector is set for continued expansion for the foreseeable future.

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The Report: Mongolia 2012

Construction & Real Estate chapter from The Report: Mongolia 2012

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