40k apartments show strong capital growth over the summer of 2011
Unexpected and sustained high capital growth over the city centre of Ulaanbaatar demonstrates a clear trend towards city living over the suburbs.
Over the course of 2011, the Mongolian Property market has born witness to unexpectedly high levels of capital growth, quickly surpassing the base pre-crisis price levels of 2009/10.
Indications of this growth initially appeared during the previous winter when, a market traditionally stagnant, kept transacting at an ever increasing and unprecedented pace.
The sector that has witnessed some of the most impressive levels of growth is almost certainly the 40k State Department Store area with nearly 55% capital growth on average over the last 6 months while rental yields have remained at a steady average of 8% to 12% net across the sector.
The 40k are those low level (4 to 5 floors) apartment buildings, built mostly between 1955 and 1965 in the city centre area known colloquially as the 7 courtyards. Those 40k courtyards were rigidly designed with ground-floor commercial access on the exterior towards the main roads while residential access was safely set within an inner courtyard composed of children’s amusement parks and small public gardens. Today a number of those courtyards have sadly been built on but the majority remain and provide a small island of tranquility in an otherwise bustling city. The apartments themselves typically come in 3 size declinations; 42sqms (studio), 65 sqms (1 Bed) and 89sqms (2 Beds) with a large common staircase supporting 3 to 4 apartments per floor.
Prices of the 40K apartments went from a stagnant average of 800USD per square meter in 2010 to a dynamic average of 1,350USD per square meter today while rents have skyrocketed from an average monthly rent of 800USD for a well renovated 1 bedroom apartment to over 1,200USD today. Ground floor retail units have often seen potentially even higher levels of capital growth than their residential counterparts.
A substantial contributor to this growth can be assigned to the plethora of new international players on the scene, mostly larger private-equity investment funds and high-net-worth individuals who are keen to enter the Mongolian property market in its early stages and value central real estate locations above all else.
Additional growth in the market could be termed as “natural growth” stemming from both the emerging (increasingly cash-rich) Mongolian middle class as well as those seeking to relocate to the city centre from the suburbs due to the increasingly poor traffic condition within Ulaanbaatar as well as the convenience of living within walking distance of all vital areas of the city.
The fundamental factors underlying the new-found popularity of the 40k are simple to understand; they are possibly some of the best constructions, in terms of quality, within Ulaanbaatar with their thick walls, high ceilings and large windows while the domestic population has now come to realise that new-built apartments are often of poor quality and tend to degrade rapidly.
The 40k apartments don’t come without their own set of challenges; common areas are often poorly maintained, plumbing issues are common-place and none of the buildings have modern conveniences such as underground heated garages, fire exits or lifts. They are never the less an increasingly desirable option for both expats wishing to remain within close proximity of restaurants, bars, shops and the CBD as well as those Mongolians who value comfort, convenience and safety over the perceived prestige that new developments may bring.
This gentrification process can easily be demonstrated through the increasingly visible collection of expensive SUV’s parked outside as well as the less visible but very real number (and increasingly high-cost) of renovations taking place within those apartments.
The city of Ulaanbaatar has itself recognised the increasing importance and gentrification of the people living in the area as, in the run-up to the June 2012 elections, it has spent the summer of 2011 repairing all the roads in the area, repainting the front facade of the buildings, installing new balconies, re-equipping the children’s courtyards as well as installing street lights throughout the area.
The general improvements in the area made by the city as well as the fast growth in prices leads current landlords to add-value to their property through renovation instead of selling and purchasing new-builts, this in addition to an increased number of both foreign investors as well as Mongolians seeking to gain a foothold in the market, is leading to a considerable lack of liquidity and thus lead to few transactions actually taking place. Strong levels of demand with very increasingly limited supply is only contributing to further growth in the prices.
It has furthermore been rumoured for a very long time that the 40k apartments will be demolished by the city to make place for much larger and more modern apartment buildings, while this could have been considered a real risk a few years ago, today it is nothing but a dream practically impossible to achieve; the legal framework is not in place (and has been rejected by parliament a number of times) while current market prices would not make it economically feasible to purchase, demolish and redevelop those units within the 7 courtyards area.
While the recent capital growth may dissuade some investors from seeking further exposure in the market, it could be argued that with only about 8% of the market mortgaged, worsening traffic conditions, poor quality of new builds, scarcity of greenfield sites as well as increasing demand from the domestic market compounded by a fast growing economy; the 40k area still has a considerable amount of growth still ahead. Comparable situations could easily be drawn with Kazakstan, Russia or other CIS countries where those very same types of apartments are now transacting at an average of between 2,500 to 4,500USD per square meter.
The capital growth in the 40k areas has undoubtedly had a profound repercussion on the rest of the market as logic would dictate that if such older buildings have now reached an average price per square meter of 1,350USD, than surely, new builds in a similar area must be worth double this price, hence the Altai construction building or the A1 residence now have price points of around 2,500USD per square meter and are still selling well despite being off-plan.
We expect that the next prominent areas of high capital growth will be found in the 50K area near the Ulaanbaatar Delguur as well as the residential courtyards directly to the back of the Bayangol hotel and near the Mercury market. Those buildings are maybe not comparable in terms of quality but are never the less well located and, most importantly, still affordable for a larger segment of the population with an entry price point that we still believe to be undervalued.
External, macro risks to the market as a whole will come from a possible renewed global commodity crisis which may still severely impact Mongolia but is most likely to come from closer to home, primarily from politicians toying with international investors good-will and threatening Mongolia’s perceived political stability by announcing their wish to re-negotiate the OT agreement in order to please a nationalist electorate.
There is a very real risk that property in the 40K area may yet again depreciate a little over the coming winter but there is no doubt that over the medium term (3 to 5 years) all signs point towards strong, continued growth sustained by the unique location and quality of those buildings, further strengthened by strong levels of both domestic and foreign demand for rental and investment properties.
Written by Christopher de Gruben for M.A.D. News
Source : M.A.D. News
Over the course of 2011, the Mongolian Property market has born witness to unexpectedly high levels of capital growth, quickly surpassing the base pre-crisis price levels of 2009/10.
Indications of this growth initially appeared during the previous winter when, a market traditionally stagnant, kept transacting at an ever increasing and unprecedented pace.
The sector that has witnessed some of the most impressive levels of growth is almost certainly the 40k State Department Store area with nearly 55% capital growth on average over the last 6 months while rental yields have remained at a steady average of 8% to 12% net across the sector.
The 40k are those low level (4 to 5 floors) apartment buildings, built mostly between 1955 and 1965 in the city centre area known colloquially as the 7 courtyards. Those 40k courtyards were rigidly designed with ground-floor commercial access on the exterior towards the main roads while residential access was safely set within an inner courtyard composed of children’s amusement parks and small public gardens. Today a number of those courtyards have sadly been built on but the majority remain and provide a small island of tranquility in an otherwise bustling city. The apartments themselves typically come in 3 size declinations; 42sqms (studio), 65 sqms (1 Bed) and 89sqms (2 Beds) with a large common staircase supporting 3 to 4 apartments per floor.
Prices of the 40K apartments went from a stagnant average of 800USD per square meter in 2010 to a dynamic average of 1,350USD per square meter today while rents have skyrocketed from an average monthly rent of 800USD for a well renovated 1 bedroom apartment to over 1,200USD today. Ground floor retail units have often seen potentially even higher levels of capital growth than their residential counterparts.
A substantial contributor to this growth can be assigned to the plethora of new international players on the scene, mostly larger private-equity investment funds and high-net-worth individuals who are keen to enter the Mongolian property market in its early stages and value central real estate locations above all else.
Additional growth in the market could be termed as “natural growth” stemming from both the emerging (increasingly cash-rich) Mongolian middle class as well as those seeking to relocate to the city centre from the suburbs due to the increasingly poor traffic condition within Ulaanbaatar as well as the convenience of living within walking distance of all vital areas of the city.
The fundamental factors underlying the new-found popularity of the 40k are simple to understand; they are possibly some of the best constructions, in terms of quality, within Ulaanbaatar with their thick walls, high ceilings and large windows while the domestic population has now come to realise that new-built apartments are often of poor quality and tend to degrade rapidly.
The 40k apartments don’t come without their own set of challenges; common areas are often poorly maintained, plumbing issues are common-place and none of the buildings have modern conveniences such as underground heated garages, fire exits or lifts. They are never the less an increasingly desirable option for both expats wishing to remain within close proximity of restaurants, bars, shops and the CBD as well as those Mongolians who value comfort, convenience and safety over the perceived prestige that new developments may bring.
This gentrification process can easily be demonstrated through the increasingly visible collection of expensive SUV’s parked outside as well as the less visible but very real number (and increasingly high-cost) of renovations taking place within those apartments.
The city of Ulaanbaatar has itself recognised the increasing importance and gentrification of the people living in the area as, in the run-up to the June 2012 elections, it has spent the summer of 2011 repairing all the roads in the area, repainting the front facade of the buildings, installing new balconies, re-equipping the children’s courtyards as well as installing street lights throughout the area.
The general improvements in the area made by the city as well as the fast growth in prices leads current landlords to add-value to their property through renovation instead of selling and purchasing new-builts, this in addition to an increased number of both foreign investors as well as Mongolians seeking to gain a foothold in the market, is leading to a considerable lack of liquidity and thus lead to few transactions actually taking place. Strong levels of demand with very increasingly limited supply is only contributing to further growth in the prices.
It has furthermore been rumoured for a very long time that the 40k apartments will be demolished by the city to make place for much larger and more modern apartment buildings, while this could have been considered a real risk a few years ago, today it is nothing but a dream practically impossible to achieve; the legal framework is not in place (and has been rejected by parliament a number of times) while current market prices would not make it economically feasible to purchase, demolish and redevelop those units within the 7 courtyards area.
While the recent capital growth may dissuade some investors from seeking further exposure in the market, it could be argued that with only about 8% of the market mortgaged, worsening traffic conditions, poor quality of new builds, scarcity of greenfield sites as well as increasing demand from the domestic market compounded by a fast growing economy; the 40k area still has a considerable amount of growth still ahead. Comparable situations could easily be drawn with Kazakstan, Russia or other CIS countries where those very same types of apartments are now transacting at an average of between 2,500 to 4,500USD per square meter.
The capital growth in the 40k areas has undoubtedly had a profound repercussion on the rest of the market as logic would dictate that if such older buildings have now reached an average price per square meter of 1,350USD, than surely, new builds in a similar area must be worth double this price, hence the Altai construction building or the A1 residence now have price points of around 2,500USD per square meter and are still selling well despite being off-plan.
We expect that the next prominent areas of high capital growth will be found in the 50K area near the Ulaanbaatar Delguur as well as the residential courtyards directly to the back of the Bayangol hotel and near the Mercury market. Those buildings are maybe not comparable in terms of quality but are never the less well located and, most importantly, still affordable for a larger segment of the population with an entry price point that we still believe to be undervalued.
External, macro risks to the market as a whole will come from a possible renewed global commodity crisis which may still severely impact Mongolia but is most likely to come from closer to home, primarily from politicians toying with international investors good-will and threatening Mongolia’s perceived political stability by announcing their wish to re-negotiate the OT agreement in order to please a nationalist electorate.
There is a very real risk that property in the 40K area may yet again depreciate a little over the coming winter but there is no doubt that over the medium term (3 to 5 years) all signs point towards strong, continued growth sustained by the unique location and quality of those buildings, further strengthened by strong levels of both domestic and foreign demand for rental and investment properties.
Written by Christopher de Gruben for M.A.D. News
Source : M.A.D. News
Comments
Post a Comment