Construction activity in Mongolia driven by the residential and infrastructure segments

Rapid economic expansion in Mongolia over the past half-decade has played out across many of the country’s constitutive industries, and construction is no exception. According to the National Statistical Office (NSO), works carried out in 2014 totalled MNT2.2trn ($1.3bn), up 16.3% on 2013. Much of this growth took place in the residential segment, which has been the focus of an increasing number of large-scale, state-led development projects in recent years.

One of the latest initiatives, a low-cost mortgage scheme, has had a major impact on the housing market, as have a clutch of others aimed at redeveloping Ulaanbaatar’s sprawling informal residential neighbourhoods. More than half of residents in the capital currently live in makeshift areas, known as ger districts after the traditional circular felt tents of their inhabitants. Given the attention the sector is drawing from the public and private sectors, most local construction firms are looking forward to rising revenues in the years ahead.


At the same time, many challenges remain, starting with Mongolia’s harsh climate. Temperatures drop as low as -40°C from October to April, putting construction activity almost completely on hold during the winter months. Most local construction firms carry out more than 90% of their business during the short summer period, which stretches from April or May to September or October, depending on the year. The shortness of this window affects all facets of the industry, from labour contracts to materials prices and delivery schedules.

A less elemental challenge is the country’s small and low-skill pool of labourers. In 2013 the construction sector employed around 6.6% of Mongolia’s workforce, up one percentage point from 2012. In general, it is hard for local contractors to find well-trained workers, so to meet their staffing needs in the face of rising demand for new construction, many have had to hike wages regularly – a practice which may not be sustainable over the long term.

Nevertheless, the industry’s rapid growth over the past five years is widely seen as a success story, and most local players expect to see continued growth in the future. Despite an increasingly challenging domestic economic situation and declining levels of foreign direct investment (FDI), demand for new space of all kinds has continued to rise.

The government has played a major role here. As of the end of 2014 the state was in the early stages of a series of residential development projects, with the goal of adding 75,000 new homes in the ger districts in the short term. Similarly, the government has been proactive in expanding Mongolia’s transport infrastructure in recent years, which has been a boon for the construction industry. In 2013 investment in road building and repair jumped by 745% year-on-year from a low base, according to M.A.D. Investment Solutions, a local property research firm. With such levels of activity, plus Mongolia’s steadily urbanising population, the construction industry is looking forward to years of continued expansion.


Like the rest of Mongolia’s economy prior to the fall of the Soviet Union in the early 1990s, the construction sector was an entirely state-run affair. During that period, an official workforce of around 28,000 people, directed by the government, was responsible for all building in the country. Construction Company Number One, which was based in Ulaanbaatar, took on most of the work in the capital city and its environs, and many of the Soviet-era apartment blocks it built are still operational.

The construction sector downsized in the early and mid-1990s as the state worked to transition to a democratic political system and a market-based economy. Most of the existing state-owned building firms were listed on the Mongolian Stock Exchange, which began operations in early 1991. As in many former Soviet countries, through the 1990s Mongolia’s construction industry went through a volatile period of privatisation and consolidation. From 1990 to 1995 the sector’s GDP contribution fell by about 15% on an annual basis.

By the end of the decade, the market had stabilised somewhat, due largely to the nation’s steadily improving economic situation and a handful of early state-led development projects. In 2000 the government began work on its 40,000 Homes residential building programme, the country’s first formal ger development scheme.

From 2000 to 2008 the construction sector grew rapidly, driven by rising real estate prices and urbanisation, which continues to swell the population of Ulaanbaatar today. Indeed, between 2000 and 2010 population density in the capital increased by two-thirds, according to M.A.D.

While Mongolia as a whole is famously known as the world’s most sparsely populated nation, with a density of fewer than two people per sq km, according to the 2010 census, in Ulaanbaatar the figure is nearly 250 people per sq km.

The construction sector took a hit in 2008 as a result of the global economic downturn, which led to many building projects being put on hold in Ulaanbaatar and elsewhere. The crisis affected foreign firms in particular. By 2011, however, Mongolia was once again clearly ascendant, due chiefly to a series of massive new projects in the country’s booming mining industry. Since then, the construction sector has posted solid growth. While declining FDI levels have caused anxiety about the future in some quarters, the industry continued to experience strong growth throughout 2014.


Much of the sector’s recent activity can be chalked up to state-led residential development projects. The construction industry is regulated by the Ministry of Construction and Urban Development (MCUD), established in mid-2012 by what was at that time a newly elected government; reorganising the state bureaucracy into new entities is fairly common for new governments in Mongolia. Many of the MCUD’s largest ongoing projects were launched by the previous construction authority, the Ministry of Roads, Transportation, Construction and Urban Development. The 100,000 Homes programme, for example, forms the basis of the current government’s residential housing development framework, and includes the 75,000 new homes currently being developed in the ger districts.

As of late 2014 the MCUD was in the process of revamping Mongolia’s construction laws and regulations. This followed on a brief government-mandated stoppage of all construction work in the capital in late 2012 after accidents at construction sites around the city resulted in a handful of deaths and injuries. While the legal framework underpinning the building sector is mostly in line with international standards, legislation is currently spread across a wide array of disparate documents, and enforcement is widely considered somewhat lax. The MCUD has already introduced some updates to safety standards, and other changes are expected in 2015.

Growth Spurt

The construction industry has expanded rapidly in recent years. According to NSO data, the sector’s 16.3% growth in 2014 came mainly from domestic companies, which made up 93.8% of activity and increased their outlays by 17.1% that year. In 2014, construction firms completed MNT2.2trn ($1.3bn) worth of works, up from MNT1.8trn ($1.1bn) in 2013, MNT811.3bn ($486.8m) in 2012 and just MNT600bn ($360m) in 2010.

The bulk of 2014 spending went towards residential projects, and particularly the government’s 19 ongoing ger redevelopment initiatives, which are being led by the private sector with the support of both the state and a wide range of international institutions, including the World Bank and the Asian Development Bank. By the end of 2013 Mongolia’s total housing stock had reached 11.48m sq metres, up 1.24m sq metres on the previous year. This jump, which represented an increase of 8.4%, was equal to more than 18,000 new apartments coming into operation over the course of the year.

Residential Expansion

The rapid rise in activity in the residential segment is closely tied to the state’s low-cost mortgage programme, which has given citizens access to home financing at a heavily subsidised interest rate of 8%. Although the scheme faced considerable challenges due to a lack of financing, it is considered a major driver of the recent surge in the residential real estate segment. Overall, loans to the real estate sector increased by nearly 76% in the first quarter of 2014, for example, compared with a jump of just under 20% in the same period of the previous year. Much of this difference has been attributed to the 8% mortgage programme.

Moreover, the government has taken steps to divert lower-income housing away from ownership towards an expanded rental market. In April 2015 it announced the implementation of an apartment lease programme for those low- and middle-income households who do not meet the criteria for 8% mortgage loans. Apartment blocks for 1300 households will be constructed across the country, of which 800 units will be located in Ulaanbaatar.

Despite the rapid year-on-year jumps in construction output, the sector’s share of total GDP has remained relatively consistent, at around 5%. For local construction firms, the boost in activity is still encouraging – after all, the industry has benefitted much from the uptick in activity in recent years – and simultaneously worrying, as they could potentially herald the growth of a construction bubble. However, the fact that much of the industry’s recent expansion has been driven by the state in the form of a raft of new housing and infrastructure programmes bodes well in this regard.

As of mid-2014, residential development in Mongolia was continuing apace. According to M.A.D., as of the end of June some 228 residential construction projects were under way across Ulaanbaatar, with more than 40,000 new units being erected. A considerable number of projects are forecast to be completed in 2015. Work on the ger redevelopment is under way, though some of these projects are still in early planning stages. At the same time, others are just wrapping up. The government has announced that, as of mid-2014, 19 ger development initiatives – around a quarter of the total upcoming housing projects in the capital – were 20% complete. By the end of 2015 the state expects to have finished the first phase work on all 19 of them.


Mongolia’s small, low-quality transport network has posed a challenge for many industries over the years. With most roads outside of Ulaanbaatar unpaved and poorly marked, some tourism companies have had to rely on off-road vehicles. A lack of connectivity has also made it hard for the agriculture sector bring local products to international markets, such as cashmere and wool.

In recent years the government has invested heavily in improving infrastructure, particularly the national road network. As of late 2013 around 3000 km of new roads were either under construction or in the midst of refurbishment, according to the NSO. Work on more than half of this had been completed by the end of the year, with the remainder set to be finished by the end of 2015. The government is also in the final planning stages of an initiative aimed at extending the national rail system, which at present consists of only a handful of major cross-country lines. By the end of 2018 the state hopes to have completed work on 1800 km of new lines, which will be dedicated, at least initially, to carrying freight.

Material & Labour

The new freight rail capacity is widely expected to have a positive impact on the supply of construction materials in Mongolia. While a handful of local firms manufacture cement and a limited number of other materials, the great bulk of the nation’s building supplies are imported, primarily from China, Russia, Germany and South Korea. Given this reliance on foreign imports, maintaining a steady supply of high-quality building materials can be a challenge for many local operators. The seasonal nature of the industry only exacerbates this: almost all construction in Mongolia takes place during a four- or five-month summer building period, as it is simply too cold during much of the rest of the year (see analysis). The construction sector has become an important source of work for many Mongolians in recent years. According to data from the NSO, in 2013 the industry accounted for 6.6% of total employment, an increase from 5.6% in 2012 and 5% in 2011. Many construction firms have had trouble finding reliable, well-trained employees, particularly for skilled and semi-skilled positions.

To attract workers in these areas, firms have been forced to raise wages sharply in recent years. In 2013, overall construction wages increased by 16.5% year-on-year, compared with a 4% average rise in the economy as a whole. So long as demand for new construction work continues to grow, most local firms have come to accept regular wage rises as part of the cost of doing business.


Given the high level of government investment in recent years, Mongolia’s construction industry is broadly optimistic about the future, though some challenges remain. The nation’s short-term economic outlook, for example, is not as sunny as many would prefer (see Economy chapter), and the materials and labour markets are likely to be somewhat volatile, with no quick fixes on the horizon.

Still, the country is rapidly urbanising – nearly half of the population currently lives in the booming capital – its long-term economic prospects are solid and a huge amount of construction is still needed in the form of infrastructure, housing and other projects. Last, much of the populace, and especially the newly urban population, has seen their incomes rise along with the nation’s overall economic performance and deepening integration with the global economy. With such growth drivers underpinning activity, and so long as the state continues to invest heavily in residential housing and infrastructure in the medium term, the prospects for continued growth in the industry for years to come look solid.

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The Report: Mongolia 2015

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