Introduction from the editor
When I first came to Ulaanbaatar just four years ago, I found a very different
city to the on...
Table of contents

Map of the city.......................................................................................p...
ULAANBA
Bileg
Department
Store
Urgoo
Movie
Theatre

Teng
Mov
Thea
Gandan
Monastery

UB Palace
d

TBD Anduu

Maxmall
Grand
...
ATA R M A P
SOS Medica
Ulaanbaatar

gis
vie
atre

Natural
Museum

Chinggis
Hotel
IT Center
ent
n Parliam
Mongolia t buildi...
Thoughts from the CEO
Ulaanbaatar: The changing face of one of Asia’s most vibrant frontier cities
The view from the top o...
Russia

Mongolia

China
Macroeconomics
Macroeconomics
Just twenty years ago, a newly democratized Mongolian state was struggling to survive a
transformation rece...
Macroeconomics
remainder. Research by Ivanhoe
Mines estimates that the deposit
contains around 37 million tons of
copper a...
Macroeconomics
converted into tangible wealth, as exports reached a record high of US$4.8bn at the end
of 2011, up from ju...
Macroeconomics
The short-term vulnerability of Mongolia’s export performance is connected to a number
of worldwide phenome...
Macroeconomics
half the value recorded in the previous year.

Concerns over China’s economic stability are only natural fo...
Macroeconomics
much more gradually then was observed in 2008, whilst the rate of deceleration has
slowed in recent months,...
Macroeconomics
submission of the following documents:
the application form; the company’s
charter; a document to confirm t...
Macroeconomics
costs being estimated to have required $7 billion of foreign capital. The apparent success
of Oyu Tolgoi ha...
Macroeconomics
As opportunities in these sectors are appreciated by international entities increasingly
aware of Mongolia ...
Macroeconomics

Photo by Hamid Sardar / Khasar Sandag

a proportion of potentially taxable revenue in the future has alrea...
Macroeconomics
in particular by
the quarters’
substantial
increases
in
public sector
wages
and
salaries
(up
36%).
Asia
Pac...
Macroeconomics
Current high inflation is being fueled by both core inflation and increases in the price of
food, most nota...
Macroeconomics
Wage Growth: The emergence of the Mongolian Middle Class
Mongolia’s rapid economic growth has led to consid...
Politics
Politics

Photo by Hamid Sardar / Khasar Sandag

Mongolia peacefully transitioned to democracy in July 1990, enshrining mu...
Politics
legitimacy of the majority of legislators who nominated
them following each separate parliamentary election.
In c...
Politics
so many of the nation’s peers.
Parties Overview
The Madisonian dispersal of power across branches of government t...
Politics

Prime Minister Noroviin Altankhuyag

The effectiveness of the party however has been subject to constraints stem...
Politics
The allegations suggested there were irregularities in the counting process, along with
the bribing of the electo...
Politics

Photo by Hamid Sardar / Khasar Sandag

The 2012 Parliamentary Election
Mongolia’s most recent parliamentary elec...
Politics
president Nambaryn Enkhbayar upon the 12th April, who was imprisoned by the
Independent Authority Against Corrupt...
Legal System
Legal System

Supreme Court Justices of Mongolia

The Rights of Foreign Citizens in Mongolia
Foreign citizens for the most...
•	
•	
•	

Legal System
Land ownership, or to ‘own land’, meaning to be in legitimate control of land with the
right to dis...
Legal System

•	
•	
•	

The code of the territorial unit(s) requested which shows the territorial and administrative
juris...
Legal System
companies and
organizations.
Extending
the
Land Possession
License
The duration of a
land possession
license
...
Legal System

Photo by Hamid Sardar / Khasar Sandag

Expiration of a Land Possession License

•	

A land possession licens...
Legal System

Governors of soums and districts are allowed the ability to terminate land possession

•	

licenses in the f...
Legal System
Subject to the provisions of the law, the right of a person or legal person to own
immovable property arises ...
Legal System

globally, being known as ‘eminent domain’ in the United States, ‘compulsory purchase’ in
the United Kingdom,...
Legal System
International Comparison
When looked at in the context of the region, Mongolia is more similar to the real es...
Legal System

Tax

43
Tax
The Mongolian Tax Regime
Mongolia’s economic success over the past five years has been based upon the country’s
natura...
•	
•	
•	

Tax
Individuals with residence in Mongolia
Or
An individual who resides in Mongolia for 183 days or more a year
...
Tax

•	
•	
•	

An economic entity formed under Mongolian law, and their subsidiaries;
A foreign economic entity headquarte...
Tax

•	
•	

Photo by Hamid Sardar / Khasar Sandag

If no such information is available, then the value is to be determined...
Tax

Photo by Hamid Sardar / Khasar Sandag

Taxation Bureaucracy

•	
•	
•	

The Mongolian Law on Personal Income Tax stipu...
Tax
Tax Ambiguity
Although theoretical tax rates are clearly desirable, the Mongolian tax regime has on a
number of instan...
Tax
Property Own-

Variable

Variable

Standard rate

Up to 1.5% de-

ership Tax

between 0.6%

between 1%

of 15% of net
...
Section Two
Section Two
Ulaanbaatar
Ulaanbaatar is at present Mongolia’s only first tier conurbation. Located in the north of
central ...
Section Two

Photo by Hamid Sardar / Khasar Sandag

The Demographics of Ulaanbaatar
Two connected forces have fuelled the ...
Section Two
These high rates of urban migration are caused by a combination of financial necessity and
the perception of o...
Section Two
The Outcome of Mongolia’s Urbanisation: The Ger Districts
For the majority of the migrants who flock to Ulaanb...
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
Real estate report 2013 Mongolia
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Real estate report 2013 Mongolia

  1. 1. Introduction from the editor When I first came to Ulaanbaatar just four years ago, I found a very different city to the one I work in today. The Mongolian growth story had not yet begun and it showed. The buildings were decrepit, foreigners were a novelty, and the food was predominantly mutton. Just four years on, none of these remain true. Fast paced construction fueled by massive inflows of Foreign Direct Investment have allowed large structures such as the The Monnis Tower, The Blue Sky, and the Central Tower to dominate the city’s skyline. The expatriate population has swollen over recent years, with thousands of professionals having located to the steppe in order to make the most of the country’s considerable opportunity. These changes have taken place against the backdrop of unprecedented economic development. Having achieved a real GDP growth rate of 17.3% over 2011, the Mongolian economy is outperforming every one of the BRIC economies. Mongolia is predicted by the World Bank to be the world leader in economic growth over the next two decades. This momentum appears to have transferred effectively into the real estate sector, with many property assets facing double-digit value appreciation over recent years. Although huge gains have already been realized, it appears the market is only just beginning to gather momentum. As the country continues its rapid growth trajectory and urbanization, immigration and upward mobility spur demand for all types of real estate, a combination of unique conditions is also limiting the growth of an inadequate supply. The Mongolian real estate market however continues to face a chronic information deficit, resulting in many of these future price drivers yet to be priced into the market. Asia Pacific Investment Partners and Mongolian Properties seeks to bring some clarity to investors looking to enter this exciting market by publishing this Mongolian Properties Real Estate Report 2013. This book is the first comprehensive piece of research into Ulaanbaatar’s real estate market that is backed by local data and ten years of direct operational expertise. Drawing upon the combined wisdom of all of Mongolian Properties, the oldest real estate agency in the country, the Mongolian Properties Real Estate Report 2012 aims to convey a decade of expertise to the reader in a relatively simple document. With thoughts, reflections and forecasts having been recorded in a comprehensive series of interviews with each member of the company’s team, we are confident that the reader could not be in better hands. Additional data for the Mongolian Properties Real Estate Report 2013 was sourced from Tenkhleg Zuuch, Mongolia’s leading real estate trade magazine. This report is divided into three sections: a country overview designed to guide those new to the country through its politics, macroeconomic situation, and legal and tax regimes; an analysis section that describes and examines many of the trends and drivers that have, and should continue to shape the real estate over the coming years and finally an examination of the real estate market detailed into the six key districts of Ulaanbaatar – with some ideas of future price trajectories. However you are thinking of investing in the Mongolian growth story, Asia Pacific Investment Partners is confident that the Mongolian Properties Real Estate Report 2013 is the most comprehensive examination of market drivers currently published. We hope you find it a useful tool in determining your investment strategy for Mongolia! Content Editor – Joe Holloway Design & Production - Urtnasan Erdenebileg Art Director – Naranmunkh E Editorial Assistant – Yanjindulam Tuvd Editorial Assistant – Saruulzaya Bayarsaikhan Marketing Manager - Buyanhishig International Distribution – Stuart Evans Financial Analyst – Locke Brown Editorial Contributor – Evan Casey Operations Coordinator – Andrew Bergman Administration – Kevin Trzcinski Business Development Director will@apipcorp.com UK Tell: (+44) 7776 195209 HK Tell: (+852) 9549 2188 Websites www.mongolia-properties.com www.apipcorp.com Follow us on Facebook www.facebook.com/mongolia.property www.linkedin.com/company/mongolianproperties Mongolian Properties Disclaimer Every effort has been made to ensure the accuracy of the information and data contained in this book however, the editors and the publishers accept no responsibility for any errors it may contain, or for any loss, financial or otherwise, sustained or incurred by any person or entity using this publication. Copyright All rights are reserved in this publication. No part of this publication can be re-produced displayed, stored, or transmitted in any manner without the prior written consent of Mongolian Properties. Photo Credits Photographers: Hamid Sardar /Khasar Sandag To order a copy of this report, please contact: Kevin Trzcinski, Group Sales & Marketing Director kevin@apipcorp.com
  2. 2. Table of contents Map of the city.......................................................................................p2 Macroeconomics.................................................................................p11 Politics....................................................................................................p25 Legal System.........................................................................................p33 Tax..........................................................................................................p43 Section Two...........................................................................................p51 Residential Market................................................................................p75 Office.....................................................................................................p81 Retail......................................................................................................p89 Sukhbaatar............................................................................................p99 Chingeltei............................................................................................p111 Khan Uul...............................................................................................p119 Bayanzurkh..........................................................................................p129 Bayangol.............................................................................................p135 Songinokhairkhan...............................................................................p141 DISCLAIMER: CERTAIN STATEMENTS IN THIS DOCUMENT ARE ‘‘FORWARD LOOKING STATEMENTS’’. THESE FORWARD LOOKING STATEMENTS ARE NOT BASED ON HISTORICAL FACTS BUT RATHER ON MANAGEMENT’S EXPECTATIONS REGARDING FUTURE GROWTH, RESULTS OF OPERATIONS, PERFORMANCE, FUTURE CAPITAL AND OTHER EXPENDITURES (INCLUDING THE AMOUNT, NATURE AND SOURCES OF FUNDING THEREOF), COMPETITIVE ADVANTAGES, BUSINESS PROSPECTS AND OPPORTUNITIES. SUCH FORWARD LOOKING STATEMENTS REFLECT MANAGEMENT’S CURRENT BELIEFS AND ASSUMPTIONS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. FORWARD LOOKING STATEMENTS INVOLVE SIGNIFICANT KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS INCLUDING RISKS ASSOCIATED WITH VULNERABILITY TO GENERAL ECONOMIC MARKET AND BUSINESS CONDITIONS, COMPETITION, ENVIRONMENTAL AND OTHER REGULATORY CHANGES, ACTIONS BY GOVERNMENTAL AUTHORITIES, CAPITAL MARKET CONDITIONS, RELIANCE ON KEY PERSONNEL, UNINSURED AND UNDERINSURED LOSSES AND OTHER FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT ARE BASED UPON WHAT MANAGEMENT BELIEVES TO BE REASONABLE ASSUMPTIONS THE COMPANY CANNOT ASSURE INVESTORS THAT ACTUAL RESULTS WILL BE CONSISTENT WITH THESE FORWARD LOOKING STATEMENTS. THE COMPANY HEREBY EXPRESSLY DISCLAIMS ANY LIABILITY FOR ANY INACCURATE OR OUT OF DATE INFORMATION PRESENTED IN THIS DOCUMENT AND THE COMPANY SHALL HAVE NO OBLIGATION TO CORRECT, AMEND OR UPDATE THIS DOCUMENT IN THE FUTURE FOR WHATEVER REASON. THIS PRESENTATION IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER OR SOLICITATION FOR AN OFFER WITH RESPECT TO THE PURCHASE OR SALE OF ANY SECURITY. NEITHER THIS DOCUMENT NOR ANYTHING CONTAINED HEREIN SHALL FORM THE BASIS OF, OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT WHATSOEVER.
  3. 3. ULAANBA Bileg Department Store Urgoo Movie Theatre Teng Mov Thea Gandan Monastery UB Palace d TBD Anduu Maxmall Grand Plaza tar Ulaanbaa t en Departm Store Naran Mall
  4. 4. ATA R M A P SOS Medica Ulaanbaatar gis vie atre Natural Museum Chinggis Hotel IT Center ent n Parliam Mongolia t building en Govertm ar Sukhbaat square State ent Departm Store State Gallery ic Academ Theatre of ma Dra us State Circ Wrestling Palace Central Tower Blue Sky Tower Park View Temple View Olympic Residence Bayangol Hotel Regency Residence Children Park Naran Plaza Bayanmongol Khoroolol Central Stadium Sukhbaatar District Bayangol District Chingeltei District Khan-Uul District Bogd khan Nuseum Bayanzurkh District
  5. 5. Thoughts from the CEO Ulaanbaatar: The changing face of one of Asia’s most vibrant frontier cities The view from the top of one of Ulaanbaatar’s newly built skyscrapers offers a cityscape markedly different from that of only a few years ago. Numerous luxury high-rise buildings have sprung up in the centre of town, and construction of new high-end residential, commercial and mixed use developments continues apace. Several leading international hotel brands have moved into the market and, in addition to the existing Kempinsky, Shangri-La and Hilton are now also building new five star hotels in the city centre. The stock of housing catering to the demands of the middle and low income sectors of the city is also increasing dramatically, under pressure both from an increasingly affluent middle class, and high levels of immigration from the Ger district into formal brick and mortar structures. In addition to rapid development within the city, new residential developments are also springing up in the valleys of Zaisan, Nukht, and Ikhtenger, pushing the boundaries of the city outwards. Following a decade of chaotic development the government is now also beginning to take a more considered approach to the city’s development, and is implementing an aggressive infrastructure program to improve traffic, water and heating conditions. Driving these changes in the cityscape is a highly eclectic and rapidly changing population. As the capital of one of the world’s fastest growing economies, Ulaanbaatar is currently witnessing a rapid influx of highly educated overseas Mongolians returning home, together with rapid ongoing urbanisation as a result of migration from the countryside. Added to this the city is also becoming increasingly cosmopolitan, with large numbers of investors and bankers from global financial centres such as Hong Kong, London, Singapore and New York mixing with miners from Australia and Canada. The result is a highly energetic and entrepreneurial culture that manifests itself not only in business, but also in the city’s vibrant cafés, bars and nightspots. As a result of the country’s mining boom, combined with rapid improvement in the level of human resources, Ulaanbaatar is now benefitting from a spillover effect into other areas of the economy, leading to rapid growth across numerous industries, in particular real estate, construction, manufacturing, and tourism. Combined with these positive forces are also a number of constraining factors, in particular the city’s fixed heating grid, the scarcity of parking, and the overloaded road network, all of which conspire to create pockets of extraordinary opportunity for real estate investors in specific locations across the city. We hope that this real estate report will shed light on some of the key industry dynamics at play and provide investors and family planners alike with a useful guide to the opportunities currently available in the real estate market in Ulaanbaatar, as well as pointers as to which areas to avoid. A special thanks to Joe Holloway, the research team at Mongolian Properties and our friends at TenchlinZuch for all of their research and hard work, without which this report would not have been possible. We hope you find this report useful and look forward to assisting you further as you explore the opportunities available in Ulaanbaatar. Yours Sincerely, Lee Michael Cashell Chief Executive Officer Mongolian Properties LLC
  6. 6. Russia Mongolia China
  7. 7. Macroeconomics
  8. 8. Macroeconomics Just twenty years ago, a newly democratized Mongolian state was struggling to survive a transformation recession as its previously subsidized agricultural enterprises were forced to face international competition. Today, through market liberalization, democratization and a certain amount of geographic good fortune, the country is recognized as one of the world’s fastest growing economies. Mongolia achieved real GDP growth of 17.3% in 2011, significantly outperforming every one of the BRIC economies. The World Bank estimates suggest 2012 will play out in much the same way; based on Q1 observed data real GDP growth is forecast to be 16.7%, in comparison to 5.8% across the BRICs, and 2.5% worldwide. Despite demand from China appearing somewhat weakened according to Q2 2012 metrics, growth in Mongolia’s industrial output remains healthy. The mining sector that underpins Mongolia’s growth saw output rise by 10% y-o-y in April 2012 according to the World Bank. The potential for increases in industrial output remain substantial in the medium term, with Oyu Tolgoi already having begun to stockpile ore from its open pit, being on track to begin commercial production in Q1 2013. Investment Basics: The Mining Sector The estimated value of Mongolia’s resource wealth is approximately US$1.3trillion. According to ResCap, a Mongolia-focused investment bank, there are approximately 6,000 known deposits of over 80 different minerals in the country, including gold, copper, coal, uranium, molybdenum, tin and iron. However as just 27% of the country has been surveyed to a scale of 1:50,000. The country’s exploration potential is vast. Of the many operations currently in the country, two deserve a specific mention. The first of these, the internationally renowned ‘Oyu Tolgoi’ (OT) representing the largest undeveloped copper deposit worldwide, situated 80km from the Chinese border. The project is managed through a joint venture between Ivanhoe Mines and Rio Tinto, who have a 66% stake, whilst the Mongolian government controls the 12
  9. 9. Macroeconomics remainder. Research by Ivanhoe Mines estimates that the deposit contains around 37 million tons of copper and 1,431 tons of gold and is considered to be worth USD$350 billion (around 50x the value of Mongolia’s current GDP). Commercial production at OT is set to commence in Q1 2013 at the Southern Oyu open pit mine, whilst the Hugo North division (a black rock cave mine) is on track to extract its first ore in 2015. Photo by Hamid Sardar / Khasar Sandag Despite deposits of copper and gold playing a crucial part in Mongolia’s economic development, coal looks to be the country’s most important resource over the coming years, possessing an estimated 163.2 billion tons of the mineral as opposed to just 77.3 million of copper. The largest operation is the ‘Tavan Tolgoi’ (TT) project, located just 200 km from the Sino-Mongolian border. The site is believed to be the second largest untapped reserve in the world and is made up of over 6.4 billion tons of coking coal. Extraction began as far back as 1960, but until recently, the mine has been functioning subject to severe inefficiencies and output constraints. To unleash the coalfield’s true potential, the government has decided to split the project in two; one half it will develop alone, the other being opened up to foreign investment. The public sector operation is to be financed through a three way international equity IPO that will list shares in London, Hong Kong and Ulaanbaatar in Q1 2013, whilst international players are currently being courted to fund the development of the private ‘West Tsankhi’ venture. Located between Russia and China, Mongolia has the potential to supply two of the world’s largest growth economies with the raw materials needed to sustain development. The Chinese are dominant in the consumption of Mongolia’s resources, receiving more than 90% of its exports. The currently dyadic Mongolian current account is cause for concern, with resource revenues perceived to be at the mercy of protectionism, infrastructural bottlenecks and imperfectly competitive price setting regimes. A project of rail network renewal is currently underway in order to ease some of these concerns and it will expand the service links to both China and the TransSiberian Railway, which will logistically connect OT and TT to the ports’ of Russia’s Pacific Coast. Access to naval trade through both of Mongolia’s neighbors is expected to ensure a fair price is met for the country’s extracted minerals. Avoiding the potential threat of Chinese monopsonistic abuse is thus greatly reduced, as the goods are allowed to face internationally competitive commodity prices. The extraction of Mongolia’s previously latent resources have allowed deposits to be 13
  10. 10. Macroeconomics converted into tangible wealth, as exports reached a record high of US$4.8bn at the end of 2011, up from just US$2.5bn four years earlier. Coal outflows were valued at US$2.2 billion in 2011, more than twice the total of the previous year (US$0.9 billion), whilst the contribution of copper to the Mongolian current account increased by 25% over 2011 (although much benefit was derived from the commodity’s price increase over the period). Growth has been facilitated by the easing of the country’s production constraints by capital and expertise inflows from a number of multi-national mining corporations. Levels of FDI have surged, reaching 39% of GDP in 2011. Forecasts based upon Q1 results expect this figure will be exceeded in 2012, as foreign direct investment is predicted to be US$4.4bn (roughly half of the country’s GDP). Export Expectations Despite a strong performance over recent years, recent data has upset the trend of positive export growth. Exports contracted by 2.8% for the first time in two years in April, whilst coal exports, representing the Mongolian external sectors largest earner, have displayed negligible growth in recent months. Copper prices have been falling since January, which has translated into a 19% y-o-y drop in the goods total revenue. 14
  11. 11. Macroeconomics The short-term vulnerability of Mongolia’s export performance is connected to a number of worldwide phenomena. Pessimism and uncertainty borne out of the current Eurozone crisis has created volatility in world commodity markets, directly impacting Mongolian export revenues. China’s Consumption of Mongolian Exports As resulting global trade slows, continually disappointing growth figures reported in China (which currently consumes 93% of Mongolia’s total exports) has led to slackening demand growth for Mongolian commodities. Investor Insight: Can Chinese Growth Sustain Mongolian Exports Q2 2012 saw Chinese real GDP growth at its lowest level in three years. After reachieving double-digit rises in gross domestic product from Q4 2009 to Q2 2010 as a result of decisive counter-cyclical fiscal policy in the wake of the global economic crisis, the Asian giant has recently seen figures slip unusually low. Part of this is due to deliberate tightening of monetary conditions, shifting domestic policy from ‘relatively loose’ to ‘prudent ’ in order to subdue high levels of inflation and fears of an overheating real estate market. Slowing growth across the world’s high income economies have continued to depress economic activity worldwide; in 2011 growth decelerated to 1.6%, about 15
  12. 12. Macroeconomics half the value recorded in the previous year. Concerns over China’s economic stability are only natural for those with vested interests south of the Mongolian border (as indeed they are for the majority of Asia). Despite a bleak global economic outlook, there are however positive signs that suggest a further deterioration of the Sino-Mongolia commodity dyad may be limited. With China’s inflation hitting 30-month lows in July 2012 and consumer prices rising by just 1.8% compared to a year earlier, CPI looks set to fall significantly below the yearly target price increase of 4 percent according to Zhang Zhiwei, Chief Economist at Nomura in Hong Kong. This may well be the catalyst needed to facilitate the main body of the Chinese counter cyclical effort. The PBoC’s inflation aversion being the key motivation for the reasonably tight policy witnessed towards the beginning of 2012. Policymakers are now faced with increased room for maneuver; with inflation control no longer their most pressing issue, the government will be able to shift its focus to securing growth. With these factors taken into consideration, the international outlook on the Chinese economy is perhaps more bearish than is justified. Key indicators from the OECD, China’s National Statistics Bureau and the official purchasing managers index have all showed a downward trend since early 2010. However each metric has declined 16
  13. 13. Macroeconomics much more gradually then was observed in 2008, whilst the rate of deceleration has slowed in recent months, suggesting the economy may be beginning to stabilize. As fiscal policy is rolled out in the near future, and the monetary changes enacted earlier this year feed through with the usual lag to the real economy, the Chinese look set to reestablish their growth momentum in the medium term. This should offer much comfort to Mongolian exporters. A Chinese stimulus founded upon infrastructure spending and increased business credit has the potential to steady the commodity demand forming Mongolia’s major export channel. Asia Pacific Investment Partners remains cautiously optimistic for Mongolia’s export revenues in the medium/long term, considering that the power of the Chinese policy response should not be underestimated. Foreign Direct Investment: Facilitating export growth Extraction of mineral wealth, the major force behind Mongolia’s GDP growth, has been funded by aggressive Foreign Direct Investment over recent years, which looks set to continue well into the future. With the exception of 2009, where conditions were weakened due to international financial instability, total FDI flows to Mongolia have increased consistently on a yearly basis. Investment Basics: FIFTA Registered Companies Much Foreign Direct Investment in Mongolia begins as foreign entities start a FIFTA (Foreign Investment and Foreign Trade Agency) registered company. With the exception of land ownership , FIFTA registered companies face identical legal and tax regimes and enjoy exactly the same rights as Mongolian incorporated companies. Registration with FIFTA costs approximately $1000 (including registration fees, stamp fees, notary costs, and administrative charges), however before the process can commence it is necessary for the company to prove that they are in possession of a minimum of $100,000 of available assets. FIFTA registration requires the 17
  14. 14. Macroeconomics submission of the following documents: the application form; the company’s charter; a document to confirm the company address; the minutes of the foundation meeting; the balance sheet confirming the required minimum amount of owners’ equity; a letter from the banking institution stating the shareholder has maintained its accounts in good standing; documents confirming the identity of founders; and payment of the required fee for state registration. Once an application is received, FIFTA will usually issue a company its certificate within 7-14 working days. Photo by Hamid Sardar / Khasar Sandag For these reasons, FIFTA registration is seen as a simple and cost effective way of allowing foreign direct investments to compete on a level playing field with Mongolian companies. Mongolia’s desirability as an investment location for many has stemmed from: interest in its under-utilized mineral wealth; combined with its reputation for democratic and stable politics , investor friendly legal system, and attractive tax environment. The OECD FDI Regulatory Restrictiveness Index measures statutory restrictions on foreign direct investment in 55 countries worldwide, based on data drawn from across 22 sectors. Mongolia’s rank of 0.096 represents an economy considerably more open to FDI than in many comparable macro investment cases, its score being lower than Russia’s 0.189, China’s 0.408, and both the Non-OECD and World averages. The Oyu Tolgoi project, finalized after six years of negotiation in 2009 has spearheaded the development of Mongolia’s investment inflows. The mine’s construction budget for 2011 alone was $2.3 billion (over 1/3 of the country’s 2010 GDP), the operations total assembly 18
  15. 15. Macroeconomics costs being estimated to have required $7 billion of foreign capital. The apparent success of Oyu Tolgoi has led to a significant rise in FDI flows into the country from resource-focused investors worldwide. A stabilization in Foreign Direct Investment is expected by Asia Pacific Investment Partners over the coming years. Capital flows to the mining sector are set to decrease somewhat, as the first stage of Oyu Tolgoi is completed in Q3 2012 and the financing of operational equipment for the open pit mine begins to drop off. Despite this, investment in the country’s foremost mining project looks set to support growth well into the medium term. Development of the mine’s two capital intensive, high tech block cave mines are set to continue until 2015 and 2017 respectively, whilst the financing of considerable infrastructural expansion is required if the capacity constraints currently limiting the mine’s efficiency are to be eased. Mongolia’s resource led growth has begun to spill over across the economy, with increased growth and Foreign Direct Investment expected to face many industries other than those directly related to mineral extraction. 19
  16. 16. Macroeconomics As opportunities in these sectors are appreciated by international entities increasingly aware of Mongolia as an investment location, it is predicted that FDI flows will remain buoyant, with everything from luxury consumer brands, to insurance, to multi-nationals looking to break into the high growth market. Government Spending Recent years have seen government spending growth outpace increases in the country’s revenues. Although a country in Mongolia’s position may be expected to run deficits now to facilitate immediate infrastructural development and poverty alleviation, many are concerned that if the government is not able to reduce its deficit, fiscal sustainability may be threatened. Source: NSOM, IMF, BoM, World Bank The first four months of 2012 saw government spending increase 32% in nominal, and 13% in real term compared to the previous year. Revenues cannot seem to keep pace, growing just 21% in nominal terms over the same period and 4.2% if inflation is taken into consideration. The withdrawal of customs and excise taxes last year on petrol and diesel products has drastically weakened Mongolia’s domestic tax base. According to y-o-y estimates from data obtained in April, the former are to expect a 26% reduction, whilst the latter are likely to fall by as much as 50%. This is a substantial loss given that the combination of the two items accounted for around 8% of total revenues in 2011. On top of these more recent developments, the Mongolian treasury is still feeling the effects of its 2011 decision to abolish its Windfall Profits Tax, which was responsible for roughly a fifth of government revenue last year. These pressures have been somewhat offset by maintained growth in tax revenues derived from personal, corporate and domestic goods markets, and VAT on capital goods imports. These however do not look capable of filling the deficit in the medium term. To add to its problems the Mongolian government is finding policy increasingly constrained by its long-term commitments. A share of future tax revenues have already been received in the form of pre-payments from the developers of Oyu Tolgoi and Tavan Tolgoi, meaning 20
  17. 17. Macroeconomics Photo by Hamid Sardar / Khasar Sandag a proportion of potentially taxable revenue in the future has already been accounted for. Furthermore, over 1.5 million of the population have opted to trade their state issued Erdenes Tavan Tolgoi shares for MNT 1 million per person. The state has already started selling 10% of its 51% holding of the venture to local companies; a successful sale would raise more than enough capital to cover the government’s fiscal liabilities, however if the actual sum achieved is insufficient, then the state would be liable to cover the amount necessary. Despite continued spending increases in Q1 2012, over the medium term the Mongolian government clearly appreciates the need to adjust government expenditures. The FSL (sometimes called the Fiscal Responsibility Law) passed in June 2010 sets out strict fiscal rules, requiring all government budgets to ensure they do not allow the country’s structural deficit to exceed a limit of 2% of GDP after the law becomes binding in January 2013. As of April, the fiscal deficit lies at 4.2% of GDP, whilst the structural deficit is 6.1 % of GDP. Although hitting its self-imposed target will be a challenge, certain conditions in Q3 and Q4 2012 should help the government make the crucial cuts. The Integrated Budget Law was passed in December 2011 in order to support fiscal sustainability and to aid the successful implementation of the FSL. The legislation is designed to strengthen the public sector’s investment framework by requiring more rigorous feasibility studies, whilst implementing increasingly demanding checks on planned expenditure programs to ensure they are necessary in accordance with national priorities. Like many emerging markets with credible democratic institutions, Mongolia is affected by a politically motivated fiscal cycle. The proximity of the June parliamentary election undoubtedly inflated the government’s budget early in the year, as politicians attempted to enact populist policies in an attempt to sure up their chances of reelection. This is reflected 21
  18. 18. Macroeconomics in particular by the quarters’ substantial increases in public sector wages and salaries (up 36%). Asia Pacific Investment P a r t n e r s anticipates that Q3 and Q4 will be a period of fiscal consolidation, as government expenditure Photo by Hamid Sardar / Khasar Sandag experiences a negligible rate of growth, whilst revenues continue to be driven up by Mongolia’s double digit growth. Public sector wage increases from the start of the year will have largely been eroded by inflation, whilst the new parliamentary cycle should provide a combination of incentives and constraints for policymakers, which will hopefully encourage fiscal prudence. Inflation Inflation is the largest challenge for the Mongolian economy at present, as increases in the price level remain both high and volatile. Peaking at over 30% in the summer of 2008 before turning briefly negative the following year, Mongolia’s inflation as of April 2012 was estimated to be 16% y-o-y, much higher than the Bank of Mongolia’s target of 10%.The situation is slightly worse in Ulaanbaatar, being the epicenter of the Mongolian economy. The city’s headline inflation rate climbed to 17.8% y-o-y from 9.4% in December. 22
  19. 19. Macroeconomics Current high inflation is being fueled by both core inflation and increases in the price of food, most notably meat. Prices of ‘core’ goods rose by nearly 13% y-o-y in April 2012 this was responsible for roughly half the increase in headline inflation. Food prices however account for about 40% of Mongolia’s basket of goods, and represent the key driving force behind inflation and its volatility. Increases in meat prices have been borne out of supply shocks to the agricultural industry, most notably harsh weather conditions. As the breeding of new livestock takes time, the supply lag has pushed up the prices of meat nationwide. The continuation of rapid growth in government expenditure has however contributed to the generalized wage and price pressures. Increases in cash handouts (such as the Tavan Tolgoi share option program, effectively giving MNT 1,500,000 to each citizen) and growth in public sector wages in 2012 have drastically increased inflationary forces. The resulting changes in civil servants wages are seen as particularly damaging, causing many private sector firms to immediately raise wages by a proportional amount in order to remain competitive. Reacting to these conditions, the Bank of Mongolia’s benchmark rate was raised by 50 basis points in March 2012 and 50 basis points again in April 2012, setting the interest rate at 13.25%. However, these bold policy prescriptions appear to have little effect with the headline national rate of inflation at 17.8%, the real policy rate is negative in real terms, creating no incentive for the cooling off of demand side pressures, as both investment and consumption remain high. Combined with consistently high fiscal spending, the Bank of Mongolia is considered by most commentators to be largely powerless in achieving its target. Headway is likely to be made in the coming periods however as the new parliament (the furthest it is possible to be away from the next electoral cycle) begin to cut back their expenditure in order to reduce the structural deficit down to the 2% level stipulated by the FSL. This will likely ease many of the demand side pressures underlying Mongolia’s recent inflationary experience, giving the Bank of Mongolia room to effectively maneuver policy. 23
  20. 20. Macroeconomics Wage Growth: The emergence of the Mongolian Middle Class Mongolia’s rapid economic growth has led to considerable increases in the wage rates across many groups of society. The average national wage according to the National Statistics Office of Mongolia rose by 24% between 2011 and 2012 alone, from MNT 341.5 thousand to MNT 424.2 thousand, a 13.8% increase in real terms. Increases in the wage packages outside of the mining sector are also considerable, with average incomes across the economy increasing by 17.3% over 2012. As Mongolia’s growth continues on its double-digit path, practically every industry is expected to maintain wage growth momentum. This upside potential is particularly striking in the financial services industry, which saw average real incomes expand by 16.3% over the period, and the infrastructure sector, whose workers saw their real incomes increase by 21.0% last year. A wage rate increase in these key industries has been accompanied by an expansion in the labor market size, as high demand incentivizes the rapid expansion of capacity. The number working in the mining and quarrying sector has increased by 34,900 in 2009 to 45,100 in 2011, the number in financial services from 12,300 to 16,200 over the same period, whilst the quantity of those with careers resting within the infrastructure has expanded from 18,700 to 75,800. These factors point to the emergence of a wealthy class that represents an increasingly large proportion of Mongolian society. As the economy provides opportunity, more and more citizens are prepared to enter into increasingly white-collar industries. The growth of wages have fueled consumer demand primarily focused upon the purchase of increasingly expensive vehicles, real estate, and western consumer goods, with utility being derived from both the actual consumption, and the inherent status of such items. 24
  21. 21. Politics
  22. 22. Politics Photo by Hamid Sardar / Khasar Sandag Mongolia peacefully transitioned to democracy in July 1990, enshrining multi-party politics constitutionally in 1992. Quick to embrace principles synonymous with the western liberal democratic ideal, the country is often used as an illustration of regime consolidation and stability in the otherwise tumultuous post Soviet space. Despite a strong track record when compared to its geographical peers, the exact course of Mongolia’s political trajectory in just two decades on is still somewhat uncertain. Recent incidents, such as the controversial parliamentary elections of 2008 and certain short-lived spells of resource nationalism have highlighted the country’s youth and inexperience. Shocks of this magnitude are however reasonably commonplace when compared against the majority of frontier markets worldwide, being a risk which investors much bear to capitalize on lucrative growth potential. This is not to say that signs of malaise in the Mongolian system can be brushed under the carpet. Instead it should be noted that the country is prone to similar temptations that plague transition regimes all over the post-soviet bloc. Thus, the question is to what extent Mongolian politics is institutionally and culturally prepared to avoid falling off the democratic wagon. Institutional Structure Mongolia’s institutional configuration is best described as ‘semi presidential’. Thus executive power is split between a Prime Minister (endowed with the most power of any single actor in the Mongolian political system) and the President (who is commander in chief of the military and acts as Mongolia’s head of state). The Prime Minister is drawn out of the majority party in Mongolia’s unicameral legislature (the State Great Hural or Parliament of Mongolia), their mandate being derived from the 26
  23. 23. Politics legitimacy of the majority of legislators who nominated them following each separate parliamentary election. In contrast the president is elected directly by the country’s population once every four years. The outcome is determined by simple plurality, and candidates are constitutionally allowed to serve up no more than two terms in office. Once in office the President is constitutionally obliged to renounce the membership of any political party to which they were previously affiliated. Despite the office drawing its mandate from the people as opposed to parliament, legislative checks are on the position are in place. If a two thirds majority of the Ikh Khural (the Parlament of Mongolia) deems the President President of Mongolia to have abused the position, or violated their oath of nonTsakhiagiin Elbegdorj partisanship they face removal from office. This check is balanced by the President’s right to veto against any part (or the entirety) of any law or decision passed by the country’s legislative body. The Ikh Khural In terms of the country’s legislature, the Ikh Khural consists of 76 members, each elected by their own single seat constituency, requiring a simple plurality to gain office. The country’s electoral convention stipulates that a legislative election is only to be considered valid if 50% of the electorate turns up to the ballot box, placing emphasis on the importance of participation within the electoral mechanism. The body is charged with drawing up and approving new laws in conjunction with the government, and passing the national budget on a yearly basis with a simply member majority. Super majorities are required to overrule the Presidential veto, and ratify constitutional change. The political trajectory Mongolia has embarked upon, has somewhat troubled scholars of political science who study the institutional arrangements of states at the time of democratization. Semi-presidential regimes have been commonplace in the postcommunist world, and have more often than not provided the framework for the failure of the democratic process. The experiences of Russia, Kyrgyzstan and Kazakhstan are testament to this, where the constitutional counterweights between branches of government have been gradually eroded by powerful executives. The result has been the move from party dictatorship under the communist mechanism to personal dictatorship, as individuals begin to dominate every aspect of political life. The constitutional strength of the Mongolian system stems from the relative power endowments it permits the branches of government. By giving the country’s parliament the significant powers outlined above, authority has effectively been fragmented; split between an accountable executive and influential legislature. As such, the Mongolian institutional arrangement has removed the possibility of the president eroding their legislative check; changing the political game from one of ‘semipresidentialism’ to ‘superpresidentialism,’ as has been well documented across the post soviet space. Thus fragmentation of the Mongolian system has prevented the consolidated of power by any one individual, allowing the country to evade the reversal to despotism that has plagued 27
  24. 24. Politics so many of the nation’s peers. Parties Overview The Madisonian dispersal of power across branches of government tends to lead to accusations of political ineffectiveness, decisive action being replaced by stagnation and paralysis. Mongolia has, to a large extent avoided the ineffectiveness frequently accused of cursing the regimes of the United States and France, the country’s two principle political parties overlapping on a number of ideological issues. Both organizations are seen to have worked together on a variety of issues, allowing the country’s democratic effort to derive legitimacy from a joint effort as opposed to from a revolution of the Democratic Party against the incumbent Mongolian People’s Revolutionary Party. The Mongolian People’s Party The Mongolian People’s Party (the MPP), formerly the Mongolian People’s Revolutionary Party is Mongolia’s oldest political organization in Mongolia. Formed in 1921 to facilitate the Outer Mongolian Revolution, the party enjoyed a monopoly of power through the country’s socialist period, and enjoyed a majority in the Ikh Khural up until 1996. Despite a lasting commitment its socialist orgin (the organization became a member of Socialist International in 2003), since transition the party has embraced liberal economic reforms and democratic practices. Describing itself as a ‘center left political force, based on social democratic idealsi’ the group demonstrates an ideological pragmatism rarely displayed by the ancestors of previously dominant Marxist-Leninist parties which have developed in countries across the post Soviet Union. The commitment towards modernization in the democratic world is demonstrated by the group’s decision at its 26th Party Congress in 2010 to remove the ‘Revolutionary’ component of its name, being supported by 99.3% of delegates. It should be noted that from the minority of members who did not support the amendment, a splinter organization has been created headed by the group’s former leader and ex-President Nambaryn Enkhbayar. Awarded legitimate party status on June 24th, 2011 by the Mongolian Supreme Court, the two entities should not be confused. The Democratic Party of Mongolia Founded by those who pioneered the democratic revolution of 1990, the Mongolian Democratic Party (DP) was a product of the merging between the Mongolian National Progressive Party, and the Mongolian Social Democratic Party. These two parties were the ruling coalition in the Ikh Khural after democratic forces first gained a parliamentary majority in 1996, holding fifty out of the available 76 seats. Ideologically describing themselves a conservative liberal grouping, the party’s primary goals are stated as overseeing the continuation of Mongolia’s transformation into an open and democratic society and the facilitation of the country’s economic development. This commitment was demonstrated by the group’s influential role in securing the Oyu Tolgoi contract in 2008. 28
  25. 25. Politics Prime Minister Noroviin Altankhuyag The effectiveness of the party however has been subject to constraints stemming from its continued changes in membership and composition. Its current form being determined by a series of mergers and splits which have been almost continuous since 1990, the group found this has cost them electorally on a number of occasions. This is particularly potent when the DP is juxtaposed and evaluated against the MPP, which generally displays impressive levels of ideological unity and structural consistency. It is worth noting that the election the DP’s President Ts. Elbegdorj in June 2009 highlights the extent to which liberal democratic ideals are embedded not only in the party (who nominated him as their electoral candidate) but the country as a whole (who placed him in office with a majority of 51.21%). Ethnically Zahchin (a small grouping found in western Mongolia), Elbegdorj represents the first non-Khalkh majority President in the country’s history. This example of Democratic Party success highlights a certain level of sophistication in Mongolian political culture, the country overcoming tribal differences to focus on issues of national unity policy choice. Although such an instance may seem something of a footnote, it has huge comparative significance within for those aiming to access the political stability of the region. The contrast is particularly potent against Kazakhstan and Russia, where ethnic cleavages play a decisive, and often distorting role in the electoral mechanism; dominant cultural groupings responsible for supporting malignant regimes. The 2008 Parliamentary Election The single greatest challenge to Mongolia’s democratic political trajectory has been the infamous aftermath of the 2008 parliamentary election. As preliminary results were released on the 30th June suggesting a clear MPRP (as it was known at the time) victory, the Democratic Parties Chairman, Tsakhiagiin Elbegdorj declared that the election was fixed and his party would refuse to accept the results. 29
  26. 26. Politics The allegations suggested there were irregularities in the counting process, along with the bribing of the electorate, and the concerns were soon echoed by country’s smaller parties. Against a background of extensive media coverage, protesters gathered the following day in front of the People’s Revolutionary Party headquarters (situated between the Ulaanbaatar Hotel and Sukhbaatar Square). What was originally intended to be a peaceful demonstration sadly escalated into violence as a minority broke into the MPRP headquarters and looted small liquor store situated on the ground floor, torching the premise in the process. As the fire spread across the entirety of the building, police clashed with the mass left outside the structure. Batons, water cannons, tear gas, rubber bullets, and live ammunition were deployed in a vicious police reaction, assuming the worst of the majority of protestors. A series of myopic arrests followed, the bulk of those taken into custody being peaceful protestors who played no part in the arson that the incident is famed for. Tragically five were killed amongst the ensuing mayhem, four of whom were shot. At midnight President Enkhbayar declared a national state of emergency which was to be in effect for 96 hours. 96 Armored Personnel Carriers were deployed to the streets, a curfew was put into effect, and a media blackout declared. Within a few days the situation stabilized and the harsh measures were revoked. Although representing a short period of time however, the episode did much to damage the country’s impressive democratic reputation, commentators and investors alike speculating that the incident was to mark a change in direction for Mongolia’s political development. This however was not the case, despite Ts. Elbegdorj stating on the 18th July that the Democratic Party would boycott the opening season of the Ikh Khural. After a short period of political posturing, all members of the Democratic Party, including Elbegdorj himself were sworn into parliament, S. Bayar being elected prime minister of a coalition government, supported by both the MPRP and the DP. Not only was parliament able to form a majority, but the policy which resulted from its operation is often considered some of the most crucial in Mongolia’s history. The two parties worked together in order to negotiate the terms of the Oyu Tolgoi Agreement in the months that the crisis, effectively kick starting foreign direct investment in Mongolia and the headline grabbing growth figures that the country has witnessed in recent years. Furthermore, the crisis can hardly be seen to represent the manifestation of a fundamental problem in the Mongolian democratic culture. Instead the general consensus on the ground is that the issue concerned a handful of troublemakers, intoxicated on stolen alcohol, who got out of control. The resulting brutality of police action was a function of the uncertainty surrounding a large crowd watching a building burn in the night, and is an isolated response in the history of Mongolia since its democratic transition. No incidence of electoral fraud has ever been reported in Mongolia since the country’s conception in 1990. Despite accusations being the commonplace reaction of defeated politicians, no international monitoring agency has ever recorded, or even suspected any irregularities. 30
  27. 27. Politics Photo by Hamid Sardar / Khasar Sandag The 2012 Parliamentary Election Mongolia’s most recent parliamentary elections, taking place on the 28th June 2012, were internationally proclaimed as something of a litmus test of the country’s political stability in the aftermath of the 2008 debacle. Although marred by controversy not unusual in the Mongolian politics, in many ways the event marked the return to business as usual for the country’s democratic system. For the first time in its history, the country used an electronic voting system, to remove any possibility of a repeat of the 2008 of the allegations that caused widespread civil unrest occurring in the previous round. In addition to this slightly technical issue, a number of constitutional changes were enacted to the electoral process designed to allow for the better representation of minority interests, going some way to breaking the DP and MPRs duopoly of power. The seat allocation mechanism was changed from first past the post to proportional representation, significantly benefiting the interests of the country’s smaller parties and independent candidates, who managed to secure 16 out of the 76 positions on offer. A quota system was also introduced - designed to ensure that no less than 20% of candidates running were women. This was a progressive concession by the Mongolian regime that is more of a democratic achievement for gender equality than has been managed by many more developed countries around the world. The policy was clearly successful, with the proportion of female candidates being nearly 32%. Concerns were voiced before the polls even commenced due to the arrest of former 31
  28. 28. Politics president Nambaryn Enkhbayar upon the 12th April, who was imprisoned by the Independent Authority Against Corruption over allegations of misconduct during his time in office. The case is widely held to be politically motivated; although the prevailing mood in Ulaanbaatar is that Enkhbayar has questions to answer concerning the sources of his income, the action taken neither addressed the most crucial issues, nor was carried out taking into account the due process rights stipulated by Mongolian Law. With the exception of this incident, the actual parliamentary process has been seen to be a reasonable success. The Democratic Party gained 31 seats, representing the largest parliamentary grouping, whilst the Mongolia People’s Party polled closely behind, with 25 seats. The Justice Coalition (a combined effort from the MPRP and the MNDP) acquired a sizable 11 seats (with support somewhat fueled by a public outcry over N. Enkhbayar’s treatment), whereas the Civil Will Green Party and independent candidates obtained two and three seats respectively. The results were generally accepted by all major groupings; some complaints were voiced by the MPRP when the initial results were published criticizing the untested nature of the electronic vote counting machines, however they soon deceased as it became obvious their claims rested upon little substance. Mongolia’s New Political Trajectory On August 25th, Prime Minister Norovyn Altankhuyag chaired the first cabinet meeting of the country’s sixth government. Because the Democratic Party did not obtain the 39-seat majority necessary for it to form its own cabinet, proceedings were delayed whilst coalition negotiations played out. With the government being formed out of a union of the Democratic Party, the Justice Coalition, and Civil Will Party, the new political trajectory of Mongolia remains unclear. Certain members of the Justice Coalition are well known for the resource nationalism, although public statements made in the run up to the election may well have been an example of little more than political posturing. Recent stories have reported worldwide the intentions of some key actors in the government, such as the Mining Minister Gankhuyag Davaajav, to seek to reopen negotiations of the Oyu Tolgoi contract. This is true, although many reports misrepresent the intentions of even the more extreme members of government. The Oyu Tolgoi contract holds that once Rio Tinto has recouped all the capital of its principle investment, it would be possible for negotiations to reopen as to how the gains from extraction should be distributed between the public and private sectors. It is this that is currently being advocated by the more extreme members of Mongolia’s parliament, hoping to see the governments stake in profits raised from 34% to 50%. Given the size of the projects investment however, it is expected to be around fifteen to twenty years before the principle investment is recouped, meaning that these ideas have little to no political impact on policy in the short to medium term, apart from the perceived gain of reputational capital. Investors may seek reassurance in the fact that a clear majority of the coalitions members are from the generally free market minded Democratic Party. It is unlikely any currently minority, anti-FDI sentiments will be likely to gather momentum whilst the government’s power is distributed so heavily in favor of the pro free market grouping. 32
  29. 29. Legal System
  30. 30. Legal System Supreme Court Justices of Mongolia The Rights of Foreign Citizens in Mongolia Foreign citizens for the most part enjoy the same legal rights as Mongolians, meaning those interested in investing in real estate are provided with a wide range of legal protections. Made explicit in Article VIII of The Law of Mongolia on the Legal Status of Foreign Citizens, the following conditions can be assumed to apply in general throughout the rest of this report unless otherwise stated: • • All persons legally residing in Mongolia are to be considered equal before the law and its courts. Foreign citizens whilst in Mongolia are to enjoy the same rights and freedoms as are conferred on to Mongolian citizens by the law. There is one notable exception regarding the rights citizens are allowed to enjoy over land plots, which shall be made explicit and examined in detail in the following section. The rights of international investors over immovable property assets are however identical to those enjoyed by Mongolian citizens. Land Ownership Rights in Mongolia The 2002 Law of Mongolia on Land creates three classes of land rights: 34
  31. 31. • • • Legal System Land ownership, or to ‘own land’, meaning to be in legitimate control of land with the right to dispose of this land; Land possession, or ‘to possess land’, meaning to be in legitimate control of land in accordance with its purpose of use; Usage of Land, or ‘to use land’ which means to undertake a legitimate and concrete activity to make use of some of the land’s characteristics in accordance with contracts made with the owners and possessors of land. However, Land Use licenses of the foreign invested companies shall be granted by Citizen’s Representatives Khural. It is clearly stated in the 2002 Law of Mongolia on Land that land ownership is only open to Mongolian citizens, who are entitled to claim small plots between 0.35 hectares and 0.7 hectares in size. Mongolian governmental companies, non-governmental Mongolian companies, and registered foreign invested companies do not qualify for land ownership rights under Mongolian law. Instead, land possession rights are offered to Mongolian governmental companies and non-Mongolian governmental companies, but not to registered foreign invested companies operating within Mongolia. Such rights offer significant protections upon the claims of the possessor over their land, and as such are seen as a satisfactory alternative. Land Possession Rights in Mongolia Land possession rights are established through procurement of a ‘license for land possession’, a document bestowing the holder with the authority to possess land in accordance with Mongolian law. The maximum size of land associated with a license awarded to companies for the purpose of production or service provision is at the discretion of the Mongolian Government entity. Governors of the soum or district are tasked with the identification of land to be auctioned off for possession. Plots selected are subsequently published in the annual land management plans of the respective authorities. Acquiring the land possession license The 2002 Law of Mongolia on Land outlines two basic requirements that must be met for a possession license request to be considered: • • Applicants for a land possession license must be either Mongolian citizens, companies and organizations; The location of the land requested for possession shall have been marked in the annual land management plan of the capital city or soum as available. Applications are initiated for companies and organizations by submitting a request to the governors of the appropriate soums and districts. In addition to the application itself, it is necessary to submit the following information: • The name of the company or organization, jurisdiction to which the company belongs, its address and location, and a copy of the state registration certificate; 35
  32. 32. Legal System • • • The code of the territorial unit(s) requested which shows the territorial and administrative jurisdiction upon which the land where the company intends to undertake production or services provision belongs, along with its size and location; The desired purpose and duration of land possession; Proof of creditworthiness. A successful applicant will then be entered into a silent auction for the plot. The highest bidder will receive a notification of their success, along with their payment obligations. If payment is not received within a pre-determined time scale, the right to possession of the plot of land in question is automatically passed down to the next highest bidder (be it a citizen, a company or an organization). If upon the second attempt payment is not received, the license is required to be put up for auction once again. Any entity that has acquired the right to possess land for undertaking the production of goods, or the provision of services must complete a general environmental assessment within 90 working days of receiving the right. If the results are positive a contract on land possession will be made, the license issued, and a record of ownership noted in the Mongolian national registry. The Rights and Duties of License Holders • • Those who hold possession licenses are endowed with the following rights over their plot: • • • • • The right to use the land according to the purposes set forth in the contract; The right to obtain a State Certificate on the land characteristics and quality from the owner; The right to be awarded damages, compensated by the guilty person in accordance with established procedures; The right to transfer the license, or provide it as collateral subject to the approval of the person who made the decision on giving the possession license initially; The right to have the license extended upon expiration, provided that the license holder has duly met their obligations concerning land legislation and their contract; In return, the holder of a land possession license is required to fulfill the following obligations: • • • • To meet the terms and conditions set forth in the land possession contract: To use land efficiently and rationally in order to protect their given space, to comply with legislation on protection of nature and environment, and to meet common requirements related to land use, as issued by the relevant government authorities; To pay land fees in a timely manner; To have state certification of land characteristics and quality made according to established procedures; Not to infringe upon the rights and legitimate interests of others, related to the possession of their land; To have registered at the National Registry if the license is to be used as collateral. Readers of this guide should note that the option of land possession license transferal, and the ability to use the documents as collateral are legally only open to Mongolian citizens, 36
  33. 33. Legal System companies and organizations. Extending the Land Possession License The duration of a land possession license is a n y w h e r e between fifteen and sixty years in its original state. As stipulated above, the land possession license holder enjoys the explicit right to extend the term of the license, provided they have fulfilled their obligations on the plot. Each renewal will prolong the license for no more than forty years at a time. An extension request must be submitted to the Photo by Hamid Sardar / Khasar Sandag governor of the relevant soum or district a minimum of thirty days prior to expiry. The application must be supported by the following documents: • • • The initial land possession license; Documents proving that land fees have been paid on a timely basis; The status of implementation of the recommendations made upon the environmental impact assessment test. Once received the appropriate official will review the documents, and will reach a verdict within 15 days. Provided the duties of land possession have been consistently met, little in the way of difficulty should be expected. 37
  34. 34. Legal System Photo by Hamid Sardar / Khasar Sandag Expiration of a Land Possession License • A land possession license may expire under the following circumstances: • • • If the land possession license expires naturally, and no request is made for it to be extended; If the license holder (a natural person) has died, is announced dead or missing, and the license holder has no legitimate successors; or if a license holder (a legal person) is dissolved or liquidated; If a license holder makes a request to terminate his/her possession license; If compensation is paid in full to the license holder, in the event of the plot being taken into state control to fulfill exceptional government needs. The relevant authority may only remove land prior to the scheduled expiration date for special state purposes once an agreement has been reached with the owner of the license. The request for removal must then be submitted through the State Cabinet, who must consent to the proposal. If this is achieved, the governors of the relevant soum or district will then make a contract with the citizen, company or organization in question and remove the land from their possession with or without asset replacement and with compensation. Reimbursement calculation depends upon a range of variables, including the prior arrangement with the land possessor, the value of immovable constructions and other properties on the plot, and the costs to vacate the land estimated at current prices. If the license holder remains unsatisfied with the package offered, then the appropriate legal channels are in place for the decision to be challenged in the Mongolian courts. Termination of a Land Possession License 38
  35. 35. Legal System Governors of soums and districts are allowed the ability to terminate land possession • licenses in the following circumstances: • • • • If the license holder has consistently or seriously violated obligations set forth in the land legislation, or it the provisions and the conditions of the land possession contract; If it is established that the land has been used to the detriment of human health, nature, or national security; If a license received from others is not registered, and a new contract is not made; If recommendations made from the general environmental assessment are not implemented; If the license holder has not paid land fees according to the law, on time and in full. In the event of a termination notification being issued for whatever reason, license holders have a ten-day window to appeal to the court if they consider a contract termination illegitimate. With proper management techniques in place however, it should be easily manageable not to fall foul of the Mongolian law. Immovable Property Rights in Mongolia Mongolia has in place an effective mechanism of property rights to protect the owners of immovable properties. These protections are so effective that the country’s government has recently found implementation of town and city planning initiatives (such as the JICA master plan) and the development of Ulaanbaatar’s many ger districts impractical if not completely impossible. Both regional and central governments have found themselves legally ineffective in their ability to develop infrastructure and new constructions on existing low quality real estate in many regions, as the owners simply do not want to move. The foundation of the state’s guarantee on immovable property rights stems from Article • Five of the Mongolian Constitution, which stipulates: • Mongolia shall have an economy based on different forms of property consistent with universal trends of world economic development and the country’s own specifics; The State recognizes all forms of public and private property and shall protect the rights of the owner by law. In order to protect private property under the Mongolian constitution and law, it is necessary to make sure the structure is properly registered through the appropriate channels. If not done successfully, ownership is not acknowledged (and in turn protected) by Mongolia’s legal institutions. Registration of Real Estate through the Immovable Property Office The Law of Mongolia on the Registration of Immovable Property holds that: 39
  36. 36. Legal System Subject to the provisions of the law, the right of a person or legal person to own immovable property arises upon registration at the Immovable Property Office of Mongolia. The process is initiated when an individual, a legal person, and/or their legal representatives provide the Office for the Registration of Immovable Property (hereinafter referred to as • • the ‘Registry Office’) with the following items: A document certifying the applicant’s right to ownership of the immovable property; A document by a competent authority setting out the dimensions and valuation of the property; Applications from non-permanent residents of Mongolia should (technically) be made through an authorized permanent resident of the country, in the owner’s name. However in reality this condition is rarely enforced, as foreigners who are familiar with the registration mechanism generally face little problem in completing the process. Upon receiving an application, the Registry Office is required to decide whether a property can be registered or not within thirty days. If the office considers all application requirements to be met, the property is registered in the Registry Offices records, and endorsed by the State Registrar and the Assistant Registrar. The ‘Floating Freehold’ Whereas in many Western countries the rights of ownership to the land beneath a given piece of real estate naturally accompany the ownership of the building, the prevailing system across the post soviet space is that of the ‘floating freehold’. These ownership structures are found to operate across the majority of the Mongolian market, being effectively the only option to foreign investment interested in purchasing real estate. Such a system allows the owner of a building to control the land upon which their property is built, without actually owning the land themselves (instead simply being endowed with the right to ‘use’ the land). The actual owner of the land may be the Mongolian government, or a private individual or business entity. Despite the investor owning less, their influence remains just as considerable. Development or the sale of a piece of land that houses a real estate asset is impossible unless the developer owns every Immovable Property Certificate connected with the plot. Thus with ‘floating freeholds’, investors may technically not ‘own’ the land that their property rests upon, but are able to stop the alterations to the land, in a way consistent with the concept of land ‘ownership’ in the western world. Expropriation The Mongolian government has rights of expropriation over private property and immovable assets under specific circumstances. Such powers are common across markets 40
  37. 37. Legal System globally, being known as ‘eminent domain’ in the United States, ‘compulsory purchase’ in the United Kingdom, and ‘expropriation’ in South Africa and Canada. The powers are outlined in the ‘Law on Allocation of Land to Mongolian Citizens for • Ownership’, and may only be utilized in certain instances: During occurrence of environmental or public disasters such as damages to lives and health of many people, loss of animals and livestock, earthquakes, strong winds, drought, dzud (exceptionally cold winters), flood, fire, outbreak of lethal infectious diseases that may cause significant damage to property and environment or emergency situations such as big scale industrial accidents, outbreaks of radioactive or poisonous chemical substances. Land (and property) owned by Citizens may be expropriated according to procedures provided by law and based on decisions of an authorized state entity for purposes of taking measures in order to protect and • • rescue the population’s livestock, animals and property and to eliminate the negative consequences. Damages caused to citizens owning land due to such expropriation shall be compensated to the full extent. If it becomes impossible to return the expropriated land, the owner shall be compensated for the value of the land and the damages according to the market rate at that time or the damages shall be compensated by allocating other land not worse than the expropriated land by its status and quality. If there is a dispute regarding the determination of the rate of expropriated land and damage caused to the landowner, it shall be resolved in court. There are next to no examples of the doctrine being applied in and around Ulaanbaatar, even though it is necessary for the infrastructural development of the city’s suburbs. Several gers are normally enough to cease the development of huge construction projects, as the government is not prepared to use its theoretical confiscatory powers to enable the commencement of sizable ventures. 41
  38. 38. Legal System International Comparison When looked at in the context of the region, Mongolia is more similar to the real estate legal structures of its post Soviet neighbors, than those prevalent across Asia. The extent to which the actual ownership of real estate assets is allowed in Mongolia, resembles much more closely the investor friendly policies common in Kazakhstan than China. Mongolia also lacks much of the administrative baggage that is problematic for those interested in entering the Chinese market. Despite having a far more developed property market, China is well known for its investment restrictions and market uncertainty, which severely limits the maneuverability of the foreign investor in a way not problematic in Ulaanbaatar. The Chinese state requires that neither land, nor immovable property can be owned, instead stipulating that all real estate assets must be leased for ‘terms’, usually between fifty and seventy years in length. Efforts to control China’s property bubble, which have caused house prices to triple over the last five years in Beijing, have seen the real estate legislative environment tighten in the country. Legislation passed in July 2006 holds that any residential property not for the individual owner’s personal use is classifiable as commercial real estate (even if it is not to be rented out to third parties). Furthermore any commercial property investment, whether funded by an individual investor or a business entity, may only be invested in through a mechanism involving a Chinese commercial vehicle (such as a Foreign Invested Enterprise, a Wholly Foreign Owned Entity, or a Contractual Joint Venture). Those looking to enter the property market in China therefore not only lack access to the permanent structural ownership available to them in Mongolia, but must also face a far more obstructive bureaucratic apparatus. Many of the transition economies of Central Asia have embarked upon legal trajectories far more favorable than China. Kazakhstan (widely held as the regional leader in open real estate legislation) stipulates in it Law on Investments that the rights of foreign investors are virtually indistinguishable from those of Kazakh citizens. As such, international entities are permitted to own both immovable property and land (with the exception of large agricultural plots) as long as the country’s Real Estate Center correctly registers their assets. Kazakh competitiveness is unsurprising given how the country’s growth has played out. The property markets of Astana and Almaty have already developed in a way that those of Ulaanbaatar can expect to do in the coming years. Technically Kazakhstan is the more liberal of the two countries, however the tangible rights endowed to foreign investors in all but the longest of time frames (with reference to how often contracts must be renewed) are very similar. The current institutional framework suggests many shared attributes between the two countries. Given the success the Kazakh property market has enjoyed since the turn of the Millennium, Mongolia’s legal system looks set to provide the structure needed for similar development well into the medium term and beyond. 42
  39. 39. Legal System Tax 43
  40. 40. Tax The Mongolian Tax Regime Mongolia’s economic success over the past five years has been based upon the country’s natural resource wealth, effective market liberalization, and significant flows of Foreign Direct Investment. To encourage this FDI, the Mongolian government has implemented one of the most generous foreign investor tax regimes globally. Although much of the country’s effort has been devoted to streamlining policy facing the mining industry, many of the attractive rates have spilled over to benefit investors in the economy as a whole, including those with exposure to the real estate industry. P e r s o n a l Income tax rates have recently been reduced to a rate of 10% for foreigners, identical to that faced by Mongolian c i t i z e n s . Corporation tax rates vary between 10% and 25%, or are fixed at 20%, depending upon the way in which a given company is structured and how its chooses to utilize its profits. Property Holding Tax currently Photo by Hamid Sardar / Khasar Sandag is extremely low, set at 0.6% of a properties estimated value, although this is set to marginally increase to 1% as of January 1st 2013. Some real estate investments may be required to pay VAT, which is charged at a flat rate of 10% Personal Income Tax There are effectively two types of individual entities in Mongolia as laid out by The Mongolian Law on Personal Income Tax: permanent resident taxpayers and non-resident taxpayers. A permanent resident taxpayer is defined by The Mongolia Law on Personal Income Tax as: 44
  41. 41. • • • Tax Individuals with residence in Mongolia Or An individual who resides in Mongolia for 183 days or more a year Conversely, the same document identifies a non-resident taxpayer as: An individual who has no residence in Mongolia and has not resided in Mongolia for 183 or more days in a tax year. The legislation goes on to state that any individual classified as a permanent resident taxpayer must pay tax to the Mongolian authorities on their worldwide income. Those who manage to qualify as non-resident taxpayers (by fulfilling neither of the conditions stipulated above) are required to only pay the Mongolian authorities a proportion of their income earned within Mongolia itself. The Mongolia Law on Personal Income Tax sets the personal income tax rate at a flat rate of 10% (reduced for foreigners from a rate of 20% as part of the country’s 2007 tax rationalization). This flat rate of 10% is applicable to the following income streams that may affect the real estate investor: • • • • Salaries, wages, and bonuses; Total taxable income from activities; Total taxable income from property; Total taxable income from sale of property; Total taxable income is defined in The Mongolia Law on Personal Income Tax as aggregate annual income minus all allowable expenses. This is applied to real estate incomes through the following framework: • • The total taxable income from property is determined by deducting the cost of leasing from the total income from leasing; The total taxable income from the sale of property is classified as the total proceeds from the assets sale. Any individual interested in purchasing real estate should note one exception to the total 10% flat tax rate: • The total taxable income from the sale of property is to be charged at a rate of 2% Corporate Income Tax The Economic Entity Income Tax Law of Mongolia governs the taxation of profits acquired by the following different forms of taxable entity: 45
  42. 42. Tax • • • An economic entity formed under Mongolian law, and their subsidiaries; A foreign economic entity headquartered in Mongolia; A foreign economic entity earning income in Mongolia, and its representative offices. The first two categories are charged a variable rate of corporate income tax subject at the following rates: • • All annual income between 0 and 3 billion Mongolian Tugrugs is to be charged at a rate of 10%; All annual income which exceeds 3 billion Mongolia Tugrug is to be charged at a rate of 25% The final category (foreign economic entities earning income in Mongolia, and its representative offices) however face the following completely separate rate of tax, their activity being classified as a repatriation of funds: • All annual income transferred out of Mongolia by foreign economic entities is to be taxed at a flat rate of 20% The above condition does not apply to FIFTA registered companies and joint ventures who reinvest their profits within the Mongolian economy. Property Tax • • • • Entities facing property ownership taxes upon immovable assets are: • • • • • Any company that owns property in Mongolia; Any NGO that owns property in Mongolia; Any citizen that owns property in Mongolia; Any non-citizen that owns property in Mongolia However, the following types of immovable property are exempt from property tax: Immovable property of legal entities which are subsidized by central or local budget. Residential/dwelling property Building and facilities for public use Management and production units in production and technological parks Buildings, facilities and other immovable property within technological parks Those required to pay property tax on the immovable assets are to be taxed in accordance with the following conditions: • Property tax is currently charged at a flat rate of 0.6% of the immovable asset’s value; The value of the property necessary to determine the total property tax liability is determined by data from the one of the following sources, listed in order of legal preference: • 46 The value of the property as it is listed with the immovable property state registry;
  43. 43. Tax • • Photo by Hamid Sardar / Khasar Sandag If no such information is available, then the value is to be determined based on the properties assessed worth for insurance purposes; If neither of the above are available, then the value of the property is to be based upon the estimated book value of accounting record. Withholding Tax Mongolian entities are required to withhold tax on dividends, royalties to economic entities resident in Mongolia, and royalties to individuals at a rate of 10%. However, dividends to individuals are exempt from taxation until 2013. Withholding tax is also applied to gains on the sale of immovable property at a rate of 2%. Non-residents with no presence in Mongolia are subject to 20% withholding tax on Mongolian source income, includeing the following: • • • • • • • Dividends Certain types of loan interest Royalties Rental income Management and administrative expenses Income goods, work or services provided in Mongolia Value Added Tax V.A.T. is charged on an ad valorum basis in Mongolia, at a rate of 10% 47
  44. 44. Tax Photo by Hamid Sardar / Khasar Sandag Taxation Bureaucracy • • • The Mongolian Law on Personal Income Tax stipulates that: • • Income tax reports are to be compiled by either the individual or their tax agent; Income tax reports are required to have both hard and electronic copies submitted; Both the electronic and the paper copy of the income tax report must be submitted in Mongolian, or alongside certified Mongolian translations The Economic Entity Income Tax Law of Mongolia stipulates that: • • • Annual corporate income tax statements are due by the 10th February of each year; Quarterly corporate income tax statements are due before the 21st of the month immediately following the end of the previous tax quarter; Corporate income tax payment schedules are to be issued by the authorities by the 25th of month; When total corporate income tax paid exceeds a companies total corporate tax liability, the company in question can credit the excess against future payments. The Immovable Property Tax Law of Mongolia stipulates that: • 48 Taxpayers must submit immovable property tax returns to the Mongolian tax office before the 10th February each year. Legal persons and corporate entities are liable to pay property tax before the 15th of the last month of each quarter;
  45. 45. Tax Tax Ambiguity Although theoretical tax rates are clearly desirable, the Mongolian tax regime has on a number of instances been known to suffer from a degree of ambiguity. In the real estate market the most commonly cited example of this occurring is undoubtedly with regards to determining when VAT is applicable. The confusion arises over ambiguity concerning the use of the word residential within The Value Added Tax Law of Mongolia. Some clauses of the document suggest that ‘residential’ assets (which do not face the 10% tax) are simply those used to house people in any capacity, whilst others lead the reader (and some members of the tax authorities) to the conclusion that ‘residential’ real estate require the owner to physically live in the property. The way in which the Mongolian tax authorities interpret this equivocality is anecdotally reported to vary case by case, depending upon the individual tax inspector. Some investors have eventually been charged 10% V.A.T. on their properties rental income, whilst others have been charged none, with both outcomes still facing the 10% income tax on their income from immovable property. Although it is important to be aware of issues such as these, the lack of definitional clarity is a problem facing many tax regimes in developing countries around the world. As Mongolia develops, it is expected that such inconsistencies will be ironed out, in a way that largely mirrors the progression of Kazakhstan’s tax regime. International Comparison When its content is considered, Mongolia’s tax credibly lives up to its internationally liberal reputation. The table below attempts to quantify this comparatively generous environment by examining what a non-incorporated entity would be charged across the four key tax types relevant to the real estate investor. Mongolia Kazakhstan Hong Kong Russia Flat tax at 10% Variable tax 10% tax on Variable tax Flat tax of 30% from 3% to employment from 2% to 45% Income Tax China income, 15% 17% on capital gains, 20% on ‘other income’ Corporate Variable tax Flat rate of Flat rate of Flat rate of Flat rate of Income Tax ranging from 25% 20% 16.5% (15% for 20% 10% to 25% if unincorporat- incorporated ed businesses) in Mongolia, 20% otherwise. 49
  46. 46. Tax Property Own- Variable Variable Standard rate Up to 1.5% de- ership Tax between 0.6% between 1% of 15% of net pending upon and 1% as of and 1.5% assessable cadastral 1st January property value value 2013 as determined None by rent, minus 20% maintenance allowance Value Added 10% 17% 12% None 18% Tax Income tax facing legal persons in Mongolia are competitive with the other nations used in this study in both the Asia Pacific and the post Soviet space. The amount payable is a flat tax at a lower rate than is found in either Kazakhstan or Russia, whilst the progressive thresholds in China and Hong Kong make it likely that larger investors will end up facing similar, if not increased bills. Exceptions to the flat tax rule for the Mongolian real estate investor (primarily in the form of sales income tax) are all designed to lower the tax rate; under no circumstance should a legal person expect to pay more than 10% income tax in Mongolia. Levels of corporate taxations facing foreign companies operating in Mongolia are fair, and are reminiscent of the regimes in place across China, Russia and Kazakhstan. For real estate investors however, the fact that the corporation’s income tax duty is lowered to just 2% on income from the sale of immovable property gives those looking to enter into the Mongolian real estate market a substantial comparative international tax advantage. Mongolia’s property holding tax, even once revised up will remain the lowest of the countries looked at, with the exception of China, which does not have a property holding tax. The Asia Pacific Investment Partners however considers Mongolia’s level essential in facilitating the efficient functioning of the country’s real estate market, stopping the speculation plaguing towns such as Ordos, China from becoming widespread. Photo by Hamid Sardar / Khasar Sandag 50
  47. 47. Section Two
  48. 48. Section Two Ulaanbaatar Ulaanbaatar is at present Mongolia’s only first tier conurbation. Located in the north of central Mongolia on the Tuul River, it represents the cultural, economic and political heart of the country. The past decade has seen the city transform from an unindustrialized settlement of 770,000, to the increasingly international city that can be seen today. Recent years have seen the emergence of a multitude of modern apartment blocks, offices, shopping malls and hotels as resource extraction has begun to bring significant wealth to the country. The city is divided into six primary districts (Düüregs): Bayangol, Bayanzurkh, Chingeltei, Khaan Uul, Songingkhairkhan, and Sukhbaatar. Each district is then subdivided into a set of Khoroo’s, representing the administrative subdivisions of Ulaanbaatar, of which there are currently 132 in total. Each Khoroo is then further divided into microdistricts, or Khesegs. Investor Insight: Scope of the Mongolian Properties Real Estate Report 2012 The focus of this guide upon Mongolia’s capital city should not be interpreted as a slight upon the economic potential of the second and third tier settlements around the country. As mining operations have developed, many urban centres have found themselves experiencing rapid growth. Dalanzadgad, the capital of the Omnogovi Aimag, is located just 247km from Oyu Tolgoi and 108km from Tavan Tolgoi and has become the epicentre of mining activity outside of Ulaanbaatar. As mining companies have established their offices in the region, the city’s population has increased from 17,000 in 2009 to 30,000. Average incomes have risen at the second fastest rate nationally (surpassed only by Ulaanbaatar). Sainshand, the capital of the Dornogovi Province is already reasonably well established, lying on the key infrastructural link between Ulaanbaatar and the Chinese border. Government plans to build an industrial park in the area, along with a railway spur system connecting Tavan Tolgoi to the Trans-Mongolian railway is expected to bring in billions of dollars in investment over the coming years. A strong demographic pull (the projects are expected to create some 200,000 to 250,000 jobs), combined with increases in average income is likely fuel real estate demand, and price appreciation over the coming years. Despite this impressive potential, Asia Pacific Investment Partners currently believes that such markets have not yet developed to a standard acceptable for the majority of international investors. Scarce information combined with fragmented management mechanisms within the still remote regions continue to create obstacles and risks that have all but disappeared within Ulaanbaatar. Given Ulaanbaatar’s unique position as the sole first tier city in a country with $1.3 trillion of mineral resources, there are a number of unique trends shaping its development. This section aims to detail the factors that are affecting Ulaanbaatar’s current trajectory, and the impact they are having on the make up and structure of the real estate market in the city. 52
  49. 49. Section Two Photo by Hamid Sardar / Khasar Sandag The Demographics of Ulaanbaatar Two connected forces have fuelled the drastic changes across Ulaanbaatar over recent years: the country’s economic growth, and considerable change in its demographic makeup. Despite informational inconsistencies in measuring Mongolia’s exact demography, all metrics are in consensus that the proportion of the population living in Ulaanbaatar has grown over the last decade. The National Statistics Office of Mongolia estimates the capital’s population increased from 1,147,700 in 2008 to 1,287,100 in 2011, growing 25% in just three years, with 40,641 people relocating to the capital in 2010 alone. Currently an estimated 47.1% of Mongolia’s population live in Ulaanbaatar according to the Japanese International Cooperation Agency, a proportion that is expected to increase considerably over the medium term. Forecasts anticipate that by 2020, over half the country’s population will be based within the capital city. 53
  50. 50. Section Two These high rates of urban migration are caused by a combination of financial necessity and the perception of opportunity among many currently based in Mongolia’s countryside. Particularly harsh weather conditions over recent years have incentivised the shift away from the nomadic lifestyle for many, with large quantities of livestock across the country having perished. As livestock numbers have dwindled, the financial and nutritional requirements of nomads have become more and more difficult to fulfil, causing many to abandon their rural existence. Investor Insight: The Nature and Impact of the Dzuud on the Mongolian Economy Dzud is the Mongolian term for a set of extreme weather conditions, which negatively impact large numbers of the country’s livestock. With the fate of so many of Mongolia’s population intrinsically connected to the health of their animals, the occurrence of a Dzud usually marks a significant change in the socio-economic conditions facing many across the country. Locals usually differentiate between three different types of Dzud: Black, White, and Ice. ‘Black Dzuds’ are usually seen when summers are hot and rain infrequent, leaving low-lying plants weak. When winter sets in and snow begins to fall, animals are incapable of locating fodder, leading many to starve. The ‘White Dzud’ is caused simply by unusually heavy snowfall, which stops livestock feeding on otherwise accessible frozen grass. The ‘Ice Dzud’ is brought about if freezing rain covers the landscape with a layer of ice making the feeding of livestock impossible. Usually infrequent occurrences, the past two decades have seen Mongolia’s rural communities having to deal with these conditions with unusual regularity. The winters of 1990-2000, 2000-2001, and 2001-2002 saw the country hit by three consecutive dzuds, killing an estimated 11 million heads of livestock nationwide. The infamous winter of 2009-2010 is still sending shock waves through the Mongolian economy. Heavy snowfall and temperatures as low as minus 50 were witnessed across the country. The UN estimates that a minimum of 8,000,000 cows, yaks, camels, horses, goats, and sheep perished, representing around 17% of the country’s total livestock. This incident has been regarded by many as something of a catalyst for the significant urban migration witnessed in Mongolia over recent years; the increased frequency of such occurrences causing many to question the sustainability of the nomadic lifestyle. With incomes unstable, conditions harsh, and even the most basic of infrastructure non-existent for many of Mongolia’s rural population, it is unsurprising that so many have decided to try their luck as city dwellers. External perceptions of Ulaanbaatar’s labour market are positive, with most Mongolians being acutely aware of the country’s extraordinary economic transformation. By simply relocating to the capital, it is believed that the unemployment and volatile wages plaguing many herdsmen can be avoided. 54
  51. 51. Section Two The Outcome of Mongolia’s Urbanisation: The Ger Districts For the majority of the migrants who flock to Ulaanbaatar, reality falls short of expectations as migrants they find themselves joining the peri-urbanised ‘ger districts’ that house approximately 60% of the city’s population. Plots of land across Ulaanbaatar’s ger districts are arranged into ‘Khashaa’s’, or small fenced properties. These plots are typically owned by those who live on the land, having been awarded the right to own plots by the private land ownership laws enacted in 2002. The land ownership registration procedures were made explicit in 2005. Investor Insight: What is a ‘Ger’? Mongolian ‘gers’ are traditional tents that have housed the country’s nomadic herdsmen for centuries. Similar to the ‘yurts’ of Kazakhstan, they are constructed out of felt and durable white canvas stretched over a wooden lattice substructure. ‘Gers’ tend to be small in size (with floor space representing roughly 30 sqm.) and consist of a single room. The sheer scale of Ulaanbaatar’s ger areas means that treating them as a homogenous entity is inadvisable. It is thus useful to loosely follow the tripartite framework developed by the World Bank, breaking down the areas by their characteristics and proximity to the central ger district. ‘City centre’ ger districts are those situated within or close to Ulaanbaatar’s urban areas, and will usually border with apartment blocks and fixed urban structures. It is estimated that 78% of structures within city centre ger districts are small, detached constructions, 18% are the traditional felt tents, whilst the remainder are represented by modern apartment blocks that have spilled over from Ulaanbaatar’s developed core. Characterised by a strong sense of community, these regions are well established and tend to represent migrant families whose ancestors moved to Ulaanbaatar generations ago, whilst free space was still freely available close to what is now the city centre. In central ger districts it is typical to observe residents investing much time in the maintenance and development of their properties. Land and the properties occupying it are likely to be owned by the family in question (around 99% of plots are in the ownership of their residents) meaning that they are secured as inter-generational investments, potentially allowing for long term gains in quality of life to be made from short term investment. 55

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