After years of rapid growth following the start of the transition to civilian government in 2011, Myanmar’s real estate sector slowed in 2015 and 2016 as a supply surge of new office space weighed on rents and occupancy. Condominiums and high-end residential property also saw growth slow, with some stakeholders arguing rents have been overinflated by a lack of supply and are set for a correction.
The industry is also grappling with new regulatory, legal and financial challenges. Although Parliament approved a long-awaited Condominium Law in 2016, which permits foreign ownership of property for the first time, the new law is at odds with existing regulations prohibiting foreign ownership of land, limiting the scope of potential foreign investment. Meanwhile, rising property taxes, a surprise high-rise building review launched in mid-2016 and lack of access to finance for both homebuyers and developers continue to hamper expansion. However, the sector remains on course for long-term growth. Much of Yangon’s office and residential stock is of low quality, and space exists for investment in new greenfield developments. Meanwhile, there is unmet demand for affordable housing, non-serviced high-quality apartments and retail space, which should keep the sector on an upward trajectory in 2017.
At A Glance
Real estate activity centres on Yangon, the country’s largest city, which contains the biggest supply of formal retail, grade-A office and high-end residential space. One of the most important public stakeholders in real estate is thus the Yangon City Development Committee (YCDC), which administers the city and regulates construction projects. Industry interests are represented by the Myanmar Real Estate Service Association (MRESA), as well as the Yangon Real Estate Entrepreneur Association and the Mandalay Real Estate Service Association.
Land ownership by foreign nationals is prohibited under the 1987 Transfer of Immoveable Property Restriction Act, although the Condominium Law, which received parliamentary approval in January 2016, permits foreign ownership of up to 40% of condominium units located on the sixth floor and above. As of December 2016 the bill had not been officially enacted, and was awaiting presidential approval. “The law was rushed through,” Richard Emerson, managing director of independent advisory firm Emerson Real Estate, told OBG. “Lots of important details are missing, including the process for the new government in taking it forward. Proper legal titles and a functional mortgage market are also still needed.”
The MRESA has been increasingly active in calling for a real estate services law to set professional standards for brokers and agents, drafting its own proposal and submitting it to the government. In September 2016 the government announced that the draft would be reviewed and approved only after other industry bodies had given their input.
Ups & Downs
In the three years following the start of the political transition in 2011, Myanmar’s real estate industry recorded explosive growth, with the value of foreign investment in the sector swelling from $440.57m in FY 2013/14 to $780.75m in 2014/15, according to the Central Statistical Organisation. Domestic investment in the sector also soared, from just $2.04m in 2013/14 to $67.47m in 2014/15, then leapt again to hit $129.32m between April and December 2015 alone.
The unprecedented demand that drove this surge overheated the market, driving the prices for some residential units to match those of major cities in developed countries. Office rents similarly sky-rocketed, from $16 per sq metre in 2011 to peak at $100 per sq metre in mid-2013.
Prices have since fallen as the effects of inflated demand set in. The 2015 general elections – which did much to reassure investors about continuity in the political transition – combined with a wave of new supply in the office, hotel and residential segments to soften real estate prices. Myanmar’s property market contracted more in 2015 than it had at any point between 2010 and 2014, with house and apartment prices falling by an average of 10%, according to U Yan Aung, general manager of Asia Construction.
Some stakeholders say this slowdown is likely to be temporary, reflecting buyer uncertainty rather than a broader industry deceleration. “People have been cautious in the last few months and in the run-up to the elections, when there is always uncertainty; businessmen have been concerned about what the new government is going to do, so the sentiment is not fully back,” Cyrus Pun, head of real estate and executive director at Yoma Strategic Holdings, told OBG. “The appetite is still there,” he added, “but actually getting people across the line to sign and pay up is much more difficult than it was before.”
Residential
According to real estate consultancy Colliers International, limited availability of high-quality, reasonably priced apartments has forced some multinationals to pay overinflated rents, either at high-end villas and condominiums, or through more expensive serviced apartments, as basic, non-serviced apartments are generally older and of much poorer quality than the serviced segment.
In a market update on Yangon’s serviced apartment segment for the second half of 2015, Colliers reported that single expatriates and couples were driving demand for one- and two-bedroom units, forecasting robust sales at new developments such as Sakura Residence 2. Total stock rose by 16% year-on-year (y-o-y) to finish 2015 with 1228 units. The supply pipeline remains healthy, if weighted towards the increasingly saturated upmarket segment.
Despite a steady increase in supply in 2015, occupancy and rental rates remain elevated. One- and two-bedroom serviced apartments, for example, ended 2015 with an 89% occupancy rate, according to Colliers, while the studio sub-segment was almost fully occupied. City-wide occupancy – which declined marginally to 93% by year’s end following the entrance of Sakura Residence 2 – was expected to rebound above 95% during the first half of 2016.
Average rent for a serviced apartment remains high compared to many regional peers – a one-bedroom, 60-sq-metre unit in Yangon, for example, would cost around $4400 a month, compared to $1900 a month for a unit of similar size in Bangkok’s central business district. Though rates dropped in each of the first three quarters of 2015, they hovered around $70 per sq metre at the start of 2016, Colliers reports, compared to just over $30 per sq metre in Bangkok.
Inflection Point
Rising supply of new apartment stock, plus expected uptake of new condominium units, could see this situation change over the medium term as the market expands and competition for tenants tightens. The completion of the 321-unit Daewoo Amara Serviced Residence, for example, could weigh on occupancy during the second half of 2016. At the start of that year, an estimated 2000 units were in the pipeline; completion would similarly affect rates in proportion to their size and number.
Development of high-quality, non-serviced apartment units therefore presents significant opportunities to potential investors. Colliers, for instance, sees “a stronger underserved demand for mid-tier limited serviced or non-serviced apartments”, a segment it said remains untapped, with only a few offered in the market at present. Better-quality condominium developments could become another attractive option for buyers and renters, especially once the Condominium Law receives presidential approval.
Affordable Housing
As the high-end residential market becomes increasingly saturated – and with rents and property prices remaining extremely high, and demand expected to soften in the coming years – stakeholders are also looking to Myanmar’s fast-growing population for future real estate growth, particularly in the low-cost housing segment. Affordable housing projects offer significant new opportunities for construction firms and property investors, especially as anticipated budget shortfalls will prevent the government from implementing new projects without external financing.
In FY 2016/17, for example, the government allocated a total of MMK46bn ($37.4m) to build low-cost rental units nationwide. This should cover the construction of 4000 units within 132 new apartment blocks, according to the Department of Urban and Housing Development. Yet demand already far outstrips this: an estimated 2m squatters are living in Yangon alone. Filling the shortage of affordable housing, exacerbated by lack of financing for midand low-income homebuyers, will therefore require foreign and bilateral investment.
Research firm Timetric’s Construction Intelligence Centre expects Myanmar’s construction industry to reach a total value of $13.5bn by 2020, driven by affordable housing development, according to a report published in June 2016. New foreign investment, it notes, will be key to long-term success in delivering new units (see Construction overview).
Challenges
Though its long-term investment potential is significant, Myanmar’s property market has faced legal, regulatory and financial hurdles of late, many of which concern access to finance, unclear zoning and building codes, rising taxes and lack of regulatory oversight for industry professionals. For investors and developers, one major challenge is access to finance. Myanmar’s banking system is still underdeveloped, and long-term facilities such as mortgages are not available; most banks offer loans with a maximum tenor of one year. Interest rates are also high, at 12-13%, and despite the entrance of several new international banks, lending to both home-buyers and developers remains extremely limited.
Construction companies, reports the Myanmar Construction Entrepreneurs Association, have helped fill the gap by offering three-year payment plans for potential buyers. The government also recently moved to offer 2000 new affordable units to low-income, first-time buyers under an eight-year instalment scheme offered by the Construction and Housing Development Bank. Nonetheless, the lack of developer and homebuyer financing remains a major impediment to future growth, while shifting regulatory requirements are also expected to have a negative impact on near-term expansion.
High-Rises
In May 2016 stakeholders were surprised by the news that the YCDC was suspending work at over 200 high-rise projects in Yangon, ordering a review of the construction permits at 64 such developments, and reviewing an additional 185 projects that had received in-principle permits under the previous administration. The committee later ordered significant changes to 12 high-rise buildings on which work had already begun; some were told to halt further vertical construction, which in the case of one project reduced its size from 32 storeys to less than 20. In August 2016 U Moe Moe Lwin, a member of the YCDC’s high-rise review committee, told the Associated Press that many halted projects had been approved solely on the basis of structural safety, whereas environmental and community impact stand as equally critical priorities.
Many criticised the review process for not measuring existing projects based on the standards in Yangon’s building code, but rather on new and unspecified criteria that have not yet been published. “Yangon’s building code has been made public, but the YCDC has yet to release its zoning code, which has created confusion for some developers,” U Thein Han, technical consulting engineer at A1 Group of Companies, told OBG. Indeed, although the YCDC announced in May 2016 that its draft zoning plan, created in 2013, would be released by the end of the year, it had not been made public by December.
On August 21, 2016, the YCDC announced it would allow 12 suspended projects to begin work again, revoking an earlier demand that some knock down floors in their projects to comply with urban planning regulations. A further 64 were given permission to resume work in September, though many developers reported a significant negative impact, both on project finance and investor sentiment.
“The worst thing about it is halted construction, which costs a tremendous amount of money, while some of the changes made to these projects will have a significant impact on their financial viability,” Emerson told OBG. “On the other side of it, a lot of previous approvals were highly questionable: the buildings were too big for the plot and did not have enough parking, so a review was the right thing to do.”
Tax Regime
Rising property taxes are another significant challenge to residential sales growth. In January 2016 Parliament moved to return rates to their 2014 levels, following a series of rate cuts rolled out in 2015. Effective April 1, 2016, properties worth up to MMK30m ($24,400) will pay a 15% tax, those worth MMK30m-100m ($24,400-81,200) will be taxed at a rate of 20%, and those worth more than MMK100m ($81,200) will be taxed at 30%.
Prior to the decision, taxes had been cut to 5% for properties worth up to MMK500m ($406,000), 10% for properties valued at MMK500m-1bn ($406, 000-812,000), 20% for those worth MMK1bn-1.5bn ($812,000-1.2m), and 30% for those worth more than MMK1.5bn ($1.2m). Many local estate agents decried the move. The MRESA, for its part, told the MMK30m-100m ($24,400-81,200) is too high for many middle-class buyers, extending a purchasing process that already takes an average of five months.
Office
Burdened by a rising oversupply of grade-A space, Yangon’s office market recorded weak performance in 2015. Colliers International reports that the city’s office stock ended the year at 230,000 sq metres in 2015, more than twice the amount on offer in 2014. Developments in the pipeline are expected to add more than 100,000 sq metres of space to the market in each of the next three years. Demand, Colliers warned, is moderating, while take-up rates have been hampered by a sudden surge in new supply, exacerbated by investor and business uncertainty during the 2015 general elections. Nonetheless, the firm reports, demand for office space will remain on an upward trend, particularly as the government’s liberalisation agenda progresses.
“Office prices have come down by about 40% over the past 12 months, but if the economy starts opening up to banks, supermarkets and oil companies, you’ll see 5000-10,000 new people coming in, and it will have an impact on the market,” Dan Davies, director of Colliers’ Myanmar operations, told OBG.
Myanmar Centre
Of the 130,000 sq metres of office space added to the market in 2015, some 95,000 sq metres were located in Yangon’s Inner City Zone, according to Colliers. Most notable among new Inner City Zone office projects was the two-tower HAGL Myanmar Centre, which contains the largest amount of office space in the city. The $550m centre, owned by Vietnamese firm Hoang Anh Gia Lai, will eventually offer four office towers, as well as a five-floor mall, Myanmar Plaza, housing over 100 retail and food and beverage outlets. The project’s first phase came on-line in December 2015, with the second expected to wrap up in 2017.
The Maha Land Office Tower, developed by Mottama Holdings in Bahan Township, and the Uniteam Office Tower developed by the Uniteam Marine in Sanchaung Township, also came on-line in the latter half of 2015. In all, Colliers reported that eight new office buildings opened in 2015, the highest amount of new supply ever added in a single year.
Office Oversupply
An additional 14 office buildings were under construction in early 2016, which will add more than 300,000 sq metres of future leasable space in the coming years, more than doubling Yangon’s current stock. Of these, six developments were expected to open in 2016, including Vantage Tower in Kamaryut, 8 Mile Business Centre in Mayangone Township, and Sule Square and Junction City Officer Tower, both located in Kyauktada Township. The volume of projects in the pipeline will have a profound mid-term impact on Yangon’s office market.
One positive effect, according to Colliers, is that rising competition for tenants will make the emergence of quality developments a more important consideration for developers and property owners. Surging supply has weighed on demand and rents, however. Between the fourth quarters of 2014 and 2015, Colliers reported, occupancy rates plummeted by 36 percentage points to rest at 47%, their sharpest drop yet in a period of weakening demand that kicked off in the second quarter of 2015. Office rents also ended the year down 3% on the previous quarter and 17% y-o-y to rest at $58.68 per sq metre.
Looking ahead, Colliers projected that rising competition in 2016 will make the market more favourable to tenants, with landlords offering discounted rates and other incentives. Rents, however, should remain generally stable until 2017, it said, while the opening of international-quality office developments could drive upward pressure on prime rents.
Brighter Future
Emerson Real Estate’s second-quarter 2016 market update shows the overall occupancy rate increasing to 68%, up 7% y-o-y.
Office rents have not increased at all over this period and continued to decline, by 8% quarter-on-quarter and by 21% y-o-y. The average office rent was $44 per sq metre per month in the second quarter of 2016. The notable positive figure was strong uptake across the office market, particularly in the Grade B category, due to increased availability and more affordable rents.
Colliers for its part projects that, following the supply surge that occurred in 2015, additional office stock will ease this year, with only around 42,000 sq metres of leasable space expected to come on-line in 2016. It added that the high-rise review, having delayed a large number of major projects, should lead to a tightening of supply.
There were approximately 250,000 sq metres of leasable stock in Yangon as of June 2016, but according to Colliers, downtown supply was set to surge during the second half of the year, with the opening of Sule Square, which will boost office stock there by some 45% to 90,000 sq metres. Over the first half of 2016 occupancy rates increased from 47% to 63%, the company reported, while rental rates are forecasted to dip to $55 per sq metre in the second quarter of 2017, from $57 in early 2016.
Retail
The outlook for retail real estate is more promising. At the end of 2015 Yangon’s total retail stock was estimated at 220,000 sq metres of leasable space, nearly twice the amount recorded in 2014 – a result of the opening of Myanmar Plaza, the largest mass retail development in the city to date, as well as the Hledan Centre in Kamaryut Township. Roughly 130,000 sq metres of retail leasable space is expected to come on-line between 2016 and 2018, driven by rising middle-class demand. Major developments in the pipeline include Yadanar Mall, Kantharyar Centre, the expansion of Junction Square and Junction City Shopping Centre.
As a result of significant new supply, Yangon’s retail occupancy rate dropped temporarily in 2015, by 5.2% and 4.9% on a quarterly and annual basis, respectively, to end the year at 86%. Colliers International expects occupancy to have rebounded to approximately 90% in 2016, however, while high pre-commitment rates in upcoming developments are expected to keep occupancy healthy. Retail rents, meanwhile, recorded a 7% increase to end 2015 at $27.70 per sq metre per month, and were expected to rise at a moderate pace throughout 2016, with the continuous entry of high-end global retailers creating an upwards pressure on rental rates over the long-term.
Outlook
Although the outlook for the office and residential segments remains subdued as a result of rising new supply, the sector is expected to maintain steady momentum in the coming years, on the back of further economic liberalisation and new opportunities coming up in the retail, non-serviced apartment and affordable housing segments.
While a complex regulatory environment, land acquisition challenges and delays in the implementation of the Condominium Law could hamper nearterm growth, the 2015 elections, whose results grant some assurance that liberalisation and political stability will continue, should further bolster prospects.
Read More from OBG
