Finding opportunities in real estate in Mongolia

April 1, 2011

Lee Cashell of Asia Pacific Investment Partners looks at some of the key features, opportunities and considerations in relation to Mongolia’s fast-growing property sector.

  • Opportunities for foreign investors in Mongolia’s property market are arising from people moving into low-end apartments in the capital city, as well as the need for serviced apartment buildings to cater for expatriates
  • The currency is convertible, and there is free repatriation of profits
  • Rental yields have decreased from 35% eight years ago to around 14% - but the opportunity is morphing as investors are increasingly focused on the capital gains
  • There is a lot of interest in Mongolian property at the moment from investors in Hong Kong and Singapore

According to Lee Cashell in an interview, there are various opportunities for foreign investors in Mongolia’s property market. One interesting sector, he explained, is related to the fact that while the capital city was built for 250,000 people, there are now 1.4 million people living around it, with around 700,000 in the surrounding hills in temporary housing. As a result, there is a process of these people moving into low-end apartments, so a number of property developers need to raise financing for this.

There are also opportunities arising from the need for serviced apartment buildings to cater for the expatriates coming into the country to work in the mining industry, said Cashell. These can either be purchased in the style of a private equity real estate fund, or individually by private investors.

__The pros of Mongolian real estate __

Among the advantages for overseas property investors, said Cashell, is the fact that the currency is convertible. Plus, he added, there is free repatriation of profits, without withholding tax or capital gains tax – which is driving a lot of the returns on investments in the Mongolian property market.

At the same time, foreign investors get title to an immovable property certificate. So although the land is generally leasehold, Cashell said the certificate can be sold or mortgaged in the same way as a deed or title in many other markets. Investing challenges Yet investing in any overseas property market can be difficult, said Cashell, for example understanding what is happening with the property, which makes it critical to have people to look after the running and upkeep.

Also, in Mongolia in particular, while rental yields started out around eight years ago at about 35%, they have since come down to 25%, then to 20%, and for upcoming developments Cashell said they are likely to be around 14%. But the opportunity is morphing as investors are increasingly focused on the capital gains also, he said, especially since the economy is growing at 12% to 25%. When looking to realise gains, Cashell said investors need to look at the liquidity of the secondary market, although he added that the liquidity is better than it has been for the last 10 years, given that Mongolians are becoming wealthier, so mortgages are being introduced in the local market.

Typical investors in Mongolia

In 2007 and 2008, when London’s property market and the British pound were both very strong, Cashell said there was a lot of interest in Mongolia from UK-based investors. At the moment, given the strong economies in Hong Kong and Singapore, and based on the listing of Mongolian companies in Hong Kong, he said there is a lot of interest in Mongolian property from investors in Hong Kong and Singapore.

Future hurdles

When considering what might hold back further development in the property market in Ulaanbaatar, Mongolia’s capital, Cashell said the power plant which fuels the heating pipe that runs throughout the city is at 99% capacity. Yet it is difficult to get approval to build a property outside the zone served by the heating pipe, given the need for heating in the winter.

So this is restricting the supply of land on which properties can be built, he explained, and therefore forcing up the price of land on an annual basis, perhaps as much as 300% to 400% per year. At the same time, however, developments in the natural resources sector in rural areas has meant that there is high demand for housing, commercial property and infrastructure in towns which once had 500 to 1,000 people – but might soon have 50,000 people or more.

SOURCE: Hubbis