Is it still worth investing in Ulaanbaatar property?
As the summer economic growth period is reaching its traditional zenith, property prices are yet again on the slow path upwards. For all intents and purposes, it seems that Mongolia’s recession blues are over to be replaced by a new wave of optimism.
Is this growth sustainable and does the UB real estate market still makes investment sense?
The crisis seems to have had a lasting impact on Mongolia’s investment environment. It has served its purpose as a wake up jolt, demonstrating Mongolia’s heavy vulnerability to international economic swings with it’s over reliance on commodity prices as a catalyst for economic growth. As those commodity prices dropped, Mongolia quickly found itself in an unfamiliar situation of recession followed by a long period of economic confusion.
The sudden lack of liquidity in Mongolia’s industries and the subsequent general loss of confidence negatively impacted property prices throughout the capital. The economic loss forced Mongolia to kick start the economy by opening itself up to foreign investments while presenting a stable political front.
Today, it seems that the euphoria of the care free days has gone away to be replaced by more sophisticated and considered investment strategies. Real estate prices are still generally below pre-crisis levels (by 20 to 40% depending on the type of property), but the market is slowly showing distinct signs of recovery.
Challenges of the Ulaanbaatar real estate market
Looking at the market from an outsider’s perspective, you may think that it is back in full swing with rental yields yet again advertised at staggeringly high levels along with heavy promotion of ambitious construction projects. This is not necessarily an accurate picture of what is happening on the ground. Those staggeringly high returns on investments are rarely realized, while many properties sit empty for months post-completion, that is, if they ever do reach completion. Walk into the office of any one of the Mongolian construction companies in Ulaanbaatar, and you will be shown futuristic architectural drawings depicting tall, graceful, steel and glass skyscrapers, each more elegant and over-sized than the last.
If, on the other hand, you were to ask about financing for those projects, you will invariably find that it is still wanting. The financial tools and systems to capitalize on such projects are yet to be created or utilized. This is possibly a good thing as it seems that the size and growth potential of the market is consistently overestimated.
The city abounds with examples of this extraordinary lack of foresight. Empty commercial buildings litter the landscape. Deserted shopping malls are legion. Hotels are being built left, right and center with no clear concept as to who will fill those hundreds of new luxury rooms. To give but a few examples, in the new Jiguur Grand Plaza, both the retail and office space is mostly vacant. The brand spanking new Ulaanbaatar Delguur has sufficient empty space to play car football on its marble floors. The Eko construction office tower has not yet dared to open as they fear that it will be entirely populated by ghosts.
New hotel opening rumours are equally prolific, while it seems that the Hilton project has been canceled, the Shangri-La Hotel is forging ahead while the Radisson Hotel is itself slated for completion in 2011. Both a Sheraton and a Best Western hotel also seem to be in the plans, while a Holiday Inn may take over an existing hotel. In total, over a thousand new hotel rooms are due to open in the coming few years; this in a country that only has a 4 month-long tourism season, mostly backpackers.
Will there be sufficient business travelers to reach the required 80% levels of occupancy year round? Despite the oversupply of property in some segments of the market, today’s real estate market is more mature than ever. Some areas, as well as some types of properties, are still likely to witness strong growth while other segments of the market will remain stagnant for the foreseeable future. Potential can be seen in particular within parts of the residential property as well as the low cost housing sectors.
What are the predictions on the Ulaanbaatar Property Market?
PFurther criticism of the real estate market in Ulaanbaatar could be levied. It is currently segmented into a strong domestic sector, with generally lower prices but dedicated to owner’s self occupation while another, shadow property investment sector is itself growing alarmingly fast. This property investment sector is generally concentrated around the heart of the city and the Zaisan areas. It is based around those investors who regularly buy property with the specific aim of renting to expatriate, corporate tenants.
This is gradually leading to an increasingly artificially inflated and detached property market. As more investment pours into the sector, prices are automatically, artificially inflated, thus leading to further inflation in rental rates as investors need to justify their return on investment, which in turn leads to continued increases in purchase prices. This snowball effect is further compounded by considerable, and slightly misplaced, public enthusiasm about the estimated number of executive expats coming into the country. Those figures seem to be consistently inflated and thus, indirectly, contribute to the potential creation of a new property bubble.
Despite all of the above, the market is not all despair and missed opportunities. There are a number of distinct and attractive possibilities that present themselves for both medium to long term investments. The main factor driving this growth is of course speculation in the mining boom currently gripping the country. If Mongolia keeps heading on the path of welcoming foreign investments and safeguarding their rights and investments in the same manner as it safeguards those of Mongolians, it is likely that Mongolia as a whole will remain an attractive investment destination.
Generally speaking, a bubble is unlikely to happen in the near future (famous last words). As the market further matures along with the general state of the economy, a greater proportion of the Mongolian population will become involved and thus create new potential tenants. Furthermore, the Millennium Challenge Account property rights program will, if completed as planned, signal the start of a real mortgage financial industry in Mongolia, thus, yet again, creating a brand new customer base. Beyond that, further growth in the property market is dependent on the diversification of the economy, moving away from a complete reliance on commodity prices as well as retaining its attractive tax regime. While the increasing levels of urbanization currently experienced in Mongolia’s cities are unlikely to have an impact on medium to high grade properties, it presents gigantic opportunities in the low to mid housing sectors.
Is this growth sustainable and does the UB real estate market still makes investment sense?
The crisis seems to have had a lasting impact on Mongolia’s investment environment. It has served its purpose as a wake up jolt, demonstrating Mongolia’s heavy vulnerability to international economic swings with it’s over reliance on commodity prices as a catalyst for economic growth. As those commodity prices dropped, Mongolia quickly found itself in an unfamiliar situation of recession followed by a long period of economic confusion.
The sudden lack of liquidity in Mongolia’s industries and the subsequent general loss of confidence negatively impacted property prices throughout the capital. The economic loss forced Mongolia to kick start the economy by opening itself up to foreign investments while presenting a stable political front.
Today, it seems that the euphoria of the care free days has gone away to be replaced by more sophisticated and considered investment strategies. Real estate prices are still generally below pre-crisis levels (by 20 to 40% depending on the type of property), but the market is slowly showing distinct signs of recovery.
Challenges of the Ulaanbaatar real estate market
Looking at the market from an outsider’s perspective, you may think that it is back in full swing with rental yields yet again advertised at staggeringly high levels along with heavy promotion of ambitious construction projects. This is not necessarily an accurate picture of what is happening on the ground. Those staggeringly high returns on investments are rarely realized, while many properties sit empty for months post-completion, that is, if they ever do reach completion. Walk into the office of any one of the Mongolian construction companies in Ulaanbaatar, and you will be shown futuristic architectural drawings depicting tall, graceful, steel and glass skyscrapers, each more elegant and over-sized than the last.
If, on the other hand, you were to ask about financing for those projects, you will invariably find that it is still wanting. The financial tools and systems to capitalize on such projects are yet to be created or utilized. This is possibly a good thing as it seems that the size and growth potential of the market is consistently overestimated.
The city abounds with examples of this extraordinary lack of foresight. Empty commercial buildings litter the landscape. Deserted shopping malls are legion. Hotels are being built left, right and center with no clear concept as to who will fill those hundreds of new luxury rooms. To give but a few examples, in the new Jiguur Grand Plaza, both the retail and office space is mostly vacant. The brand spanking new Ulaanbaatar Delguur has sufficient empty space to play car football on its marble floors. The Eko construction office tower has not yet dared to open as they fear that it will be entirely populated by ghosts.
New hotel opening rumours are equally prolific, while it seems that the Hilton project has been canceled, the Shangri-La Hotel is forging ahead while the Radisson Hotel is itself slated for completion in 2011. Both a Sheraton and a Best Western hotel also seem to be in the plans, while a Holiday Inn may take over an existing hotel. In total, over a thousand new hotel rooms are due to open in the coming few years; this in a country that only has a 4 month-long tourism season, mostly backpackers.
Will there be sufficient business travelers to reach the required 80% levels of occupancy year round? Despite the oversupply of property in some segments of the market, today’s real estate market is more mature than ever. Some areas, as well as some types of properties, are still likely to witness strong growth while other segments of the market will remain stagnant for the foreseeable future. Potential can be seen in particular within parts of the residential property as well as the low cost housing sectors.
What are the predictions on the Ulaanbaatar Property Market?
PFurther criticism of the real estate market in Ulaanbaatar could be levied. It is currently segmented into a strong domestic sector, with generally lower prices but dedicated to owner’s self occupation while another, shadow property investment sector is itself growing alarmingly fast. This property investment sector is generally concentrated around the heart of the city and the Zaisan areas. It is based around those investors who regularly buy property with the specific aim of renting to expatriate, corporate tenants.
This is gradually leading to an increasingly artificially inflated and detached property market. As more investment pours into the sector, prices are automatically, artificially inflated, thus leading to further inflation in rental rates as investors need to justify their return on investment, which in turn leads to continued increases in purchase prices. This snowball effect is further compounded by considerable, and slightly misplaced, public enthusiasm about the estimated number of executive expats coming into the country. Those figures seem to be consistently inflated and thus, indirectly, contribute to the potential creation of a new property bubble.
Despite all of the above, the market is not all despair and missed opportunities. There are a number of distinct and attractive possibilities that present themselves for both medium to long term investments. The main factor driving this growth is of course speculation in the mining boom currently gripping the country. If Mongolia keeps heading on the path of welcoming foreign investments and safeguarding their rights and investments in the same manner as it safeguards those of Mongolians, it is likely that Mongolia as a whole will remain an attractive investment destination.
Generally speaking, a bubble is unlikely to happen in the near future (famous last words). As the market further matures along with the general state of the economy, a greater proportion of the Mongolian population will become involved and thus create new potential tenants. Furthermore, the Millennium Challenge Account property rights program will, if completed as planned, signal the start of a real mortgage financial industry in Mongolia, thus, yet again, creating a brand new customer base. Beyond that, further growth in the property market is dependent on the diversification of the economy, moving away from a complete reliance on commodity prices as well as retaining its attractive tax regime. While the increasing levels of urbanization currently experienced in Mongolia’s cities are unlikely to have an impact on medium to high grade properties, it presents gigantic opportunities in the low to mid housing sectors.
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