Mongolian realestate executive summary The 2011 Mongolian Real Estate Report

1. EXECUTIVE
SUMMARY
Inclusive of the Consumer Price Index

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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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12. CHAPTER 1
THE EXECUTIVE SUMMARY
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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
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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,
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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