As the recent crisis has shown, real estate, the world over, is not only an important indicator of the financial health of a country but also one of its main instruments. For the past couple of weeks I have had ample time to reflect on the state of the property market in Mongolia and more specifically Ulaanbaatar. What impact will it have on the economy at large and how will the market move in the next few years? This reflection is of course fueled by a consideration of what actions I should take for my own property portfolio, is it better to cash out and seek new investments or remain in the market and wait for the longer term benefits?
This week will probably turn out be one of the most eventful and important weeks for the Ulaanbaatar Real Estate market, in exactly seven days, the deadline set by the government for the signature of the Oyu Tolgoi project runs out. The long awaited signature of this agreement is expected to have a wide ranging impact on all the various industries of Mongolia. Due to its small size (not geographic but in terms of economy as well as population), this project alone could give an enormous boost to what has now become a mostly lethargic economy.
As Peter Morrow, CEO of Khan Bank declared at the recent Euromoney Conference, Mongolia has remained largely unscathed by the world financial crisis but was hit hard by the subsequent commodity crisis. Due to its lack of exposure to the global financial markets, it had little to lose, the real hit came when the price of copper (Mongolia’s single largest export) collapsed from 9,000USD a ton to 3,000USD a ton in little over 5 months. This greatly impacted the unprepared Mongolian economy: foreign investments dried up, GDP growth collapsed; the national currency became unstable, national reserves dwindled, large companies went into administration, construction projects screeched to a halt, banks stopped lending and most property prices fell between 20 to 50% of what they use to be.
Not all property prices fell. Some sectors not only remained stable but appreciated in value, for example the high end prices have remained generally stable while properties that benefit from an excellent location and middle to high end pricing have gained in value as they are considered a safer investment. The demand for quality properties has not dropped (if at all) as fast as the supply has. Not everyone in the Mongolian economy was hit equally hard, indeed some benefited handsomely from the crisis.
Since the last winter, cautious optimism in the economy has grown; property prices have slowly risen again even if they are still a far cry from their pre-crisis levels. Will the imminent signature of the Oyu Tolgoi Investment Agreement signal the start of the Mongolian Property Boom (Version 2.0 Beta)?
The signature of the agreement will not only bring in the associated investments by Rio Tinto and Ivanhoe Mines, which is considerable at 5$bn (equivalent to current GDP levels), but also create a strong supply chain with its own capital investments. This means more expats on the ground, more money circulating in the economy and a subsequent boom in all mining related businesses. As the economy explodes, it is likely that the property market will follow. A large number of expat families are expected to relocate to Mongolia within 6 months of the signature, foreign companies currently waiting on the sidelines, will finally make their long awaited investments in Mongolia. The combined effect of those investments will undoubtedly affect the demand of real estate; more office space will be required by companies, new comfortable apartments will be needed for expat families not to mention the increasing need for hotels, restaurants and shops.
Demand will of course not only be driven by the expat market along with its foreign direct investments, the bulk of the new demand will come from the increasingly wealthy Mongolian middle class, they are the end user and the main players in this market, it is their new found wealth that will dictate the property prices of the majority of the market. As Mongolian commercial banks recover and mortgages are once again available, the market will gradually move from cash only purchases to mortgage driven acquisitions, thereby making house ownership affordable to a larger segment of the domestic market.
While the levels of demand are expected to increase exponentially, there will be an equally distinct lack of new supply, the vast majority of construction projects that began pre-crisis have been abandoned due to a lack of financing from the banks coupled with falling demand, it will take at least two to three years before we experience again a consistent supply of new properties on the market. This supply is not only limited by financial constraints, by the harsh weather conditions (which limits the available construction time) but also by the lack of available buildable land.
When the Soviets built Ulaanbaatar in the early 1950’s, it was designed to accommodate a relatively small population, since then the population of the city has greatly expanded but investments made in the infrastructure of the city has been lagging behind, this means that land which has access to the city infrastructure is strictly limited to the city center and a few outlying suburbs. With no serious Government commitment to infrastructure development predicted in the near future, buildable land will command an even greater premium and property prices will rise accordingly.
All of this is pointing towards a new explosion of property prices within Ulaanbaatar, but surely in such a buoyant market as Ulaanbaatar, there are other investment opportunities that can prove to be more exciting and indeed rewarding?
Over the past 5 years, I have been fortunate enough to work in a wide spectrum of industries; cashmere, restaurants, tourism, fire safety and of course property to name but a few. While every investment in Mongolia can be made profitable, it is my strong opinion that there is no better business in Mongolia than Real Estate.
Every business should try to minimize its exposure to external risks such as government intervention, reliance on licensing, “favours” from officials (a.k.a. corruption), the need to enter into partnerships with Mongolian entities and its vulnerability to changes in unstable taxes and laws aimed at discriminating against foreign investors. Mining is clearly a business that has a high level of exposure to all of the above, property, on the other hand, has none of those external risks. Foreign investors in Mongolia can own their property 100% as freehold properties, do not need to go into a partnership with any Mongolian entity, have no restrictions on the movement of capital and benefit from very low tax levels. More importantly, Mongolian and foreign investors are treated as equals under Mongolian law.
Despite its recent drop in value, property remains a strong and stable asset in times of crisis, an asset that will (nearly) always appreciate in the longer term while providing recurring rental income for minimal involvement in terms of management. In short, it presents low risks with medium to high levels of returns. The currently undervalued prices present an unparalleled opportunity for cash rich investors to get into the game before it’s too late. There is a limited window of opportunity for the next two years when the demand for quality property will in by far outstrip the supply and the returns on investments are likely to become phenomenal.
How far can prices go? Well, it is as always a case of demand versus supply, a glass of fresh water in the Gobi desert is worth infinitely more than it is in Paris. In the short term, prices will rise, the longer term outlook will depend on supply but a double digit GDP growth a year, a nascent mortgage market along with a growing urban population can only push prices one way, up.
While I do need to sell some property over the next few months to fund some upcoming expenses (MBA School) it is clear that it is in my interest to retain as much real estate in Ulaanbaatar as I can. I have never seen another country with such potential for growth and above average returns as Mongolia.
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