EXECUTIVE
SUMMARY
Inclusive of the Consumer Price Index
RESEARCH SQUARED LLC
The 2011 Mongolian Real Estate Report is part of the Industry Intelligence series, providing
mission ...
EDITORIAL
Global Crisis 2011/12 - The potential impact on the Mongolian Property Sector
Will we see a repeat of the 2009/1...
TABLE OF CONTENTS

Glossary-----------------------------------------------------------------------------------------------...
Third Neighbor Policy

87

Corruption

88

Overview of the Legal System

89

The Legal Profession

90

International Law

...
Legal and Land Allocation Framework Revisions

146

Housing Development in the UBMP 2020

147

Specific Projects

149

Exp...
Future Supply

245

Serviced Apartment Markets ---------------------------------------------------------------------------...
Infrastructure

284

Travel and communications

284

Residential

284

Hotels

284

Retail

285

Land

285

Appendices ---...
I.

GLOSSARY

Aimags of Mongolia, with Standard Abbreviations
AR

Arkhangai

BO

Bayan-Olgii

BKH

Bayankhnongor

BU

Bulg...
Glossary of Terms
Acronyms of Organisations, NGOs, Projects and Publications
ABD

Asian Development Bank

USAID

United St...
Glossary of Mongolian Terms
Dzuud

A winter of extremely heavy snowfall, often following a very dry summer, in which lives...
CHAPTER 1

THE EXECUTIVE SUMMARY

Research Squared - Mongolian Property Report 2012
12
/ 343
II.

EXECUTIVE SUMMARY

Ulaanbaatar is fast becoming one of inner Asia’s most exciting and vibrant cities. A city has stoo...
Mongolian currency. After net exports levelled out at near equilibrium in 2010, this year has seen Mongolia becoming a net...
EXPERT OPINION - CHRISTOPHER DE GRUBEN - M.A.D. INVESTMENT SOLUTIONS
CHALLENGES AND OPPORTUNITIES FACED BY MONGOLIA IN DEA...
Mongolia at a Glance
Metric

Value

Source

Date

Territory

1,564,115.75 sq.km

NSOM

2011

Population

2,754,685

NSOM C...
Ulaanbaatar at a Glance
Metric

Value

Source

Date

Population

1,240,037

NSOM

2011

Net in-Migration for 2010

40,641
...
1.

Demographic Factors

% of National Population

Population forecasts for Ulaanbaatar city 2007-2030
60
45

37.7

42.8

...
2.

Residential

Demand across Mongolia is being driven by five key factors:
•

Explosive economic growth, with GDP expect...
The National Mongolian Real Estate Market at a Glance
Metric

Source

Date

Total Housing Stock
estimate (GFA)

16.2 milli...
In all this equates to 443,600 individuals in Ulaanbaatar living in accommodation attached to heating, sewerage and water
...
reaching all time highs month by month over Q2 of 2011. By the end of this period average prices across Ulaanbaatar had
ri...
Areas of Ulaanbaatar
The State Department Store

This landmark store, which at peak times receives over 25,000 visitors a ...
Areas of Ulaanbaatar
The University Area

To the north of Parliament, within Sukhbaatar District, the campus of the Nation...
3.

Retail

The retail sector too has changed dramatically in the transition from a centrally planned to a market economy....
Retail new supply and uptake by year for A grade and B grade Retail

Square Metres

40,000

30,000

20,000

10,000

0

200...
4.

Office

In recent years Ulaanbaatar has seen the rapid new development of ambitious office and mixed use projects. Thi...
Grade A office supply and update over the past 3 years

Square Metres

40,000
30,000
20,000
10,000
0

2009

2010

2011

Ye...
5.

Hotel and Serviced Apartment Market

One highly visible result of Mongolia’s fast economic growth is a renewed influx ...
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
The 2011 Mongolian Real Estate Report
Upcoming SlideShare
Loading in …5
×

The 2011 Mongolian Real Estate Report

794 views

Published on

Mongolian realestate executive summary The 2011 Mongolian Real Estate Report

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
794
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
18
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

The 2011 Mongolian Real Estate Report

  1. 1. EXECUTIVE SUMMARY Inclusive of the Consumer Price Index
  2. 2. RESEARCH SQUARED LLC The 2011 Mongolian Real Estate Report is part of the Industry Intelligence series, providing mission critical information on Mongolian markets. Research Squared excel provides investment research and market analysis, as well as economic and social data pertinent to investment decision-making. Our services include due diligence, business environment briefings and feasibility studies. We also specialise in design and implementation of reliable, context appropriate research solutions. Based in Mongolia’s capital, Ulaanbaatar, our international team combines industry-leading research and analytic skills with local knowledge to help make the risk of emerging markets work for you. Research Squared was set up in 2011 as a subsidiary of M.A.D. Investment Solutions to provide in-depth analysis and market data on Mongolia. As Mongolia continues in its transition to a fully fledged free-market economy new practices new systems are gradually being developed to meet the information demands of a large and competitive private sector. Nevertheless, market research remains limited within Mongolia and is even thinner on the ground internationally. With over 16 years of combined experience in the Mongolian market the M.A.D. Investment Solutions team created Research Squared in order to provide market research and analysis that investors, both domestic and international, are desperate for. We have conducted extensive market research in the sectors of healthcare, real-estate, finance and banking. Our client base extend across Asia, the U.S.A. and Europe and include one of some of the largest real estate investment advisors on the planet. Our international staff of researchers, based in Ulaanbaatar, combine local knowledge with robust analysis to deliver thorough and practically focussed views of Mongolian markets. As the first major commercial study of the real-estate market in Mongolia this document provides an in-depth history of the development of real estate markets in Mongolia as well as detailed information for each market segment. More than just a market overview, the Mongolian Real Estate Report 2012 is designed to furnish the reader with in-depth, practically oriented and up-to-date knowledge the Mongolian real estate market and its functioning. The private property market in Mongolia has only been developing for two decades, making kind of long-term projections that underpin investment decisions in more developed markets are not yet possible. In this context investors rely more than ever on on-the-ground information. With this in mind the Mongolian Real Estate Report 2012 delivers the combined insight of our experienced team in a single encompassing document designed to give robust information, practical guidance and a feel for the urban spaces of Mongolia. M.A.D. INVESTMENT SOLUTIONS LLC With established on-the-ground expertise, M.A.D. Investment Solutions provides a wide range of turn-key Real Estate Services including investment trips, due diligence, Rental & Sales, project management and property valuations both within Ulaanbaatar as well as high-growth secondary cities. The M.A.D. expat management team has been operational in Mongolia for an average of 8 years each and have been involved with an estimated 1,500 real estate transactions throughout their careers in Mongolia. They are dedicated to furthering the Mongolian business environment and creating a sustainable investment environment for its clients. Today M.A.D. offers a unique dedication to service and providing all the tools necessary for foreign investors to make the right investment decision in Mongolia.  In 2011, M.A.D. Investment Solutions published Mongolia's first truly comprehensive property market study through Research Squared, its subsidiary investment research company.  Website: http://www.mad-mongolia.com AUTHORS OF THE MONGOLIAN PROPERTY REPORT 2012 Alex Skinner, Christopher de Gruben, Joachim Bertot, Uyanga Tsoggerel, Tsolmon Dorjgotov, Gansukh Khurelbaatar, Lhagvasuren Erdenchuulun, Chinguun Enkhbayar, Otdgonbayar Magvan. EXPERT OPINION CONTRIBUTORS TO THE MONGOLIAN PROPERTY REPORT 2012: Mr. Tom Holland, Managing Partner, Cube Capital Mrs. Burmaa Ukhnai, Managing Director, Uils Real Estate Agency Mr. Marat Utegenov, Managing Partner, Mongolian Development Resources Mr. Jim Dwyer, Executive Director, The Business Council of Mongolia Copyright © Research Squared LLC Unless stated otherwise content of this report is the Copyright of R Squared LLC. Except as otherwise expressly permitted under Copyright law or Terms of Use Agreement, the content of this report may not be copied, reproduced, republished, downloaded, posted, broadcast or transmitted in any way, in whole or in part, without first obtaining express written permission from Research Squared LLC or the copyright owner. Where information and content is attributed to other authors the views contained within said documents do not necessarily represent the views of R Squared LLC. Where information and content is included from other sources or authors those sources or authors retain Copyright over this information and content. R Squared LLC makes no representation about the suitability of is information for any purpose. It is provided “as is” without express of implied warranty. The name and logos of R Squared LLC may not be used without specific written prior permission. Disclaimer In compiling this publication the Publisher relies upon information supplied by a number of external sources. This publication is supplied on the basis that while the Publisher believes all the information contained in it will be correct or accurately represent the situation at the time of publication, it does not warrant its accuracy or completeness and to the full extent allowed by law excludes liability in contract, tort or otherwise, for any loss or damage sustained by subscribers, or by any other person or body corporate arising from or in connection with the supply or use of the whole or any part of the information in this publication through any cause whatsoever. Research Squared - Mongolian Property Report 2012 2 / 343
  3. 3. EDITORIAL Global Crisis 2011/12 - The potential impact on the Mongolian Property Sector Will we see a repeat of the 2009/10 crisis or is Mongolia now in a better position to weather the international storm? As the world seems to, yet again, slip into a global recession, we look at the potential impact this could have on the Mongolian Property Market and its subsequent attractiveness to foreign investors. The Mongolian Property Sector is currently under threat from two separate fronts, the first is increasingly similar to the 2009/2010 commodity crisis which impacted the Mongolian real estate market rather considerably. Not only did foreign investors reduce or completely halt their investments into Mongolia (on which the Mongolian economy was entirely reliant) but as the western world descended into recession, it reduced exports from China which in turn drove down China’s need for basic mineral commodities from Mongolia but also globally reduced commodity prices due to a sudden lack of demand, therefore drying up new mining investments. A serious financial crisis in China, which could lead to a weakening of its real estate market would create a pan-regional domino effect which would, in turn, severely impact Mongolia. As if the concerns of an impending global recession were not enough to worry potential investors, the current levels of political bickering and nationalistic sentiments amongst the Mongolian population are setting a dreadful precedent (or maybe a reminder) of the constant underlying threat of political instability. As we approach the parliamentary elections (June 2012), it is likely that we will see an increasing number of antiforeign public initiatives from parliament members desperately seeking marginal votes in a bid to clinch to power and the lucrative opportunities this presents. A clear and recent example of such a position was the sudden, and very public, declaration that the Mongolian state wished to renegotiate the OT agreement. While this was swiftly reversed, it has resulted in a serious blow to the international reputation of Mongolia. Mongolia’s insistence to develop its railway infrastructure towards politically relevant Russia and its sea ports rather than business oriented China thus making Mongolian commodity export considerably less profitable, has been a disappointment to foreign mining investments. The Khan Resources uranium license case, the rejection of the Tavan Tolgoi bidders (previously publicly announced by the government as a done deal) in addition to the current nationalistic positions towards OT and foreign investments can only send negative signals to those investors who are becoming increasingly risk-averse and frustrated of Mongolian politics. During the previous crisis, the property sector was impacted in various degrees. Practically all construction projects in the city halted and while prices only dropped by an average of 20% across the city, liquidity dropped dramatically with very few transactions taking place. This only changed after Oyu Tolgoi started significantly investing in Mongolia, thus signalling to the foreign investment community that Mongolia was once again a desirable global investment location. Mongolia’s overall economic position today is only slightly improved from where it was in 2009. The country has had the chance to grow its economy over the last year (14% YoY GDP Growth), it has secured and started the Oyu Tolgoi development, improved fiscal policies as well as foreign reserves and has managed to marginally diversify its economy but the country has, on the other hand, become more reliant on foreign debt, increased its trade deficit and is burdened with high inflation as well as high (unofficial) unemployment rates. Over the course of 2011, the Mongolian Property market not only recovered remarkably well but increased levels of foreign investments kept pushing up capital growth and rental prices as Mongolia became the media darling of the world; an attractive story in an otherwise gloomy world. The current growth in the UB property market is very much linked to the burgeoning emerging middle class purchasing property on the back of the rapidly increasing wage levels across the capital. Should the global crisis take a considerable turn for the worst, foreign investment will most certainly slow down over the coming 8 months of winter, wage levels may thus drop as fewer companies hire aggressively and may in turn lead to a drop of consumer confidence in property. This is in contrast to the recent announcement from the Mongolian Government of a 53% rise in public servant wages and pensions, if this is followed through, it is inevitable that inflation will rise further and we may well start witnessing the onset stages of the infamous “Dutch Disease”. However, the fundamentals of the real estate market are still extremely solid, the country is guaranteed a relatively safe future double digit GDP growth based on the existing levels of foreign investment through the commitments that mines such as OT have already made, therefore feeding the construction and mining supply chains. The current levels of FDI enjoyed by the Mongolian government are not solely reliant on the exports of minerals but rather on the long-term development of those mega-mines that take generally a few years to bring to production and require enormous up-front capital and human investments. This thus means that even if there are no significant new numbers of expats relocating to Mongolia, the current residents are here to stay and will keep renting apartments. Ulaanbaatar itself keeps witnessing considerable levels of urbanisation as nomads leave the countryside to seek their fortunes (or more often survival) in the capital, adding to the already considerable demand pool for low-to-mid end residential properties in the city. Lets not forget that over half of the city inhabitants still reside in the traditional nomadic tents known as gers. This demand, in addition to the increasing number of high-net-worth Mongolians investing in the property sector regardless of global economics, as well as those private investors that strongly believe in the future potential returns of Mongolia over those of more established western economies is most likely to keep fuelling demand across the city centre. In addition to which there is a very real “shadow FDI”, essentially private and very discreet foreign investment, mostly from China, that invests across the board in all types of assets regardless of economic logic. It is also highly likely that large foreign institutional investors realise the opportunities afforded in a market with strong fundamentals and invest heavily in existing built properties to make the most of the situation without carrying construction risks, thus, while new developments may slow down, the prices of existing properties may keep rising. In addition to growing demand, supply of new properties in the city keeps dwindling as scarce land becomes increasingly expensive and both skilled labour and construction materials are constantly diverted towards the Eldorado of the south Gobi and its enormous mining projects. As mortgages in Mongolia are still too expensive to be attractive to a vast majority of the population (less than 10% of Real Estate purchases in Mongolia are mortgaged), there is little risk of a true collapse in the industry as widespread foreclosures are impossible in a cash driven market. With the typical seasonal drop in demand over the winter months combined with the increasing uncertainty over politics and the state of the global economy, it is possible that general property prices may stagnate over the winter months with a potential small dip within some sectors of the capital but a price drop would only be short lived as the summer of 2012 will no-doubt bring renewed investment to the country’s mining sector (probably post-election) supported by, it is hoped, a more stable global economy. We furthermore expect to see a number of dedicated property funds launching their operations by mid-2012 who are, in turn, likely to single-handedly raise prices across the board. Suburban areas such as Zaisan and the stadium areas are most likely to see a noticeable drop in prices while the Star Apartments area, the CBD and the State Department Store / Ulaanbaatar Department Store areas are most likely to see continued growth. It is essentially clear to those on the ground, that, despite repeated setbacks, Mongolia has firmly set itself on a path towards extraordinary growth and, pending a catastrophe, shows no signs of slowing down in the near future. Christopher de Gruben M.A.D. Investment Solutions Managing Partner Ulaanbaatar, Mongolia. 21 October 2011 Research Squared - Mongolian Property Report 2012 3 / 343
  4. 4. TABLE OF CONTENTS Glossary-----------------------------------------------------------------------------------------------------------------------------------9 Executive Summary ----------------------------------------------------------------------------------------------------------------------13 Demographic Factors 18 Residential 19 Retail 25 Office 27 Hotel and Serviced Apartment Market 29 Construction 32 Land and Property ownership - structures and functioning of the market 34 Legal Environment 36 Doing Business in Mongolia. 37 Tier 2 Cities 39 Dalanzadgad - Даланзадгад 39 Erdenet - Эрдэнэт 40 Khan Bogd - Ханбогд 40 Mongolia in Macro-perspective---------------------------------------------------------------------------------------------------------44 Background 46 Ethnic Composition 46 Language 46 Religion 47 History 48 Geography and Climate 50 The Mongolian Psyche 51 Consumption 52 Government Expenditure 53 Investments 54 The Business Environment 56 Net Exports 57 Foreign Reserves 58 Regional Trade 59 Banking and Currency 62 The Mining Sector 62 Coal 64 Copper 64 Gold 65 Uranium 66 The Mining Policy Environment 66 Demographic Trends 68 Employment and Wages 72 Wealth Distribution 77 Employment Risk Analysis 78 Risk Factors 79 Dutch Disease 79 Mining and Social Security 80 Political Stability 80 Natural Disaster: Earthquake 80 Natural Disaster: Flood 81 Political, Legal and Tax Systems -------------------------------------------------------------------------------------------------------84 Overview of the Political System 84 Ministries 85 Political Environment and Perceptions of Government 87 Research Squared - Mongolian Property Report 2012 4 / 343
  5. 5. Third Neighbor Policy 87 Corruption 88 Overview of the Legal System 89 The Legal Profession 90 International Law 90 Law and Property Rights 91 The Rights of Foreign Citizens 91 Expropriation 91 Overview of the Mongolian Tax System 93 Property Taxes 94 Value Added Tax 95 Personal Income Tax and Compulsory Insurance 95 Corporate Income Tax 96 The Mongolian Tax Environment in International Comparison 97 Real Estate Overview --------------------------------------------------------------------------------------------------------------------101 The Development of Private Property in Mongolia Land Ownership 101 103 Property Related Risk Factors 108 Market Characteristics 108 Currency Risk 108 Reliance on Key ‘on-the-ground’ Personnel 108 Regulation and the Legal Environment 109 Taxation 110 Expropriation 110 Corruption and Political Factors 110 Insurance 111 International Comparison 111 Benchmarking 112 International Market Comparisons 116 China 116 Russia 117 Kazakhstan 118 Overview of the Real Estate Market 119 National Market Volume and Liquidity 121 Planning Restrictions in Ulaanbaatar 123 Existing supply depreciation in Ulaanbaatar 124 Redevelopment in Ulaanbaatar 124 Building Restrictions in Ulaanbaatar 125 Infrastructure in Ulaanbaatar 125 Electricity 125 Water 128 Road networks 129 Construction Sector Overview 131 Labour 134 Timescales 135 Cost of Corruption 135 Real Estate Legal Environment 135 Legal Structures of Immovable Property Ownership in detail 137 Registering an Immovable Property 137 Legal Structures of Land Ownership 138 Land Possession Rights in Detail 139 Legal Protections and Expropriation 142 The Mongolian Legal Environment in International Comparison Master Plan 2020 - The Future of Ulaanbaatar Development Plan 142 143 145 Research Squared - Mongolian Property Report 2012 5 / 343
  6. 6. Legal and Land Allocation Framework Revisions 146 Housing Development in the UBMP 2020 147 Specific Projects 149 Expectations for housing development 150 Housing Target 150 Transport 150 Roadways 152 International Airport 152 Railway 152 Bus Services 153 National Development Integration 153 The Industrial and Technological Park 153 Improvements to Social Infrastructure 153 Disaster Management Strategy in the Master Plan 154 Fire 154 Ulaanbaatar Economy 154 Budget and Investment 154 Ongoing improvement projects 155 Critiques 155 Residential Market -----------------------------------------------------------------------------------------------------------------------157 Residential Rental Market Supply 157 Expat Rental Markets 159 Residential Housing Supply in Mongolia 160 Ulaanbaatar Residential Supply 162 Overview 162 Inner City Ger Areas 163 Mid Ger Areas 163 Peripheral Ger Areas 163 Apartment areas in the inner city 164 Detached housing in ger areas 168 Housing Market Demographic Breakdown 168 Mortgage Markets in Ulaanbaatar 170 Ulaanbaatar Residential Project Overview 173 A note on aesthetics, furnishings and renovations District by District analysis 176 177 Bayangol District - Баянгол 181 Bayanzurkh District - Баянзүрх 186 Khan-Uul District - Хан-Уул 192 Sukhbaatar District - Сүхбаатар 199 Chingeltei District - Чингэлтэй 206 Songinokhairkhan District - Сонгинохайрхан 211 Office Market -----------------------------------------------------------------------------------------------------------------------------215 Office Supply 216 Retail Market -----------------------------------------------------------------------------------------------------------------------------224 Warehouse Markets ---------------------------------------------------------------------------------------------------------------------233 Parking and Garages --------------------------------------------------------------------------------------------------------------------236 Hotel Markets-----------------------------------------------------------------------------------------------------------------------------239 Overview 239 Rates 242 Hotel Supply 242 High End Hotels: 3*+ 244 Mid-to-low end. 245 Research Squared - Mongolian Property Report 2012 6 / 343
  7. 7. Future Supply 245 Serviced Apartment Markets -----------------------------------------------------------------------------------------------------------248 Overview 248 Serviced Apartment Supply 249 District by district trend analysis 252 Entertainment Markets ------------------------------------------------------------------------------------------------------------------255 Overview 255 Entertainment Supply 256 Land Market ------------------------------------------------------------------------------------------------------------------------------258 Overview 258 Secondary Cities -------------------------------------------------------------------------------------------------------------------------264 Darkhan - Дархан 265 Growth Factors 266 Residential 267 Hotel 267 Construction 267 Office 267 Retail 267 Sainshand - Сайншанд 268 Growth Factors 269 Residential 269 Hotel 270 Construction 270 Office 270 Retail 270 Dalanzadgad - Даланзадгад 271 Growth Factors 272 Transportation and Communications 272 Infrastructure 272 Retail and Commercial 273 Khan-Bogd - Ханбогд 273 Growth Factors 275 Residential 275 Hotel 275 Construction 276 Office 276 Retail 276 Erdenet - Эрдэнэт 276 Residential 277 Hotels 277 Zamiin-Uud - Замын-Үүд 278 Residential 279 Hotels 279 Bayan-Olgii - Баян-Өлгий 279 Hotels 280 Residential 280 Land 281 Retail 281 Sukhbaatar - Сүхбаатар 281 Growth Potential 282 Residential 282 Land 282 Khovd - Ховд 283 Research Squared - Mongolian Property Report 2012 7 / 343
  8. 8. Infrastructure 284 Travel and communications 284 Residential 284 Hotels 284 Retail 285 Land 285 Appendices -------------------------------------------------------------------------------------------------------------------------------287 Notes on Methodology 287 References and Bibliography 287 How To Guides 289 Locating a Property to Rent of Buy 289 Property Transaction Process 290 Rental Contract Considerations 291 Due Diligence Checks 292 Paying bills Associated with a Property 292 Water, Heating and Electricity Payments 292 Telephone and Cable Television Payments 293 Internet Payments 293 Building and Grounds Maintenance Payments 293 Obtaining Work Visas 293 Translations of the Laws of Mongolia 294 Law of Mongolia on Land fees 304 Primary Mortgage Providers 316 Major Development Companies Operating in Mongolia. 322 MCS Property LLC 322 Just Group 323 Jiguur Grand Group LLC 323 Chono Corporation - Chono Properties Co,.Ltd 323 Bridge Group LLC 323 Gangar Holding LLC 324 Gandirs Group LLC 324 Monnis Properties LLC 324 Nomin Construction 324 Modun 325 Maks Urgoo LLC 325 Bodi Construction 325 Delta Construction 326 Altai Construction LLC 326 Eco Construction LLC 326 Government Agencies 328 Real Estate Companies 329 Property Insurance Providers 332 Consumer Price Index 333 Sample Real Estate Documents 340 Research Squared - Mongolian Property Report 2012 8 / 343
  9. 9. I. GLOSSARY Aimags of Mongolia, with Standard Abbreviations AR Arkhangai BO Bayan-Olgii BKH Bayankhnongor BU Bulgan GO Govi-Altai DO Dorngovi DD Dornod DU Dundgovi ZA Zavkhan OV Ovorkhangai OM Omnogovi SU Sukhbaatar SE Selenge TO Tov UV Uvs KHO Khovd KHS Khovsgol KHE Khentii DA Darkhan-Uul UB Ulaanbaatar OR Orkhon GS Govisumber Central Districts of Ulaanbaatar with Standard Abbreviation SBD Sukhbaatar CHD Chingeltei K-UD Khan-Uul SKD Songinokhairkhan BGD Bayangol BZD Bayanzurkh Outer Districts of Ulaanbaatar with Standard Abbreviation BND Baganuur BKD Bagakhangai NKD Nalaikh Definitions of the Regions of Mongolia as established by the National Statistical Office of Mongolia (NSOM) Western Region Khangai Region Central Region Eastern Region Ulaanbaatar Bayan-Olgii Arkhangai Govisumber Dornod Ulaanbaatar City Govi-Altai Bayankhongor Darkhan-Uul Sukhbaatar Zavkhan Bulgan Dorngovi Khentii Uvs Orkhon Dundgovi Khovd Ovorkhangai Omnogovi Khovsgol Selenge Tov Research Squared - Mongolian Property Report 2012 9 / 343
  10. 10. Glossary of Terms Acronyms of Organisations, NGOs, Projects and Publications ABD Asian Development Bank USAID United States Aid MCA Millennium Challenge Account NBFI Non-Banking Financial Institution PRC People’s Republic of China EBRD European Bank for Reconstruction and Development MPP (formerly MPRP) Mongolian People’s Party (formerly Mongolian People’s Revolutionary Party) DPP Democratic People's Party of Mongolia VSO Voluntary Service Organization GTZ Deutsche Gesellschaft fur Internationale Zusammenarbeit FIFTA Foreign Investment and Foreign Trade agency of Mongolia WB World Bank IMF International Monetary Fund UNDP United Nations Development Program ADRA Adventist Development and Relief Agency NSOM National Statistics Office of Mongolia GoM Government of Mongolia LME London Metals Exchange MSE Mongolian Stock Exchange LSE London Stock Exchange MRAM Resource Authority of Mongolia NMMA National Mongolian Mining Association HIES Household Income and Expenditure Survey 2008 (NSOM and World Bank) NRA Nuclear Regulation Authority of Mongolia UB2020 The Ulaanbaatar Master Plan 2020 JICA Japanese International Cooperation Agency MMC Mongolian Mortgage Corporation CBHI Central Business Height Index GNP Gross National Product GDP Gross Domestic Product RGDP Regional Gross Domestic Product GDP Per Cap GDP per capita ROI Return on Investment CPI Consumer Price Index OT Oyu Tolgoi TT Tavan Tolgoi MMC Mongolian Mining Corporation US$ United States Dollar MNT Mongolian Tugrik RMB Chinese Yuan Renmimbi RUB Russian Ruble Economics and Geography Mining Currency Research Squared - Mongolian Property Report 2012 10 / 343
  11. 11. Glossary of Mongolian Terms Dzuud A winter of extremely heavy snowfall, often following a very dry summer, in which livestock are unable to find fodder through the snow cover. This is a catastrophic event in which large numbers of animals may die due to starvation. Aimag The largest administrative unit of Mongolia. May be translated as Province. There are 21 Aimags in Mongolia, established since 1921 Soum A Soum is the second level administrative district of Mongolia. The 21 Aimags of Mongolia are subdivided into 329 Soums. Each Soum administers a territory of rougly 4,200 square kilometers or around 5,000 people. Bag The Bag is the third-level administrative subdivision of the Mongolian territory . Most bags are not administrative territories as such and serve to sort families of nomads of Soums into groups. Dureg Literally meaning District. The capital city of Monoglia, Ulaanbaatar, is divided into 9 districts, 6 central and 3 peripheral. Khoroo Khoroos are administrative subdivisions of Ulaanbaatar. The term is often translated as subdistrict. There are 132 subdistricts of Ulaanbaatar. Khoroolol Khooroolols are the third-level administrative divisions of Ulaanbaatar. Translated as microdistrict or neighborhood, these are the smallest subdivisions of the capital city and are represented by local level administrative organizations. Ikh Khural The Ikh Khural, translated as the State Great Khiral, is the name for the unicameral Parliament of Mongolia. It represents the legislative and Government. Ger A traditional, round, felt and wood-frame dwelling used by nomadic pastoralists in Mongolia. Baga Toirog This is the name commonly given to the political and economic heart of Ulaanbaatar, now commonly known as the CBD. Baga Toiruu This is the name given to the central area of Ulaanbaatar surrounding the small CBD and political heart of the city, encompassing parts of Chingeltei and Sukhbaaatar Districts Bayshiin Literally building, an apartment or house. Barilga Literally construction or the act of building. This is a also the name of a well known trade magazine. In spoken language it is pronounced Barilag. Khashaa A small, fenced plot of land upon which a family may pitch a ger or build a property. In Ulaanabatar these are usually around 250 700 square meters in size, corresponding at the high end to the maximum size of land plots able to be privatised by a family or individual. Symbol Foreign Currency Mongolian Tugrik Rate US$ United States Dollar 1.245 RMB Chinese Yuan Renminbi 195 RUB Russian Rouble 41.5 Exchange Rates used in this Report Research Squared - Mongolian Property Report 2012 11 / 343
  12. 12. CHAPTER 1 THE EXECUTIVE SUMMARY Research Squared - Mongolian Property Report 2012 12 / 343
  13. 13. II. EXECUTIVE SUMMARY Ulaanbaatar is fast becoming one of inner Asia’s most exciting and vibrant cities. A city has stood where Ulaanbaatar is today since 1639, originally named 'Nomin ih huree', today’s Ulaanbaatar is the thriving political, cultural, economical and educational centre of Mongolia and is home to a population of over 1.2 million people (around 44% of Mongolia’s total population), the majority of whom inhabit the ger districts (a ger is a traditional nomadic dwelling made of wood and felt) which surround the city on all sides, while a select few enjoy the trappings of increasing wealth brought about by the mining boom in Mongolia. Since the dissolution of the Centrally Planned economy in the early 90’s, Mongolia has opened up to global economies and influences, nowhere is this more visible than in the capital city. Land-cruisers and Hummers now vie for space on the crowded roads, whilst the burgeoning, style-conscious middle-class shop in Louis Vuitton and Hugo Boss. The city is bustling with change and is full of expectation. Mongolian traditions are never the less still strong and herding continues as a viable way of life in many of the 'Aimags' (regions). This can clearly be witnessed in the architecture of this sprawling city, wherein Soviet era buildings, are juxtaposed against new towering steel and glass structures and a few remaining Chinese/Tibetan imperial style palaces. The precocious development of this vast and sparsely populated state is increasingly catching the eye of the world’s financial communities. World Bank figures indicate that Mongolia's economy grew by 17.3 percent in the second quarter of 2011, although annualised figures produced in the fourth quarter of 2011 indicate that growth for the year may end up closer to 40%. This has led to the rise of household income, which has risen 4.5% in the last year alone. Poverty in Mongolia has also fallen and continues on a downward curve. In 2008 23.1% of the population of Mongolia were identified as living on or below the minimum level of income necessary to achieve an adequate standard of living (currently defined by the World Bank as US$1.25 at 2005 purchasing-power parity). For the first half of 2011 GDP Mongolia’s annualised GDP growth was a remarkable 17%, with annualised inflation vacillating from a low 2% to a high of 10% between January and June 2011. Inflation is on the rise, even again after the Government of Mongolia implemented measures in spring 2011 to curb runaway food inflation. Nonetheless, a fiscal surplus of 7% of GDP reported by the end of the first half of 2011 is a good indicator that Government spending is becoming more responsible. Nonetheless, there are concerns that fiscal spending will increase drastically with the promise of mining revenues luring a Government well known for electioneering into making impudent promises. Adoption of counter-cyclical fiscal policy provides further indication of increasing fiscal maturity in the Government of Mongolia. Foreign exchange reserves are high, at 40% of GDP, or $2.6 billion. There are calls from some parts of Government to spend some of these reserves, although prevailing opinion seems to favour building foreign currency reserves, in order to improve Mongolia’s credit rating. Domestic currency is displaying 9% appreciation against the US$ despite money supply increasing 67% during 2011 year-to-date and net trade continuing in its deficit status. All indications point to a continuing appreciation of the MNT against the US$ as mining exports continue to exert upward pressure on the value of the Research Squared - Mongolian Property Report 2012 13 / 343
  14. 14. Mongolian currency. After net exports levelled out at near equilibrium in 2010, this year has seen Mongolia becoming a net importer again as huge mining projects continue construction and infrastructural development. Nonetheless, this process is all geared towards initiation of major mining projects through 2013 to 2016, such as Oyu Tolgoi and Tavan Tolgoi, that will thrust commodity exports to huge new highs. On top of all this, capital markets are rapidly improving. Plans to move the stock exchange onto a new electronic trading platform by mid- December and the promise of international trading through the LSE by Q1 of 2012 year will bring with it capital inflow increases that should bring performance of the exchange back closer to 2010 levels , when the exchange experienced a run up of 121% in a single year. Foreign investment into Mongolia for 2011 year will likely continue to rise and should easily trump the US$ 1.4 billion invested in 2010 as new investors clamour to gain exposure to Mongolia’s mineral wealth and increasing exports and mineral rich deposits, despite unsteady inflation and mineral sector dependence. In the first 5 months of 2011 investment already reached US$ 1.2 billion. The European Bank for Reconstruction and Development (EBRD) reported investors contributed to 26 percent of the GDP in 2010. The Mongolian economy is export and commodity based, with the minerals sector making up 22.5% of total GDP in 2009. Rapid recovery and expansion of exports combined with commodity price rises have led to projections of accelerated GDP growth, with nominal GDP growth rate projections peaking as high as 30%. An improving macroeconomic situation coupled with greater monetary liquidity and more developed mortgage markets will drive growth in property markets. Demographic indicators that project increased demand from a young, urbanising population also support this growth projection. At present mortgage lending is not well developed in Mongolia, with commercial banks offering rates of between 15% and 17% per annum on average. Successive reductions in the Mongol Bank interest rate and improved credit policy, should ensure greater access to mortgages for the wealthier segment of almost three-quarters of a million people in Ulaanbaatar who presently live in accommodation not serviced by basic infrastructure. This, in turn, will drive up demand for a limited supply and exert considerable upward pressure on prices. This impressive growth is being driven by exploration and extraction of Mongolia’s breathtaking mineral wealth. Beneath Mongolia’s vast and diverse terrain there are well over 8,000 individual deposits, containing a wealth of over 440 different minerals. Of these around 600 deposits and outcrops thereof have been more fully explored and their extent determined. Much of this exploration began during the socialist period One example of a successful existing project is the Erdenet copper mine. Established in the 1978 with an initial production capacity of 4 million tons per year, the mine was producing nearly 24 million tons per year by the transition period and still has reserves enough to keep the mine producing for up to 40 years hence. The nation also has a long history of uranium exploration, dating to joint Mongolian-Russian exploration projects in the 1950s of deposits in the Dornod and Gurvangulag areas of the country. Atomredmetzoloto indicates that Russia spend over US$600 million on uranium exploration and development in Mongolia up until 1995. Known mineral deposits include over 180 gold deposits, 5 copper molybdenum deposits, a lead deposit, 5 tin deposits, 10 steel iron deposits, 4 silver deposits, 42 deposits of brown and coking coal, 42 fluorspar deposits, 12 salt and 10 sodium sulphate deposits, 6 semi-precious stone deposits, 9 crystal deposits, over 200 deposits of minerals used in production of construction materials and a wealth of rare-earth metals. By 2011 well over 200 of these deposits are already being exploited. The vast majority of current individual mining operations are on in gold deposits, with copper, coal, salt and other minerals making up the remainder. Mongolia is ranked second in the world in terms of copper reserves, with the Oyu Tolgoi copper deposit considered to be over three times larger than EMC. Alongside this flagship reserve the Erdenet mine is still producing 25 million tons per annum and in 2010 was responsible for 12% of Mongolia’s GDP. Today Boroo Gold, a subsidiary of Centrera Gold, remains the largest single player in the gold sector. Boroo was estimated to have increased the entire country’s GDP by between 5% and 7%. The Gold and copper sectors are about to transform as Oyu Tolgoi mine comes online in 2013. This project has already committed US$7 billion to the Mongolian economy and as revenues from the projected 46 million ounces of gold it will produce will be a major driver of growth growth to over 20% The coal sector in Mongolia is now transitioning from exploration to large-scale production. In 2010 production reached 22.5 million tons, almost doubling that of the previous year. Exports rose by 218% year-on-year 2009-2010 to 16.6 million tons. The new Tavan Tolgoi coal mining operation, for which a national share release is scheduled to take place in 2012, will reach full capacity in 2016. The estimated reserves in Tavan Tolgoi amount to five billion tons. Mongolia already supplies Chinese steel mines via Jiangsu Province. Expected expansion of Chinese markets will underpin further demand for Mongolian coal. The mining policy environment remains somewhat capricious and calls to renegotiate the landmark Oyu Tolgoi agreement in 2011 were fuelling fears for the future of Mongolia in an already difficult global economic climate. These calls are perhaps more of a show for the electorate in the run up to the 2012 elections rather than a show of intent and all calls to renegotiate have been quashed. The most difficult period for foreign capital mining investments in Mongolia looks to be well behind us now, with windfall taxation on mining revenues being withdrawn and major projects such as Oyu Tolgoi and Tavan Tolgoi looking set to drive the Mongolian economy forward. Research Squared - Mongolian Property Report 2012 14 / 343
  15. 15. EXPERT OPINION - CHRISTOPHER DE GRUBEN - M.A.D. INVESTMENT SOLUTIONS CHALLENGES AND OPPORTUNITIES FACED BY MONGOLIA IN DEALING WITH THE INFLUX OF FOREIGN ENTITIES. MONGOLIA IS QUICKLY BECOMING AN “ELDORADO” DESTINATION FOR MANY FOREIGN INVESTORS. Its mining resources, close proximity to the Chinese and Russian markets as well as its stable politics and excellent business environment makes it a favoured destination in today’s turbulent world. This presents a unique opportunity for growth and the re-development of the country, the question is of course how to make the most of today’s situation in a way that allows for a win-win for both the foreign partners and Mongolians themselves? For a little while, Mongolia was considered as one of the most powerful and feared nations on earth but this has since changed drastically with the Manchu rulers and then the Soviet influence over Mongolia during the course of the last century. I think that it is only fair to say that Mongolia has only very recently started emerging from centuries of foreign rule or influence and its primordial that its current independence strengthens with each new foreign investor rather than see its identity and heritage diluted. Today’s Mongolia is a country which does not manufacture substantial amounts of finished goods and cannot sustain economic growth without significant exports of resources to neighbouring countries. Mongolia itself does not currently have the skill base, the capital nor the capacity to carry out large mining projects and built up the infrastructure the country so desperately needs to improve its ailing trade balance. Mongolia has no choice but to open up its borders to foreign investors and hope that it will manage to resist the temptation of greed, it must also tread carefully in order not to loose fickle foreign investor confidence (as it currently risks doing by cancelling the TT tender and wanting to renegotiate the OT agreement) which would be even more disastrous to an over-exposed Mongolian economy, particularly with a global recession on the horizon. Mongolia has either been blessed or cursed (depending on your own perspective) with an unfathomable quantity of mineral wealth, the survival of the country depends on the fair exploitation of those resources in a way that benefits the Mongolian people as much as the foreign companies who come to partake in the mining boom. To further guarantee its future independence, the Mongolian Government must invest in its transport infrastructure and concentrate on adding real value to commodities before they leave its borders in order to maintain an economically sustainable environment. The levels of Mongolian economic growth that we are all enjoying so much today is a direct result of FDI, without it, there would be few large scale mines, practically no mining supply chain revenues and certainly none of the trappings of luxury life that are becoming so prevalent in Ulaanbaatar. FDI must be used wisely, in particular by pushing through the diversification of the economy away from a pure mining base towards added-value services, agriculture and tourism. While foreign investment is absolutely essential for the further development of Mongolia, it is also important to remember that foreign companies and international markets need Mongolia as much, if not more, than Mongolia needs them. Cheap Chinese manufacturing, which underpins much of the western economies, relies on affordable and quick access to the resources that Mongolia posses in such vast quantities, China itself relies on those resources to keep the momentum of domestic growth and thus avoid social unrest. Japan needs rare earths to keep its high tech industries (on which so much of the economy is based) to maintain their position as a leading Asian economy, Korea seeks land on which to grow food to feed its population. Mongolia is truly the last untapped answer to so many puzzling problems and international questions but, at the same time it is attracting a lot of envious stares from its over-populated and under-fed neighbours. Mongolia may be a “wolf economy” but it is cornered by a much larger Russian bear and a fire-breathing Chinese dragon, an explosive situation to say the least. It is too easy for Mongolia to falter and become, either through the greed of their politicians or the demands of foreign investors, yet another resource-rich country from which much was expected but so little achieved. The region is littered with examples of such failures, the Kazakh identity has been so diluted by decades of Russian influence and foreign corporate activity that the best examples of its cultures are to be found in Mongolia’s own Bayan-Olgii region. In Russia it is corruption and a connected elite that squander its wealth while in China, power is maintained by the few to the detriment of the many. Mongolia is not new to diplomatic and geopolitical games of states and has so far played this delicate balancing act exceedingly well, implementing its third neighbour policy, courting world leaders and playing foreign powers against each other to obtain as good a deal as can be hoped for its mining licenses. It is important for Mongolia to remain on this path of stable social and economical progress but it is ultimately down to the people to use their voice to urge their politicians to refrain from excessive temptation. The State must always be held accountable its people and not the people to the State. From a foreign investor’s point of view, the perspective of investing in Mongolia brings its own set of challenges. There seems to be an industry wide lack of understanding in the basic requirements of due diligence, problems in transparency and issues with accountability, those are aspects of Mongolia which are slowly improving but are still far from being adequate as many international studies so clearly demonstrate. On the other hand they do provide the opportunity for growth to those companies that manage to satisfy those requirements. Once foreign investors have actually invested in the country, they are faced with catastrophic shortages in skilled, multi-lingual labour as well as the non-existence of reliable, actionable market intelligence. A young, well educated demographic in addition to increasing economic competitiveness will improve those aspects within the coming years but risk by themselves creating a widening gap between the “have” and “have-not’s”. Should investors resolve the above issues, they must overcome the serious problematic of market size, of the three main investment markets currently attractive (Mining, Stock Exchange and Real Estate) none offer real liquidity nor sufficiently high ticket sizes, this deters the largest investment groups from taking a bite as they would otherwise be forced into lots of smaller investments which require intensive management and bring relatively little return on their investment. Mongolians are understandably keen to take an active role in the globalisation of their country, to do so, they must adapt to the rulebook of the global players while retaining the unique advantages that makes them competitive. Transparency, due diligence and good market knowledge will only achieve so much, it is managing expectations and deliverables to their foreign partners while remaining dynamic in a fast changing environment that will allow them to succeed where others will eventually fail. Positive as well as negative signs of foreign influence are to be seen everywhere around the country but no one will influence the future development path of the country more than the return of the re-parts to their birthplace. The re-pats are those young Mongolians who participated in the great brain-drain of the 90’s by going abroad to study and work but who today have realised the promising future that Mongolia holds and are returning armed with the knowledge and understanding of how global organisations function (and how to work with them) while having retained a powerful network within Mongolia and an excellent understanding of local business practices. The marriage of the two skill-sets are a powerful combination that is increasingly seen in business leaders as well as the emerging political elite, who are often one and the same. Foreign influence, be it cultural, business, historic or otherwise, is here to stay, It is therefore important to learn from, and dare I say it, exploit, the knowledge and unique skill- set that foreign companies will bring to Mongolia in order to be able to replicate and adapt them to the Mongolian environment once the foreign expatriates have left. Those Mongolian entities that are able to maintain a long-term vision of the development of their companies in a fair partnership with foreign institutions instead of being lured by the gains of short-term profits will not only be building the foundations of their own futures but also the foundations of a strong and independent Mongolia. Research Squared - Mongolian Property Report 2012 15 / 343
  16. 16. Mongolia at a Glance Metric Value Source Date Territory 1,564,115.75 sq.km NSOM 2011 Population 2,754,685 NSOM Census 2010 Median Age of Population 26.2 years (25.8 for male and 26.6 for female NSOM 2010 Average Household Size (Nationally) 3.8 NSOM 2009 Male to female split 49% Male 51% Female NSOM Census 2010 Urbanisation Rate 68% NSOM 2011 Literacy Rate 97.8% NSOM 2008 Labour Force 1,121,000 World Bank 2011 Number of Unemployed 97,000 World Bank Q1 2011 Unemployment 8.7% World Bank Q2 2011 Population Below the Poverty Line 14.8% estimated World Bank 2011 Gini Index Rating 36.57 World Bank 2008 GDP (billion US$) 6.5 NSOM 2011 GDP Per Capita US$3,046 IMF Projections 2011 GDP Real Growth Rate 9% / 17.3% World Bank Q1 2011 / Q2 2011 Inflation 11.4% World Bank Q2 2011 International Reserves (million US$) 2,460 Bank of Mongolia / World Bank 2011 External Trade Balance (Millions of USD) I-VI 2011 -732.8 NSOM 2011 Average Exchange Rate (market) 1 USD = MNT 1,257.3 NSOM Q2 2011 MNT to USD Exchange Rate appreciation year-on-year 9% World Bank Q3 2011 Commercial Bank Lending Rates (%) 18-21 Bank of Mongolia 2011 Bank of Mongolia Policy Rate 11.5% World Bank / Bank of Mongolia 2011 MNT Deposits in Banks 2.6 trillion MNT World Bank Q3 2011 Total FDI 2010 (million US$) 1,025,955.88 FIFTA 2011 Imports % Groth year-on-year 2010-2011 106% World Bank Q3 2011 EXPERT OPINION - MR. JIM DWYER, BUSINESS COUNCIL OF MONGOLIA My 10+ years residing in UB includes the purchase and sale of a center city Russian apartment for a very good return.  It also includes the purchase of a very nice apartment and living experience with my family in Sansar. That would have continued to this day except for the ever-increasing traffic congestion causing more and more time spent and uncertainly with commuting to my center city office.  So my family recently moved to a new luxury apartment within a short walk of my office. One challenge owning and residing in a newly built luxury building is that the homeowners are not yet connected on the important aspects regarding their living conditions and protecting  the value of their RE investment as is customary in the developed world.  This is in a building where probably more than 50% of the apartments are owned by foreign residents and foreigners living abroad. There has never been a list published of owners and people don’t really have any way of knowing who lives here.  A “Management Company” overseeing the building employees working in the building to provide security and other essential services for the owner occupants and renters needs to be clearly established.  Most importantly, there should be a Board of Directors representing  all apartment owners to direct the Management Company on all aspects of living in the building. Such organization in UB’s new luxury apartments including a management agent and a functioning Board of representing apartment owners would mirror what is present in most developed countries.  It is required to help owners protect their investments in the highly possible boom in UB’s luxury apartment sector.   Another challenge for the UB market is the shortage of parking near residences and near UB businesses. The published report of a City Government official regarding complaints from small business owners (restaurants, shops) on Baga Toiruu (Inner Ring Road) as to the fact that widening the road took away most all parking spaces – “Well, they can build underground parking garages”  - is obviously not a solution. Research Squared - Mongolian Property Report 2012 16 / 343
  17. 17. Ulaanbaatar at a Glance Metric Value Source Date Population 1,240,037 NSOM 2011 Net in-Migration for 2010 40,641 NSOM 2011 Average Household Size 3.4 in apartment areas / 4.2 in ger areas NSOM 2011 Average Wage 430,00 MNT (approximately US$336.59) NSOM 2011 Average Wage Increase 2010 -2011 126% NSOM 2011 Ger Dwelling Households 76,497 Property Office 2011 Apartment Dwelling Households 118,548 Property Office 2011 Individual detached housing (usually in the ger areas) dwelling Households 97,854 Property Office 2011 Estimated average number of new residential units per annum 2004 - 2011 (Estimated) 6,200 R2 Research 2011 NSOM 2011 Residential Construction and Capital Repair Outputs by Type of Building 2011 I-VI Industrial Trade/ Service Hospital/ School/ Cultural Other Total 31,512.2 1,914.6 (US $1.5m) 4,800.1 (US $3.76m) 15,022.8 (US$11.76) 14,322.1 97,498.5 (US$76.3m) 497.4% 177.9% 296.4% (US$2.47m) (US$11.76m) % increase over 2010 I-VI 207.0% 237.9% 174.4% Number of Serviced Apartments 44 R2 Research 2011 Estimated Number of Hotel rooms 3*+ 1,273 R2 Research 2011 Estimated Retail GFA (A and B grade) 208,285 R2 Research 2011 Estimated New Retail GFA 2010 (A and B grade) 25,300 R2 Research 2011 Estimated Office GFA (A and B grade) 226,000 R2 Research 2011 Estimated New Office GFA 2010 (A and B grade) 44,327 R2 Research 2011 R2 Research 2011 R2 Research 2011 Mid-Upper Purchase (per sq.m) Average Residential Price per sq.m (per sq.m) 1,007.5 Average Residential Price Change 2010-2011 Upper/Luxury Purchase 1386.5 Mid-Upper and Luxury Rental (per month) Mid-Upper Purchase (per sq.m) Upper/Luxury Purchase (per sq.m) 21.9% 19.4% 26.2% Estimated Residential GFA 15.85 million sq.m R2 Research 2011 Number of Cars, buses and work vehicles Registered in the City 162,720 NSOM 2011 Immovable property transactions in 2010 11,650 Property Office 2011 Land transactions in 2010 5,284 Property Office 2011 Research Squared - Mongolian Property Report 2012 17 / 343
  18. 18. 1. Demographic Factors % of National Population Population forecasts for Ulaanbaatar city 2007-2030 60 45 37.7 42.8 49.8 47.1 52.5 55.5 1,900 1,425 30 950 15 475 0 2007 2010 2015 2020 Year 2025 2030 0 Ulaanbaatar Population x000 Persons Mongolia displays manifold favourable demographic characteristics pertinent to the development of its economy. The most significant of these is a a young and growing population (2.75 million people in 2010 compared with 2.37 million in 2000) entering or poised to enter the workforce. Projections from a JICA study as part of the Ulaanbaatar 2020 Master Plan indicate that the city will continue to swell, with as much as 55.5% of the total population of Mongolia residing within the capital by 2030. This represents a real population increase of over 716,000 people within the next two decades. Urban and infrastructural development of Ulaanbaatar is already struggling to meet the demands of its current population, with almost three-quarters of a million people already without appropriate and well serviced permanent accommodation, just over 300,000 of which live in gers. Population density in the capital has increased by two-thirds from 2000-2010, standing at 246 persons per kilometre. This stands in stark contrast to the national average (including the capital) of just over 1 person per square kilometre. Following a jump in population growth rates in the 1950s that accompanied the entire socialist period, rate of population increase has slowed and levelled at 1.46% per annum. Of the population 37% are between the ages of 20-39 and an identical percentage are between 0 and 19 years of age. This gives the nation a young, active workforce to support its current and mid-term growth. Household sizes are also falling both in urban and rural areas. In 2008 average household size stood at 4.0 persons per household, dropping to 3.8 persons per household in 2010. This is indicative of slower population growth rates and smaller family sizes that in the urban context has been linked to standard of living improvements. In terms of household composition the nuclear family is most prevalent. Census figures for 2010 indicated that 62.3% of households are nuclear family units, with 24.9% being extended family households. This is particularly indicative of increasing wealth, with an increasing number of individuals and families able to afford single generation housing. Over the past 20 years migration has been a key driver of economic growth, particularly in the real estate sector where labour mobility and patterns of migration as an economic necessity are dominant factors. Over the past 10 years the population of the capital city, Ulaanbaatar has jumped from 760,077 to 1,154,290 according to census data from the National Statistics Office of Mongolia, an increase of 151.9%. Ulaanbaatar is, unsurprisingly, home to by far the largest economically active population in Mongolia, at just over 500,000 persons. There is also a trend of increasing migration to centres of mining activity, including Dalanzadgad and Sainshand in the Gobi region. The pull of high wages in mining centres is now exerting more as significant an influence over economic migrants as the capital city. Average national monthly household income in Mongolia increased 20.5% year-on-year (Q4 2009-2010) to 444,700 MNT. The mining and transport/communication sectors have seen the strongest wage growth (44.9% and 41.3% respectively from 2009-2010) and a year on year rise Q1 2010 to Q2 2011 of 29%. The financial intermediation sector, which has seen large wage increases since 2008, saw a rise of 23% between 2010 Q1 and 2011 Q1. Nevertheless, wages in the financial sector remain the highest in real terms, standing at an average nationally of 814,000 MNT according to NSOM figures. However, within large mining organisations such as Oyu Tolgoi, skilled Mongolian personnel may earn several million MNT per month. The smallest growth in wages was in the field of health and social security (2.8%). Agriculture, hunting and forestry have both seen -14.3% negative growths in wages between 2009 and 2010 as a result of harsh conditions the previous winter that resulted in catastrophic livestock losses. This catastrophic event is not uncommon in Mongolia and has been given the name dzuud. It refers to a situation wherein lack of summer rains followed by heavy snowfall in wintertime create conditions whereby animals cannot get to weak low-lying plants beneath the snow and ice blanket, causing many to starve. Mongolia has experienced two such events in the past 10 years, both of which have hit the agricultural industry - upon which a majority of rural people rely - very hard. Research Squared - Mongolian Property Report 2012 18 / 343
  19. 19. 2. Residential Demand across Mongolia is being driven by five key factors: • Explosive economic growth, with GDP expected to double every two years for the next decade and rising real wages across the economically active population. • Significant FDI inflows, at 40% of total national GDP, on the back of mining developments and the mining supply chain. • Population growth and migration, with the population of the capital expected to grow to 1.5 million by 2015 and second tier cities close to large centres of mining activity (including Dalanzadgad, Sainshand and Khan Bogd) experiencing population growth of well over 35% per year. • Demand for housing among a population where 32.7% of the population still live in gers and over 700,000 residents in the capital city still live in informal accommodation without access to running water, centrally provided heating or reliable electricity. • Lack of urban infrastructure and insufficient funding to make rapid infrastructural developments, creating a bottleneck expansion of urban infrastructure and the built environment in the capital and major secondary cities that is enhancing demand pressures. Housing market price data indicates that average housing prices across the Ulaanbaatar market began to climb above US $1,000 per square meter as early as 2007. At this point in time prices were rising rapidly, approaching a 30% year-on-year increase from 2006 figures. During the financial crisis the global collapse of commodities and lack of new inflows of FDI into Mongolia led to GDP contraction of -1.6% for 2009. As a result the housing sector took a dip back below the US$1000 mark before rallying again in late 2010 and during 2011. Prices have already risen considerably beyond those seen in 2007 and 2008, with growth rates set to outrun 30% by the end of 2011. This price dynamic is thoroughly indicative of demand and supply curves that are non-convergent in the near future. Research Squared - Mongolian Property Report 2012 19 / 343
  20. 20. The National Mongolian Real Estate Market at a Glance Metric Source Date Total Housing Stock estimate (GFA) 16.2 million sq.m Value R2 Research Estimate 2011 Numbers of households residing in gers 322,836 NSOM Census 2011 Numbers of households residing in apartments 882,808 NSOM Census 2011 NSOM Census 2011 NSOM Census 2011 2011 Type Of Accommodation 535,146 Individual detached housing (connected to infrastructure) 3,839 Individual detached housing (informal or not connected to infrastructure) 209,931 Student and Workers dormitories 12,444 Type of Occupancy No. Households Urban No. Households Rural Private Ownership 401,089 217,945 Rental 40,903 4,048 Informal Rental or living free of charge in another’s accommodation 32,980 10,564 Other Residential dwelling by ownership/rental type for Mongolia 322,836 Apartments Residential dwelling Breakdown for Mongolia No. Dwellings Ger 4,531 1,720 Number of Immovable Property Transactions 2010 45,000 Immovable Property Office Number of Newly Privatised Land plots from the Government 2010 16,915 Immovable Property Office 2011 Today housing remains the subject of sustained public, political and economic discourse, both in the capital of Ulaanbaatar and nationally. Housing for low- to mid-income families has been a high priority for successive Governments attempting to grapple with problems caused by rapid in-migration and densification of the ger districts. Ministry of Roads, Transportation, Construction and Urban Development figures from 2010 estimate that 126,000 families in Ulaanbaatar alone are presently living in structures which do not meet basic sanitary requirements and which are not connected to heating and water infrastructure. Far reaching city plans already in play place heavy emphasis on meeting the vast majority of these requirements by 2020. Numbers of Residential Units Built in Ulaanbaatar by Year 2004 - 2011 2004 Apartments % change - yearon-year 2005 2006 2007 2008 2009 2010 2011 4,297 3,939 5,819 6,181 9,244 7,806 11,650 6,580 -8.33 147.7 149.5 149.5 -15.5 149.2 -43.5 Source: R2 Research As in any major city the types of structures in which people live are highly varied. The large wealth gap, lack of infrastructure and traditional housing patterns makes Ulaanbaatar’s housing profile even more diverse than many other cities around the world. In the centre of the city the stock of housing is mostly apartments in multi-level buildings, built between the late 1950s and 2000s. The total apartment stock in the city centre accommodates just over 116,000 households. Beyond these, outside of the city centre, there are a number of settlements known as ‘ger districts’ which consist of small, fenced plots of land (called khashaas in Mongolian). The majority of these plots are privately owned by the households living on them. Many households have built permanent housing on their land, although very little of this housing stock is connected to even basic infrastructure. At the end of 2010 figures from the Property Office of Mongolia indicated that there were 98,000 households living in this type of housing housing in ger districts of the city. Large detached housing structures structures connected to some infrastructure house around 878 households and small apartment buildings built on ger district land house no more than 3000 households. Just over 312,000 people presently reside in traditional Mongolian gers in the ger districts, these also have no sewerage, formal electrical supply, central heating connection or plumbed potable water supply. Research Squared - Mongolian Property Report 2012 20 / 343
  21. 21. In all this equates to 443,600 individuals in Ulaanbaatar living in accommodation attached to heating, sewerage and water supplies as well as having access to good amenities and roadways. A further 398,000 live in detached, often informal, housing within the ger districts. This creates a potentially significant market for improved residential units connected to all amenities of over 706,000 people, or just under 175,000 households. This represents 55% of the total population of Ulaanbaatar by the end of 2010. With in migration increasing faster than most Government projections have heretofore indicated and supply of new apartments already being outstripped by demand on a yearly basis, this figure is expected to grow rapidly as a result of both migratory pulls towards the capital and natural population growth. However, the question remains: how will this population begin to afford new housing? Apartment demand/supply curves (minus development of detached housing) Number of Units 60,000 45,000 30,000 15,000 0 2006 2007 2008 2009 2010 2011 2012 2013 Year Apartment Supply Cumulative Demand (cumulative minus expected growth of detached housing Source: R2 Research - based upon Mongolian Property Office data and JICA Master Plan Report projections Across most economies only a very small proportion of the population can afford to purchase housing with their savings along. As the housing market in Mongolia develops, functioning and efficient primary and secondary mortgage markets are necessary to ensure housing remains affordable and obtainable. The majority of housing transactions in Mongolia remain cash transactions. Nonetheless, increased economic stability, rising real incomes and declining interest rates have created favourable conditions for mortgage lending. In September 2006 the Mongolian Mortgage Corporation (MIK) was established. A joint-founding agreement between The Bank of Mongolia and ten commercial banks (Capitron, Golomt, Khan, Mongol Post, Trade and Development Bank, Xas Bank, Zoos Bank and Anod and Ulaanbaatar Bank) established MIK as the first private sector controlled secondary tier mortgage institution in Mongolia. The objective of this organisation is to develop both primary and secondary mortgage markets by issuing and selling mortgage-backed securities on both domestic and foreign markets. The MIK was instrumental in working with Government in order to establish a legal infrastructure governing sale of Mortgage Backed Security markets. In 2003 the Government of Mongolia passed a resolution on the creation of Mortgage Backed Securities and subsequently passed the Law of Mongolia on Asset Backed Securities in 2010. The first asset backed security sold by MIK was in 2009 MIK purchases As a solution to Ulaanbaatar’s housing problem the Government of Mongolia is already backing projects to reduce mortgage rates though the Apartment Investment Corporation, which is already offering mortgages at 8%. Extension of the mortgage markets relies upon a well functioning secondary market. The efforts of the Mongolian Mortgage Corporation to prepare and sell mortgage-backed securities will create the necessary economic conditions for a successful market. The regulatory framework governing mortgage providers must also improve drastically if commercial banks are to eliminate some of the risks that currently push up interest rates on mortgages, including poor loan quality as a result of lack of rigorous checks as well as lack of legal recourse to seizure of property. Solutions include better credit reporting systems and the creation of standardised loan issuance procedures across all banks. Before mortgages can become affordable the real estate market must also adapt, developing professional surveying and valuing services that will underpin a market based undergirded by fundamental property values as well as supply and demand dynamics. This will provide extra security for lending institutions. Finally, and perhaps most importantly, the sanctity of property rights should be reviewed to make it easier for banks to foreclose on property attached to defaulted loans. Without the assurance of being able to foreclose on immovable property in a timely manner most commercial banks are unwilling to risk lower interest rates as in the event of default they presently have little certainty of obtaining a collateralized property asset. These requirements are presently being worked through by the Government of Mongolia in cooperation with several multilateral organisations in order that Mongolia’s mortgage market can fuel growth in the property sector and contribute a solution to Ulaanbaatar’s housing shortage. The annual percentage change in median apartment prices was 34.8% in 2009 and 19.3% in 2009. Following a downturn in late 2009, precipitated by the international financial crisis, prices have risen again across all districts of Ulaanbaatar, Research Squared - Mongolian Property Report 2012 21 / 343
  22. 22. reaching all time highs month by month over Q2 of 2011. By the end of this period average prices across Ulaanbaatar had risen by 21%. House Price Changes (%) across the Districts of Ulaanbaatar 2009-2010 % change 2010-2011 % change Bayangol District -2.7 7.1 Sukhbaatar District 6.8 17.1 Chingeltei District -6.8 23.1 Bayanzurkh District -12.2 20.5 Songinokhairkhan District -16.5 45.1 Khan Uul District 2.5 22.6 Average purchase and rental prices across Ulaanbaatar ($) 600 1100 538 1000 475 900 413 800 350 2008 2009 2010 Rental Prices 2011 700 Average purchase prices per month Average rental price per month per sq.m Source: R2 Research Purchase Prices Source: R2 Research The high-end real estate market is displaying remarkable growth. The city centre has witnessed the most remarkable growth, particularly around the State Department Store. New high-end residential properties in the city are rare, with the majority of available residential units being part of buildings dating to the 1950s - 1970s. Nevertheless, prices for these units have risen rapidly, nearly doubling from Q1 2010 to Q1 2011. The highest price rises in the city centre have been in the ‘First 40,000’ apartments which, whilst representing the oldest residential stock of Ulaanbaatar, are highly sought after by virtue of their city centre location. Areas of Ulaanbaatar Area Name Description The City Centre A thriving and exciting place, transforming each year. The area is geographically very compact but contains the majority of the city’s bars, restaurants, shops and commercial spaces. A majority of expats live within this area, concentrated around a few courtyards of the First 40,000 apartments in the heart of the city. This location offers easy access to shops and entertainments, as well as to the central business district, where the majority of expat employees in the city work. The city centre does, nevertheless, have a number of potential drawbacks, such as high levels of pollution (particularly in the wintertime), severe traffic congestion and higher rates of crime and vagrancy. CBD At the heart of the City Centre is the CBD. surrounding Sukhbaatar Square - the majority of offices are located here and all of Ulaanbaatar’s grade A office is situated within a few hundred meters of Sukhbaatar Square. There are few residential buildings in the CBD, including the Park View Residence and The Temple. The CBD is also home to some of the city’s best retail, including two floors of retail in MCS Tower; boasting some of the biggest international brands to have entered Mongolia, such as Hugo Boss, Louis Vuitton and Mont Blanc. When it opens in late 2011 the Blue Sky Tower will also sport high end retail space capable of attracting international brands. Research Squared - Mongolian Property Report 2012 22 / 343
  23. 23. Areas of Ulaanbaatar The State Department Store This landmark store, which at peak times receives over 25,000 visitors a day, is the heart of commercial life in Ulaanbaatar. The building itself, constructed in the 1970s and recently refurbished by new owners Nomin, is a landmark in the city centre and is used as a point of orientation and meeting point for the expat community. The stores inside are frequented by the city’s wealthier residents as well as foreigners and tourists seeking imported food products in Nomin Supermarket as well as high end cosmetics, jewellery, clothing and home-wares. The First 40,000 Apartments The residential stock of the city centre is made up of the oldest residential buildings in the city. The first of these buildings were completed in the late 1950s as part of the very first Ulaanbaatar City Master Plan under the socialist government of the time. These three and four storey buildings have risen in price dramatically over the past year, with individual apartments transacting year on year at price increases of over 30%. These are firm favourites among expats and young, wealthy Mongolians who are looking to live close to the CBD, entertainments and the shops of the city centre. Rents range from around 300,000 MNT per month for a one room apartment which is not refurbished (US$ 234) to over US$1600 per month for a two room apartment refurbished and furnished to high-end European/American tastes. Whilst many apartments themselves have been renovated to a high standard the staircases leading to them have often been left untouched for years. This can lead to a form of culture shock to new residents as they discover world class apartments but third world looking staircases. The 50,000 Apartments Situated along Peace Avenue, to the west of the State Department Store, these were built just a few years after the First 40,000 apartments. These are generally smaller than the First 40,000 apartments, with lower ceilings. They are largely built of lower quality materials but have still stood the test of time reasonably well. They are less favoured than the 40,000 apartments by expat tenants, although prices in the 50,000 and rising as liquidity in the First 40,000 area is decreasing due to owners becoming aware of the potential for large capital gains in the near future if they hold onto their homes. The 50,000 apartments are also a little further away from the CBD and in the cold wintertime (where temperatures routinely dip below -30) a few hundred metres makes all the difference. Olympic Street Area This area is still very much under construction but is rapidly becoming the high end district within the heart of the city centre. It currently lacks amenities such as shops and restaurants, but is well served by infrastructure and is just a stones-throw from the heart of the business district itself. Development of the area began around a decade ago with the development of the Star Apartments - which in turn attracted new high end residences such as The Regency Residence, the Embassy Tower, The One Residence and The Diplomat. With the newly refurbished children’s park just re-opened a little way south and the high end Shangri-La hotel due to be completed in 2013, this area looks set to become among the most sought after locations in Ulaanbaatar for residential development. The Stadium Area The Stadium Area is located in the vicinity of the National Stadium of Mongolia, south of the city centre, over Peace Bridge and the railway lines. It extends all the way south to the Tuul River and included the International School (situated within the Japan Town complex), as well as the National Mongolian Chamber of Commerce and a new Corporate Hotel, to be completed within the next two years. This area is popular with families and is within walking distance, across the bridge, to the city centre. Many of the new developments here are what might be called ‘dormitory towns’ - large, somewhat faceless developments of high-rise residential units which are mostly inhabited by middle-class, professional Mongolian families, young blue-collar workers, as well as a handful of expats. The areas does feature a few well known restaurants, such as American Ger’ll and Pizza Dela Cassa. There are also a few small supermarkets. The Zaisan Area This areas, south of the Tuul River, is popular with wealthy Mongolians and a few expat families who prefer more expansive accommodation in gated compounds. Because it is further away from the polluting northern ger districts this area is less polluted than the city centre. The area was almost completely undeveloped around a decade ago and the glut of new high-end properties which have sprung up in Zaisan have transformed this previously ‘protected area’ into a suburb of gated communities for the wealthy. Developments such as Bella Vista and River Town are among the most expensive real estate on the primary market but are finding buyers as wages rise and ostentatious displays of wealth through real estate purchases become more important to the ‘New Mongolians’. Zaisan is not without its drawbacks. There are only two bridges between here and the city centre and they are prone to becoming clogged with traffic during rush-hours; extending a journey of 10-15 minutes to well over an hour at times. The area also suffers from a lack of nightlife, convenience shops and restaurants, leaving it somewhat isolated. New developments in the area are more and more including mixed use retail and residential facilities (case and point being the new Shine Ger development to the far south of Khan-Uul - a little way out of Zaisan itself, which will contain 16,000 square meters of retail space). There are also issues with the legality of these developments as they are technically located in a ‘strictly protected area’ (this issue is addressed in detail in the Khan Uul district description). Research Squared - Mongolian Property Report 2012 23 / 343
  24. 24. Areas of Ulaanbaatar The University Area To the north of Parliament, within Sukhbaatar District, the campus of the National University of Mongolia extends out to the north, around the ring-road that serves the city-centre. This area contains housing built in the 1960s and 1970s, which is not yet experiencing such precocious price rises as in the First 40,000 area, although its proximity to the CBD may mean that price rises are imminent. The area is home to a number of student dormitories and has a large student population (who also rent smaller apartments in the area, sometimes with more than one student to a room). Many of the city’s cultural institutions are located here, including the Children’s Palace. Metro Mall also provisions high end retail space. Nightlife is generally geared towards the lower end of the market and the streets are lined with inexpensive bars and restaurants catering for the student and young-professional populace. One of the city’s best nightclubs Brix - is located in this area, as is the French bistro; a favourite among expats. This part of the city is less popular as a residential location with wealthier Mongolian families and expats due to the higher levels of air pollution which float down from the nearby ger areas in wintertime. Sansar Sansar - literally meaning ‘outer space’ - was named as such because the residential developments therein were completed around the time of the Soviet Union’s first space mission involving a Mongolian cosmonaut. Sansar is situated to the east of the city centre and is in The Bayanzurkh District. To the far south of this area is the Ulaanbaatar Wrestling Palace and to the north low-end housing. The Kempinski Hotel is also situated here, although this location does it no favours. In the main the area is residential, with low-end bars and entertainments - including the newly opened Hennesy’s Bar, which is rapidly becoming a popular hang-out for young expats. House prices in the area are far lower than in the city centre, still at around US$830 per square meters at the low end. Expats and middle class Mongolians tend not to live in this area, although it is popular with low-waged NGO workers and professional Mongolians working in professions such as teaching and skilled manual labour. The 3rd District Shopping Area The 3rd District is Ulaanbaatar’s second major retail centre. Situated in Bayangol District - just east of the northern tip of the Gandan ger area - this long street of store-front retail caters to mid-upper retail and contains well over 30,000 square meters of ground floor retail space. Major brands such as Benetton and Adidas have opened shop-front stores here although the majority of stores are domestic retailers occupying small plots in medium-size B- and C grade retail facilities. The street is surrounded on all sides by imposing tower blocks, many of 10+ storeys. These poor quality pre-fabricated buildings were built with Soviet assistance in the 1980s (some in the 1970s) and are known as the Brezhnev era buildings as many were built following a landmark visit to Mongolia by Leonid Brezhnev, during which time Soviet support was offered in exchange for the stationing of troops in Mongolia. This poorer quality residential space is not experiencing rapid price growth, although remains popular with lower income expats and early career professional Mongolians due to its proximity to shops and entertainments. Gandan The Gandan area centers around the Gandan Khiid Buddhist Monastery. The expansive monastery complex itself is surrounded on all sides by a ger area which has grown up since the establishment of the monastery itself 173 years ago. Whilst the urban fabric of the Gandan ger area has changed dramatically - a vast majority of residents now living (at least seasonally) in reasonably large brick, concrete or wooden construction houses, many of which have electricity, plumbing and telecoms infrastructure installed by virtue of their city center location - the configuration of land plots (Khaashas) remains similar to how it was as Mongolia entered the twentieth century. This long-standing community is still, in significant part, based around the operations of the Monastery. As well as being an active teaching Monastery, home to around 150 monks, the site is also a tourist attraction and an orientation point within the city. EXPERT OPINION - MRS. BURMAA UKHNAI, UILS REAL ESTATE Mongolia is not only booming in its mining industry, but it is property market is also seeing huge growth. The Mongolian economy is not yet much integrated with the world economy. But at the moment this is a good thing as we are not too badly impacted by the world economic recession. Today, an increasing number of foreign invested companies are opening up offices in Mongolia. They are all required to rent or buy office space for their operations. 2 years ago office rent was around 15-35USD per square meter while sales price was 1200-1500USD per sq.m. Currently, rents go between 30-65USD per sq.m and sales price is around 3000USD per sq.m. Over the past two years, offices have doubled in prices. All foreign expats are also in need of foreign accommodation. They mostly rent. Residential rental prices have also increased by more than 60% over the last two years. Many foreign investors are generating good profits by investing early in apartments developments as well. They sign in apartment purchase contract and after 2 years when the development is completed, they can sell back with a minimum profit of 40%. So, Mongolia is today filled with opportunities for those investors that can move fast and are clever enough to see the potential. Research Squared - Mongolian Property Report 2012 24 / 343
  25. 25. 3. Retail The retail sector too has changed dramatically in the transition from a centrally planned to a market economy. Prior to the 1990s private trade was prohibited, although during the 1980s a number of semi-legal exchange sites grew up on the outskirts of every provincial capital and other large cities. Following new legislation on private trade and profit-making by the Government of Mongolia in the 1990s many of these markets, including the “Black Market”, now known as “Naran Tuul Market”, to the south-east of Ulaanbaatar, grew and began to formalise. Macroeconomic indicators in Mongolia’s retail sector appear very positive. Final Consumption GDP rose 128.2% from 2009 to 2010 at current prices, with wholesale, retail and trade making up 15.7% of total GDP in 2010 (a rise of 2% since 2008). The number of domestic wholesale, retail and trade companies registered as active in Mongolia in Q1 2011 rose to 19,368, a greater volume than for any other sector. The actual increase in numbers of businesses registered in this sector was 27% year on year between 2009 - 2010. This provides a good indicator of the robustness of domestic retail business in Mongolia and if these trends continue, indicates significant extra demand for retail space over the short term. Nevertheless, it must be noted that the number of international retailers in the market at present is small. A tiny, but growing, market for mid- to high end international brands, coupled with logistical bottlenecks makes Mongolia a difficult prospect for many large scale international high-street brands and it will likely be a while before these move in en-masse. In terms of supply, around 26,600 square meters of high end A, B and B- retail space came online during 2011, with an estimated 104 thousand square meters coming online in this sector within the past 5 years. As the graph above indicates, growth of A grade retail has only really begun since 2008 and the development of these large shopping centres. Concomitantly the growth of notably B and C has been remarkably slow in the past 5 years, indicating a focus on constructing new A grade in this small marketplace. Uptake has been high, although the vast majority of shops taking up those retail spaces are lone domestic entities, occupying plots of between 30-50 square meters. Uptake for A and B space only is growing rapidly at around 68% in 2010 and 85% in 2011. Rental Rates in the retail sector are growing at a slower pace than in other areas and this may be to do with the limited engagement of high-end companies bringing new products onto the market as well as purchasing power reductions as a result of high inflation in 2010. In 2010 average rental rates per square meter across A and B retail space was an estimated US$20.85. Research Squared - Mongolian Property Report 2012 25 / 343
  26. 26. Retail new supply and uptake by year for A grade and B grade Retail Square Metres 40,000 30,000 20,000 10,000 0 2006 2007 2008 2009 2010 2011 2012 2013 Year New supply (sq.m) Annual uptake estimates (sq.m) Source: R2 Research Cumulative Office Supply by year Square metres 200,000 150,000 100,000 50,000 0 2006 2007 2008 2009 2010 2011 Year Grade A Grade B Source: R2 Research Significant pipeline projects include retail space in the new Shangri-La development and Peace Plaza the high end and a new indoor market taking the place of the famous Naraan Tuul market in the low end of the sector, as well as a number of projects in the Zaisan area which form part of new primarily residential developments. These include retail space being developed on the ground floor of the KH Apartments complex and Mogul Town, as well as 16,000 square meters of retail space available for sale in the MCS Shine Ger project. INFORMATION BOX - THE ILLEGAL DEVELOPMENTS IN ZAISAN The zaisan area, to the south of Ulaanbaatar, is favoured by high ranking politicians and expats alike for its cleaner air quality as well as gated compound security. With the enormous amount of construction currently taking place in the valley, one could be forgiven for thinking that all those mega-construction projects are built with the full approval of the state and have all required licenses. In truth, practically none of the projects under construction or already built have been done with all required documents and permits. The Zaisan area is part of the Bogd Khaan National Park (delimitated by the tuul river) in which it is illegal to built residential or commercial use buildings, the only types of buildings that can be legally built are public use buildings. While technically nearly every building in zaisan has some form of public use (a tiny museum, a school with a sole teacher and student, a small medical centre or a "tourist" facility) this is clearly a breach of the law and is the reason why very few buildings (such as Green Villa) have the immoveable property certificates. Nearly all other buildings rely on the value of the sales and purchase agreements to ascertain a claim towards ownership but it has little legal value. The government is trying to regularise the situation by applying fines to landlords in exchange for immoveable certificates as has been the case with the Blue Sky development. There is a further aspect that should be noted by foreign investors, it is technically illegal for foreign investors to invest in property in national park, regardless of the type of property, it would thus be entirely possible for the state to annul whatever certificates or contracts are today in place and thus places foreign investors in Zaisan at risk. The actual risk is minimal but it is worthwhile to note that foreign investors in the area may have no legal recourse if the state seizes the properties.  Research Squared - Mongolian Property Report 2012 26 / 343
  27. 27. 4. Office In recent years Ulaanbaatar has seen the rapid new development of ambitious office and mixed use projects. This new development is strongly encouraged by Government ambitions towards the creation of a business hub in Ulaanbaatar. The vast majority of construction projects that had stalled during the economic downturn have now been heavily reinvigorated by capital inflows and are moving towards completion in 2011 or 2012. The rapid growth of commercial activity in Ulaanbaatar has increased demand for commercial real estate several times over the past five years and the current A grade stock of the city was entirely constructed within this period. Private companies in Mongolia are responsible for 88% of the national GDP, starting from almost nothing pre-1990. The Business Register of Mongolia indicates significant growth necessary to drive the development of new office and commercial premises as new companies start up and existing companies up-scale in a growing marketplace. Numbers of establishments dealing in financial serviced and other business activities have grown steadily with almost uninterrupted year on year growth since the transition to a market economy. In the last quarter of 2010, 1,208 companies in the financial services were registered as operating in Mongolia, with 884 listed as active and operating. The remaining are registered companies which are not presently actively doing business or not yet started doing business (e.g. not transacting and submitting tax returns without change). These figures are based upon The Business Register of Mongolia figures, which only take into account incorporated companies and do not register informal companies; although these are almost nonexistent within the financial and business sectors. On top of these the number of financially active registered business’ entities in Mongolia was 2,589 at the end of 2010. These sectors are key drivers of demand for office space in Ulaanbaatar for the future, whilst mining and mining supply companies are presently among the biggest occupiers of A grade office space. As an example, Monnis Tower is populated by Oyu Tolgoi, South Gobi Sands and Leighton Asia. FDI is also a significant driver of office demand. The number of registered companies in Mongolia operating with FDI stood at 10,709 in 2010. After a fall in new registrations of companies set up with FDI in 2009 (due to the economic crisis) 2010 saw a resurgence of international companies entering the Mongolian market with international funds. This upward curve is expected to continue in 2011. Research Squared - Mongolian Property Report 2012 27 / 343
  28. 28. Grade A office supply and update over the past 3 years Square Metres 40,000 30,000 20,000 10,000 0 2009 2010 2011 Year New Supply (sq.m) Estimated uptake (sq.m) Source: R2 Research Grade A offices in the city experience high occupancy rates, typically over 85%, although new developments such as Blue Sky Tower are presently exhibiting higher vacancies of above 10% reported and far higher observed. Over 73% of the total grade A office supply in Ulaanbaatar is located within Sukhbaatar District, at the heart of the CBD. The remaining space considered to be of A grade quality lies to to the west of the central business district in a single development: Jiguur Grand Plaza. Whilst the pipeline for office supply in the medium term is slowing there are some significant projects already underway and scheduled for 2012/2013 completion. This includes the Peace Plaza mixed use building which will be the only high-end office building presently in pace along the central stretch of Peace Avenue and UB Tower, which is opposite the Ulaanbaatar Hotel. These two projects, scheduled to be online by early 2012 will bring around 15,000 square meters of A grade office space onto the market. B Grade Office supply and uptake over the past 5 years Square Metres 30,000 22,500 15,000 7,500 0 2006 2007 2008 2009 2010 2011 Year New supply (sq.m) Estimated total Uptake (sq.m) Source:R2 Research B grade office supply in Ulaanbaatar is estimated to be over 165,000 square meters, representing almost half of the total supply within the city. The scale of grade B developments means that they easily dwarf smaller grade C developments at the present time. Vacancy rates are generally far higher among grade B office properties than grade A due to a glut of supply in 2008 and 2009, coming online at the same time as a large supply of A grade office space (an estimated 66,000 square meters has come online in the last 3 years). Observed vacancies around the grade B office supply of Ulaanbaatar lead us to posit a vacancy rate of 20%, although grade B office buildings in the CBD may display vacancy rates closer to 40%. In the short term the question of an oversupply dynamic in the upper end office sector has already been raised. It is likely that rapidly rising office prices will need to stabilise in the near future, although Mongolia’s bright economic future will provide sustained demand in the form of new and expanding domestic companies as well as international companies searching for well-served and prestige office space. Research Squared - Mongolian Property Report 2012 28 / 343
  29. 29. 5. Hotel and Serviced Apartment Market One highly visible result of Mongolia’s fast economic growth is a renewed influx of foreign workers, entrepreneurs, consultants and tourists, creating conditions for expansion of the hospitality industry both horizontally - expanding demand for existing domestic hotel and serviced apartment facilities - and vertically - creating new opportunities at the upper end of the market for luxury hotels and serviced apartments catering for executive travellers . Levels of registered FDI in tourism in Mongolia has fluctuated in recent years, reaching a high of US$1.4 million in 2005 and falling to just US$371,000 in 2010 in accordance with figures provided by FIFTA. Nevertheless, income from tourism is on the rise after a lull in 2009. In 2010 the National Tourism Centre reported income from tourism gathered by domestic firms reached US$ 222 million Nevertheless, much spending in the industry goes unregistered as informal tourism markets are significant and highly seasonal. Nevertheless, the increasing presence of international executives and consultants has been driving up the level of comfort and amenities required to the point where international brand hotels see a sufficiently large corporate travel market in Mongolia’s capital city to warrant entry. In 2011 a new Ramada hotel opened its doors, the first in a new wave of international brands to move into Ulaanbaatar. Construction projects are already underway for Shangri-La, Best Western, Hilton, Sheraton, Hyatt and Radisson. The Intercontinental has also been in talks with Chono Corporation, the owners of the Blue Sky Tower, concerning the possibility of setting up an Intercontinental managed hotel therein. However, indications from within Chono Corporation suggest that they may elect to manage the hotel themselves, under the name ‘Blue Sky Hotel’. In terms of real figures, the total numbers of visitors entering Mongolia have been increasing yearly since 2005. The number of tourists visiting Mongolia continued their upward curve again in 2010 after falling in 2009 - impacted by an international decline in international travel as a result of the global economic crisis. The year-on-year growth in tourist figures was 19% from 2009 to 2010 and the overall growth in visitors during this period was 10%. This is indicative of growth in corporate travel alongside tourist numbers. Nevertheless, growth of the tourism and corporate travel sectors are facing significant bottlenecks in the form of a limited international transport infrastructure. At present the Chinggis Khan International Airport of Ulaanbaatar receives and sends 209 domestic and foreign flights per week. Of these around half are to international locations including Berlin, Moscow, Seoul, Tokyo, Beijing and, as of summer 2011, Hong Kong. These flights carried a total of 155,400 passengers into and out of Mongolia during the first half of 2011. This figure represents an increase of 141.5% over the numbers of passengers carried during the same period in 2010 but is still very low. Air travel accounts for around one-third of total cross-border travel volume, the remainder being by train and road. The trans-Mongolian railway that links the nation with Russia and China is a critical artery that carries the majority of international travellers each year. Many of these are Russian and Chinese traders, as well as backpackers. Tourism and international travel in general in Mongolia is highly seasonal. Although seasonal figures are not released by the National Statistics Office, during the cold winter months many guesthouses close down and tourist numbers decrease dramatically. Corporate travel does not drop in volume to quite the same extent, however between October and April the volume of international visitors may as much as halve. Research Squared - Mongolian Property Report 2012 29 / 343

×