Healthy property market on the horizon
The discoveries of vast mineral wealth beneath the Mongolian steppes and desert drew interest from the whole world. The cash flow brought about by foreign investment in mining projects such as Oyu Tolgoi has almost been too much for Mongolia to digest, however. With the rapid changes in recent years, Mongolian policy makers are struggling to keep up, and they sometimes forget that all eyes are on them.
Every policy proposal or decision they make is scrutinized worldwide. From the attempts to renegotiate the Oyu Tolgoi investment deal or the dispute over the Erdenes Tavan Tolgoi coal deal with Chinese State-owned company CHALCO, Mongolia gets international media attention and commentary, not all of which is positive.
Mongolia’s political stability and business environment are inspected with rigour, including the laws relating to foreign direct investment (FDI), such as the strict new Strategic Entities Foreign Investment Law (SEFIL) and the amended Mineral Resource Law. Some of the international commentary is not helping Mongolia’s reputation.
Investors need assurances of stability and require a guarantee that the Mongolian government and businesses will not go back on their word, before investors can commit to an investment. Needless to say, all the negative press has the potential to hurt Mongolia in immeasurable ways.
As noted in the “Mongolia’s State of Macro” report released by M.A.D. Investment Solutions last week, “The true impact of such political instability is felt not so much by existing foreign investors, who are sufficiently mobile and liquid to focus on other attractive markets, but by Mongolian businesses and entrepreneurs who are suddenly finding themselves short on investments and whose target market has dramatically reduced in size. It would drain the essential oxygen needed by the people of Mongolia to be able to thrive and prosper.”
According to M.A.D., the SEFIL law and the revised Minerals law, could play a role in reducing FDI in Mongolia.
“The recent downturn in Mongolia’s economy can, in parts (sic), be blamed on the slowdown in China and its reduced coal purchases but an equal proportion of the blame should be allocated to domestic challenges. The SEFIL law, various populist measures and the upcoming Minerals Law, are only adding to the growing malaise being felt by Foreign Investors,” the report noted.
FDI is expected to drop by as much as 60% in 2013 from its level in the first half of 2012. This will not only mean fewer foreign companies opening offices but will also lead to a slowdown in business for Mongolian companies, which are likely to either downsize or refrain from up-scaling their operations for the moment.
The report observes that Mongolia’s property business is showing the effects of the slowdown in economic growth.
M.A.D. Investment Solutions released a 600-page report on Ulaanbaatar’s property market, the “Real Estate Report 2013-2014”, last month. The report, which is freely available on their website www.mad-mongolia.com, discusses concerns about the property market this year, especially with regard to the oversupply of commercial office space.
As the report notes, “The International Commerce Centre, the Peace Tower, the GS Tower, the Bat-Trade Building and the TDB Tower are all expected to come online in 2013, adding nearly 78,000 sqms (square metres) to the existing 109,600 sqms of grade A office space. This represents an increase of 71% on existing supply. We thus expect rental prices in Grade A office space to drop from a current average of 65 – 70 USD per square meter to a more reasonable average of 45 – 50 USD per square meter. We further expect overall occupancy rates to drop from its current estimated 90% to a more sustainable 70%. Those drops are likely to be reflected in Grade B and C office spaces, but to a lesser extent.”
M.A.D. expects the oversupply in the Grade A office market will be absorbed within three to five years as business is expected to pick up from 2014 onwards. The mismatch between the supply of luxury residential units and the demand for them may take longer to resolve, however.
According to the report, there are currently over 1,000 luxury residential units under construction or planned, each valued at over 1.5 million USD, but the total demand for such apartments is no more than 250 units in the coming three years.
“All Mongolian banks have essentially halted construction sector loans as their portfolios were too heavily weighted towards Real Estate. With the fast decline in foreign investment pouring into the country, developers are struggling to finance their developments through traditional pre-sales and need to source alternate means of financing to be able to continue construction,” the real estate report noted.
Many high profile projects are expected to go bankrupt and cancel operations altogether.
“The second half of 2012 has already claimed a few high profile victims such as Gem Stone Island, Marshall Village and a few of the Zaisan and Terelj projects but it is expected that many more will follow. Zaisan Villa, a high profile project is already suffering from considerable delays. Reduced prices are being witnessed amongst a majority of high-end developments.”
Hotel projects are experiencing challenges too. According to M.A.D., the “Intercontinental was removed from the Blue Sky Hotel Project, Hilton has abandoned all plans to continue re-developing their UB property, Radisson Blue has shelved plans for their hotel, Hyatt has pulled out of their two planned projects in Ulaanbaatar, Shangri-La is yet again delayed by another year, Sheraton suffers from further delays with no idea as to expected completion.”
On the upside, ger district land prices and land ownership rights for Mongolians are expected to improve in 2013.
“The Asian Development Bank has comprehensive projects for the re-development of two ger district sub-centers (Bayankhoshuu and Selbe) in addition to a number of projects by UN Habitat, the MCA, GTZ and a few others. The Millennium Challenge Account (MCA) is working closely with the Cadastral department of Ulaanbaatar to privatize and register most plots of land within the next 3 years,” according to M.A.D.’s report.
The M.A.D. report also mentioned government plans to spend 700 Million USD of the 1.5 Billion USD Chinggis Bond release on building roads in the ger districts of Ulaanbaatar. According to M.A.D. Investment Solutions, these projects are expected to significantly contribute towards better land ownership rights in the ger districts, improved access and infrastructure, increase in services and will ultimately contribute to rising land values. M.A.D. believes this process will begin in earnest in 2013.
“The most opportune period to invest will be from mid-April up to early June, the closer to the end of campaigning for the presidential elections the better. We expect the current domestic crisis to worsen until the close of the elections. This will lead a number of projects, in particular towards April – May to fire-sale their remaining assets as they desperately require financing to keep their essential mining operations afloat,” concluded M.A.D. “The drop in foreign investment will also be the most acutely felt at that time with many developers realising that they cannot start construction in 2013 and have no access to bank financing. Sellers will have fewer available buyers and be forced into tough negotiations.”
M.A.D. noted that by end of this year Ulaanbaatar will have a healthier property market with projects that are “sustainable, well designed, built and properly financed.”
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