Keeping Up With the Khans

Far Eastern Economic Review
by Oliver Waddington-Ball
May 14, 2008

Seen from an airplane at 35,000 feet, Mongolia is a vast and predominantly empty landscape. It’s hard to believe that it has become the scene of one of Asia’s most spectacular real-estate booms. In the last 12 months, housing sales and prices in the capital, Ulan Bator have grown exponentially. Similarly, rental yields in the subarctic city of one million people have doubled, eclipsing growth rates of Beijing and Hong Kong. According to Tsenduren Bordukh of Mongolian Properties, the country’s largest real-estate agency and developer of the luxury Olympic Residence, real-estate price levels will grow “well into the next decade.”

In this largely vacuous country of 1.56 million square kilometers, it is ironic that the real-estate boom is driven by the lack of developable spaces. However, while the country is space rich, Ulan Bator is not. With four in 10 Mongolians living in the capital, the city has reached the limits of practical developable space. The power plant responsible for the underground heating system and supply of electricity, a legacy of the Soviet involvement, is so overstretched that, even were developers to engage in rapid construction on green field sites around the edges of the city, the chances are that new domiciles would lack heating and receive an erratic supply of electricity. David Dollar, country director of the World Bank for Mongolia and China, in his closing address of a meeting with the Mongolian government in April 2007 noted: “I think it’s fair to say that participants shared some major concerns over the status of Mongolia’s power sector.” As for many developing countries, the government has struggled to finance the kind of projects necessary to support the rapid modernization of the economy and local tariffs have failed to rise rapidly enough to service debt costs or to raise significant new funds for the sector. Not an appealing thought in a country where the winter temperature plummets as low as 40 degrees Celsius below zero, and then bounces back to more than 40 degrees Celsius in the summertime.

This environmental extremity has also been the cause of sluggish development of those projects lucky enough to be guaranteed access to Ulan Bator’s heating system. Development of all types has had to revolve around the unforgiving winter season stretching from October through to April when freezing temperatures make it impossible to pour concrete. The underdeveloped level of infrastructure both in and around the capital has also mean that even in the balmier months, developers often lack the factors of production and cabooses laden with goods are often stacked up at the border, waiting for the attention of the countries’ dwindling supply of Soviet-built freight locomotives. This has culminated in a building rate that averages around 60 apartments per year for the top five developers, according to Lee Cashell, founder and chief executive officer of Asia Pacific Investment Partners, an investment group headquartered in Hong Kong but with extensive Mongolian exposure.

But as most high school economics students will be able to explain, an expansion in supply of a good, however inhibited, should lead to a decrease in prices unless there is a proportional or greater expansion in demand. This has clearly been the case in Mongolia’s real estate industry where the rate at which new housing is built is still being outstripped by the growth of demand from the market. And this is reflected in almost monthly price hikes. Who then is snapping up these new apartments? Part of the answer lies in the same backbone of Mongolia’s steady GDP growth rate of about 8% to 10% since 2003, the continued foreign investment in the exploration and extraction of resources, such as copper and coal, which has been accountable for nearly 70% of FDI since 1990. This has led to an increasing number of expats in and around Ulan Bator, all desperate to spend nontransferable housing budgets and unsatisfied with the still widely used local alternative, the ger, or felt tent commonly found in Mongolia.

But in fact, the foreign miners are not the only ones unsatisfied with the long held tradition of the versatile ger. Many aspirational Mongolians, often those who have been in some way involved with the spillover effects of FDI and sustained GDP growth, have also been rejecting the traditional abode. Having becoming increasingly wealthy and aware of the things that money can buy, this new group is looking for modern apartments. The money supply has also recently opened up. Local lenders, spurred on by market competition in the banking sector, have started offering long-term lending and mortgages and reducing collateral requirements. This has had the effect of putting even more domestic Mongolians in the market, chasing that elusive square meter.

This ever increasing demand for real estate and the resulting overnight returns on offer to the savvy foreign investor has led to a great deal of FDI aimed at the real-estate market in the past two years. The country has a rating of 60.1% on the Heritage Foundation’s Index of Economic Freedom. A percentage point above the Asian average, this classifies Mongolia as comparatively secure for investment. Whilst foreigners are not allowed to own land, they can gain freehold through an immovable property certificate for any development they build or buy, with protections similar to those in the United States. And the Mongolian government has no restrictions on foreign exchange, meaning that foreign investment will likely continue to grow. If and when these investors choose to exit the market will depend largely on the government’s handling of rising inflation, which has accelerated almost 10% since June last year. However, if some of these bottlenecks, such as the real-estate one that constrict the size and value of development projects can be removed, this could mean that the future for property developers and buyers alike could be bright.


Mr. Waddington-Ball is a marketing intern with The Wall Street Journal in Beijing.