BACKGROUND ON MONGOLIA’S ECONOMIC SITUATION

On October 6th, 2009, after years of arduous negotiation, the Canadian public company Ivanhoe Mines and the Government of Mongolia (GoM) signed a long awaited investment agreement laying the groundwork for a US$ 4B investment into a copper and gold mine in the Gobi Desert. This was the Oyu Tolgoi mine, and it signified the beginning of Mongolia’s precipitous thrust into the arena of foreign investment and economic development.

Subsequently, in 2011, Mongolia saw extraordinary economic growth. GDP grew 17.5% on the back of a 179% increase in foreign direct investment (FDI), and headlines such as “Booming Mongolia: Mine, all Mine” (The Economist, 21/01/12) and “Mining Fuels Mongolia’s Wolf Economy” (CNN, 20/05/11) began appearing in world press.,

However, in the second half of 2012 Mongolia’s course was altered. GDP growth dropped to 12.3% against estimates of around 15%, the fiscal deficit came in at 8.4% of GDP, inflation was in the double digits, and foreign direct investment dropped 17% from 2011. This downturn has continued well into 2013. FDI levels have dropped 43% in the first half of the year, GDP expectations continue to be revised down (the World Bank recently announced it was cutting its GDP growth projections to 12% compared to it’s original forecast of 16.2% and the IMF recently cut their prediction to 11.8% from its previous growth forecast of 14% in April 2013), and the MNT has seen a tumultuous slide reaching 1,722 MNT/USD in September – a depreciation of 25% from its beginning of year rate and it’s lowest level in at least 10 years. This is particularly worrying for a currency that has been relatively stable in the not so distant past and for a country that is so reliant on the USD for investment projects.

While a downturn is clearly evident in the numbers, there is a richer story to be found in the qualitative indicators. Talk to any Mongolian business owner and you’ll hear that there are considerably fewer customers coming into their stores or requesting their services. High-end shopping malls built on the 2011 consumer hype are deserted and empty on the weekends. There is a discernible drop in the number of expatriates inhabiting the city centre cafes and pubs. And importantly, a bleak and pessimistic sentiment permeates the Ulaanbaatar community, no small fact for a country with such enormous untapped potential.

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A Breakdown of Mortgage Policy in Mongolia

As Mongolia continues to experience rapid GDP and population growth, the availability of affordable mortgage financing for people seeking proper accommodation in Mongolia is in high demand. Similarly, as Mongolia’s financial system deepens, housing finance emerges as an increasingly important part of the maturation of its financial system. In emerging markets, the maturation of financial systems appears to lead to the development of housing finance, and this deeper, more extensive financial system, in turn, contributes to higher rates of growth.

 

However, while the need for housing finance in Mongolia is obvious, the 40,000 homes project illustrated the country’s lack of a fully developed and reliable mortgage system. Many banks in Mongolia simply do not have the financial expertise to offer attractive mortgage loan packages or even provide the liquidity and the necessary legal framework to deliver the loans. Consequently, Mongolia’s mortgage market faces a variety of structural and procedural issues that must be resolved before ordinary Mongolians can have access to financing for house purchases and in turn contribute to Mongolia’s economic growth.

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The Impacts of Mongolia’s "100,000 Homes Project"

Astronomical mortgage rates in Mongolia have made the prospect of owning a house unattainable for the majority of Mongolians in Ulaanbaatar. With commercial bank mortgage rates hovering around 16-19.2% APR as of early 2011, it is easy to see why only 9% of real estate transactions in Mongolia are currently mortgaged. In a country where the average age is 20-24, the availability of urban housing and infrastructure is critical for the Mongolian economy as well as to ensure sustainable capital growth yields for real estate investors.

On November 2011, the Mongolian Housing Finance Corporation announced it would provide first-time homebuyers with access to mortgages capped at an interest rate of 6% on a 25-year term for apartments of less than 50 square meters in size. This initiative, a part of the “100,000 Homes Project”, seeks to help low-middle income Mongolians relocate out of the countryside and Ger Districts that currently house approximately 700,000 of Ulaanbaatar’s 1.2 million citizens around the periphery of the city.

In a market dominated by cash transactions, Mongolian borrowers still tend to make large down payments, with commercial and state owned banks such as Khan Bank, Bank of Mongolia (BoM) and Trade Development Bank (TDB) requiring initial deposits of at least 30% of the total value of the property. In order to finance this project, the Mongolian government has asked the state owned Development Bank to raise MNT 200 billion, while commercial banks will also serve to facilitate some of the mortgage lending.

            With currently only 116,000 total residential units in Ulaanbaatar, the 100,000 Homes project is destined to expand the market for low-middle income families seeking residential space in the city. However, only 2% of all mortgaged transactions in the country are nonperforming. As the requirements for down payments and credit requirements are lowered, commercial and government lending establishments will have to make adjustments to hedge against the increased risk of credit default and foreclosures.

Will Tindall, Chief Communications Officer of Asia Pacific Investment Partners, states, "The 100,000 homes project coupled with the increased penetration of the availability of mortgages, will fundamentally change the options available to nearly every Mongolian. The traditional three tiers of housing – ger/soviet block/western style apartments – will begin to reside as we see the ger communities on the periphery of Ulaanbaatar shrink”. The 100,000 homes project will undoubtedly serve to augment the already increasing presence of the middle class in Ulaanbaatar, as well as push up capital growth in Mongolia’s luxury real estate properties. With FDI totaling 5.3 billion and GDP growth at 17.3% in 2011, the success of the 100,000 homes project and subsequent emergence of the Mongolian middle class will be a true testament to the magnitude and sustainability of Mongolia’s economic strength going into the future.

To learn more about investing in Mongolian real estate, visit Bayanzuuch for more information and for all of your news and updates on current events in Mongolia, visit Bayanzuuch, a news portal that covers everything Mongolia.

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Is there a real estate bubble in Mongolia?

Over the past decade, cheap credit and rising commodity prices in resource rich emerging economies across the world have caused real estate prices to soar in the urban centers of these frontier market countries. Yet, in the aftermath of the 2008 world financial crisis, huge sell offs rocked the property markets of emerging economies across the world as FDI and bank lending temporarily skidded to a halt.

Kazakhstan was one such country that encountered an unforeseen property bubble and financial crisis after nearly a decade of high growth. Driven by an influx of oil related FDI and easily accessible mortgages, land prices in downtown Almaty, Kazakhstan’s largest city, surged a whopping 8000% between 2002 and 2008 while the cost per meter of apartments in the downtown area rose 833% in the same time period*.

However, as the American subprime crisis took effect in 2007 and 2008, the housing bubble in Kazakhstan began to burst, and it did so quickly. By the summer of 2008, housing had dropped 40% from its peak levels and construction developers found themselves with unsold and unsellable apartments in their complexes. A full-fledged banking crisis had occurred in Kazakhstan, and developers struggled to find the financing necessary to finish partially constructed projects. Oil prices had dropped to all time lows, and to top it off, massive currency devaluation ensued, pumping up the cost of construction imports such as lumber, steel, and cement by as much as 20%.

As a country, Mongolia shares many commonalities with Kazakhstan. Both are resource economies, former Soviet satellites, and have similar cultural heritage. In a similar fashion to Kazakhstan, when the price of copper crashed in late 2008 during the global financial crisis, Mongolia's government had to call in the International Monetary Fund for help. Thus, the real question becomes: is Mongolia following a similar “boom and bust” path as Kazakhstan, and if not what differentiates the property markets between the two countries?

The real estate market in Mongolia, especially in the central business district of Ulaanbaatar, has already seen significant capital appreciation, but it is nowhere near to the 30-fold increase in Kazakhstan real estate prices prior to Kazakhstan’s bubble bursting in 2008. More importantly, mortgages for would-be apartment owners became accessible in Kazakhstan in 2002 – the start of their period of high growth. In Mongolia, however, mortgages are just now becoming accessible to the general public and most commercial banks still require down payments of 30% or more up front.

The financial industry in Kazakhstan played a large role in stimulating the property bubble by enabling unqualified creditors to take out mortgages that they couldn’t afford. The global financial environment of cheap credit and competition among national banks encouraged dependence on short- and medium term borrowing through the bond market, rather than dependence on banks’ own internal deposits and savings. In this quantity-driven environment, the way to success was through more borrowing abroad and more lending at home while quality became a secondary matter. This is a phenomenon we have yet to observe in Mongolia.

Clearly, speculation and Dutch Disease contributed to Kazakhstan’s real estate bubble. It was not just one, but many factors, such as oil price fluctuations, inadequate risk management, and currency devaluation that led to the unsustainable nature of Kazakhstan’s real estate market and economy as a whole. Even though the mining industry is certainly not free of risks, it is undeniable that mining will bring a ramp up in GDP and wage growth, and consequently induce higher real estate prices. The news that the government is considering raising state employee wages 53%, doubling state employee wages from 2008 in 4 years time, does not discourage this thesis.

As Mongolia’s property market heats up even more, Mongolia must find the right balance between enabling growth by lowering lending standards and encouraging new home ownership while also managing risk across the mining and financial sectors in the long term.

If you’d like to learn more about news in Mongolia, visit Mongolia, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check out BayanZuuch, zuslanproperty and tumniizuuch.

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Retail Real Estate Space in Ulaanbaatar

There currently exist three central hubs of retail real estate space in Ulaanbaatar:

1. The Sukhbaatar and Chingeltei districts which extend into the CBD (Central Business District)

This region represents one of the earliest areas of retail space to be established in Mongolia post 1990. The heart of the region is the ‘State Department Store’ (Ikh Delguur) run by Nomin Holdings, 277,755 sqm of grade A retail space spread over five floors. Although all the space is almost always occupied, occupants over recent years have changed from local Mongolian to international brand retailers. The structure has diversified its use over recent years by offering itself as a desirable venue for prestigious events and concerts.

The area also hosts the ‘Ulaanbaatar Department Store’ (Ulaanbaatar Delguur, a clear example of how large, grade A retail space has developed in Ulaanbaatar. The building, comprised of a six floor development spanning 25,000 sqm, boasts two lifts, escalators to each floor, climate control systems and high-grade lighting. However, display problems make it difficult to attract the large, international anchor brands that are desired. The majority of the 5-10 sqm plots that make up much of the space are occupied by small scale cosmetic and fragrance retailers. Remaining space slowly populated after the structure’s launch, and as of 2011, occupancy was around 75% (mainly individual retailers touting clothing imported from China).

2. The Bayanzurkh district

This district represents a wide variety of large scale, mid to lower end retail outfits by Mongolian standards.  The retail core of Ulaanbaatar for lower end consumers is situated in the ‘Black Market’ (Naran Tuul). The Neighbouring ‘Sunday Plaza’ is a five floor shopping mall with close to 100% occupancy selling a wide range of low budget household wares from small cubicles (10-30 sqm a piece). The rest of space consists of small individual store front enterprises, or micro shopping centres.

3. The Bayangol District

In the main, the district’s operations consist of domestic retailers renting small developments of B- quality or below. With a large supply of ground floor space exceeding 30,000 sqm, the past decade has seen multiple grade B operations come online in the district, including Next Plaza, Tumbash Shopping Centre, and the Sansar Centre.

Noted for hosting the first grade A space in Ulaanbaatar, the Jiguur Grand Plaza, which opened at the tail end of 2009, consists of 30,200 sqm gross floor space. Initially low occupancy rates have risen over the past few years and as of 2011, sit at approximately 90%.

The recent completion of Max Group’s ‘Max Mall’ opposite the Jiguur Grand Plaza has suffered similar problems when trying to secure retailers. Occupancy is now approaching 80%, however the upper floors remain difficult to fill.

Why the low occupancy rates?

Examination of Mongolia’s macroeconomic indicators may help explain the trend detailed above. Overall indicators point towards positive demand for retail space; the National Statistics Office of Mongolia (NSOM) Bulletin reports that final GDP consumption rose 22.6% between 2010 and 2011, and that the national average wage increased from 341,500 MNT to 425,200 MNT in 2011, clearly having potential to fuel demand. However, real wage increases may be somewhat limited due to a CPI which increased at an annual rate of 10.2% in 2011. Despite this, it is clear that retail space demand for firms accessible to the general population has the scope to expand in line with the incomes of the Mongolian population in the future.

Why are occupancy rates lower at the top end of the market?

This phenomenon can be explained on both the supply and demand side. In terms of demand, the top end of Mongolian incomes have the potential to increase drastically as the benefits of the country’s large mining projects – i.e. Oyu Tolgoi and Tavan Tolgoi - feed into the consumption habits of the wider population. Growing segments of Mongolian society are now beginning to earn multiple million MNT per month as they are employed within the mining and financial sectors. Within Ulaanbaatar, mid to high level management are receiving salaries often equivalent to between $1,500 and $3,000 per month. However this has not been achieved across wide sections of society; as the rewards are unlikely to become common in the wider economy until the tail end of 2012 when large-scale mining operations become live. Those earning the figures described above constitute an estimated 2% of the domestic population (or 10,000 consumers).

As for the supply side, international firms are currently erring on the side of caution when it comes to moving into the Mongolian market. Bottlenecks across the Chinese border and relatively weak infrastructure act as supply chain disincentives. Risk-reward ratios are often not seen as substantial enough given the country only has a population size of 2.8 million - according to World Bank estimates - with half living within Ulaanbaatar, Bayanzuuch  where trading operations would take place.

These disincentives in the medium term are being eroded. Increased infrastructure emphasis and government development projects aim to increase potential for cross border trade, and an increase in urban migration should mean Ulaanbaatar captures more of the country’s population, increasing the potential market available to international brands. The JICA estimates 55.5% of Mongolians will reside in Ulaanbaatar by 2030. Demographic changes occurring as wage increases are actualized from rapid economic growth should expand the ‘Mongolian middle class’. Furthermore, as FDI fuels mining operations and growth within the country, more wealthy foreign expats will generate another crucial source of demand.

Outlook

In the short term, previously rapid price rises in high end grade A retail space are likely to slow as additional international brands muster the confidence to enter into Mongolia as a market. Occupancy rates in such properties are likely to remain low in the short term as owners hold out on dropping prices for less glamorous domestic retailers, waiting for desired foreign ‘anchor brands’ to enter the country and their retail space. This stagnation of prices however is likely to be a short term phenomenon which should be broken as market conditions change and Mongolia unlocks its growth potential. However domestic demand for retail goods is growing rapidly for enterprises that cater to a larger segment of the Mongolian population. Refusal to drop prices for Mongolian firms should limit supply available to mid/high level domestic retailers looking for lucrative rental space, releasing the potential for impressive yield growth for grade A properties intending to cater to the domestic market and the upper echelons of the grade B market.

If you’d like to learn more about news in Mongolia, visit Bayanzuuch, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check outBayanzuuch, Mongolia’s leading property developer and real estate agency.

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