November 1, 2011
Real estate could be the best way to have an edge on the growth of the Mongolia economy. During my 12 days in Mongolia, this was a recurring theme. While I was there, Silk Road Management (a company that shares the same CEO as local brokerage Eurasia Capital) launched Ulan Bator’s first property index. Throughout my visit, members of all three real estate investment organizations below that I met with cited a 30-fold increase in Kazakhstan real estate prices prior to Kazakhstan’s bubble bursting in 2008. The two times I met private equity managers visiting Mongolia (both times, happenstance meetings at a bar), they were both looking into the real estate market. On my flight back to the U.S. on September 23, China Daily’s business section had a cover story that began, “the real estate industry is the biggest source of wealth for the richest people in China.” With resource-needy neighbor China to the south, it is inevitable and predictable that Mongolia’s natural resources will be developed and profitably exported thus creating an economic boom. One copper-gold mine is going to add 25% or more to GDP, and there is more copper, more gold, uranium, molybdenum, limestone, oil, gas, the second largest deposit of coal in the world, and many tons more coal in smaller mines around the country. The real estate investors often emphasize that the mining industry has a lot of risks. It is hard to predict which mine will be the most profitable and which mining company’s stock price will rise the most. However, it is knowable that mining, will bring a ramp up in GDP and a ramp up in wage growth, and that this will have a wealth effect on the 2.7 to 3.1 million people living in the country which will lead to higher real estate prices. The news that the government is considering raising state employee wages 53%, doubling state employee wages from 2008 in 4 years time, does not discourage this thesis.
All parties investing in real estate in Mongolia do so using a varying degree of shell companies, some more complex than others. They all have trusted local Mongolian employees in the field looking for assets to purchase. As one noted, “if the white guy shows up, the price goes up 30%.” These are barriers to other speculators entering the real estate market. Yet, there are economic tourists and private equity investors daily trying to meet with the below professionals to pick their brains on how to invest in Mongolia. Each of these real estate investors – Mr. Cashell, Mr. de Gruben, and Mr. Kupperman – and their staffs strongly believe that in real estate they have the investment edge on Mongolia’s mining boom. Asia Pacific Investment Partners (APIP) Lee Cashell is famed for showing up in Ulan Bator, Mongolia, with $30,000 and becoming a multi-millionaire. He bought three apartments for $10,000 each in 2001 and rented them out for $600 per month to United Nations employees. At a yield of 60% (a $10,000 apartment renting for $7,200/year), he was off to a good start building a real estate empire that is now diversifying into integrated businesses from property development to cement to brokerage services. When I met with him on September 21, 2011, he was transacting an international business deal to secure his place as the largest cement producer in Mongolia. At the same time, he was preparing a celebration for concluding selling the first 25-unit tranche of his Olympic Luxury Residence apartments at up to $3,200 per square meter and commencing sales of the second tranche at higher prices in line with Mongolia’s inflating property values. APIP is Lee Cashell’s corporate umbrella. While their website shows 11 subsidiaries, management confirms that 80% of profits currently come from property development and cement. In Ulan Bator, Mr. Cashell believes that property values are increasing on average at 3% per month but that land values are increasing by 10% per month. Since entering the property market in 2001, he has seen about a 5-fold increase in the value of property in Ulan Bator’s center. Mr. Cashell seems relaxed, confident, concerned with increasing his market share and profitability any way he can, but little concerned by competition. The estimated value of his company’s land bank is currently $150 million, “based on a combination of independent valuation and a very conservative estimate based on market comparables and actual prices offered,” according to APIP Chief Communications Officer Will Tindall. Mr.Cashell believes the land bank is his most valuable asset as Mongolian prices for precious land are at about $1,300 per square meter currently and land prices in Qatar during that country’s boom went to upwards of $10,000 per square meter. Mr. Cashell looks to Kazakhstan and Vietnam, along with Qatar, for a road map on how property prices will rise as Mongolia’s mining industry’s production booms. Mr. Cashell estimated that margins on their cement business are currently at 50% with local cement prices going from $80 to $160 per ton in the past 3 years. Cement is an important binding product, and a principal ingredient in concrete. Mr. Cashell stated there are 10 limestone deposits with rail access in Mongolia that can be used to make cement and he owns two of them.
Two more of these 10 limestone deposits are owned by a Mongolian state- run company. No one else is known to own more than one, and five are not developed. All the construction occurring in Mongolia needs cement for its concrete, and APIP thus has built-in customers in the concrete companies. Among APIP’s achievements, they are proud to have eked out about a $1 million profit in 2009 when the financial crisis hit Mongolia the hardest. Net income in for 2010 was $7 million and they are forecasting $12 million for this year. If Mr. Cashell is correct and land prices rise at 10% per month, his $150 million land bank alone will double in value every 8 months as long as the property boom continues. Christopher de Gruben was formerly employed by Lee Cashell and Joachim “Josh” Bertot worked as a consultant to Lee Cashell on some projects before they started Make A Difference Investment Solutions. I was on day 3 of my visit to Mongolia when I met Mr. de Gruben and he began our conversation by asking, “Can you feel it?” He was talking about the energy and boomtown feeling that buzzes around the investment community of Mongolia. It is ever-present, much like Mr. de Gruben’s own high-level energy. Mr. Bertot taped our conversation and Mr. de Gruben’s presentation to me as they were practicing for road shows beginning in London in October to raise funds for their private equity offering Real Estate Mongolia fund (R.E.M.). Mr. de Gruben arrived in Mongolia in late 2003. His first apartment cost $23,000 and now is worth about $148,000, a 31⁄2-fold price rise. Mr. de Gruben, the son of a Belgian diplomat, grew up living in the Soviet Union and other Eastern Bloc countries such as Poland. He whizzes through the history of real estate in Ulan Bator and Mongolia. Mr. de Gruben explains how some of the most valuable communist era apartments today are those from the planned “40,000” project which built between 450 and 500 homes. They are known to be solidly constructed and near the center of Ulan Bator. Next was the “50,000” project that built 500 to 600 apartments in Ulan Bator. The Soviet history lesson rapidly progresses through the Soviets leaving in 1991, taking all their equipment as well as most of the skilled labor. He rattles off which years foreign direct investment (FDI) and foreign aid were good and bad as rapidly as he details which years were better or worse in the quality of construction, citing 2005 – 2007 as an improvement over the early 2000s. He notes that the financial crisis of 2008 led to a stop in construction and a freeze in real estate prices. Well-located real estate held its value in 2009, but there were no buyers. With the lift of the mining windfall tax and the Oyu Tolgoi copper-gold mine agreement in 2010, property prices returned to their appreciating trajectory. In pointing out the importance of international aid to Mongolia, Mr. de Gruben lists some of the streets in Ulan Bator sponsored by various countries: Korea (Seoul Street), Japan (the airport road and Millenium Street), India (Gandhi Street), and the U.S. (Denver Street). He is not building his case for international aid, but his case for the scarcity of property. The number of roadways are limited, and thus the desirable properties – linked to the limited roads that get you to the center of Ulan Bator rapidly – are limited as well. He cites undeveloped land as appreciating at 100% per year for the last 3 years (or roughly 7% per month). One of the driving forces behind property values rising is Mongolia’s laws regarding property rights are very favorable to property owners. The idea of purchasing every apartment in a building so you can tear the building down and put something new up is not viable. For example, if one were to purchase 22 of 25 apartments in a building, each of the last three owners can successively ask for as much money as they want, and more than the last one, and they know this, and they will.
Mr. de Gruben’s accumulated wealth of knowledge from purchasing, holding, and flipping properties both for himself and private investors will is available in a new $1,200 report on the real estate market. He was kind enough to share a draft executive summary of the report (68 pages) with me and the actual report that I saw sitting on his desk (over 450 pages) will indeed provide a lot of data to digest. Sam Zell and other private equity groups Sam Zell in an August 30, 2011, interview with Bloomberg TV discussed that he believes Mongolia will be the fastest growing economy in the world for the next 5 years. It’s believed he has been investing in Mongolia real estate since at least 2009. No one knows what he owns, but know Mr. Zell has some investments in Mongolia. As one person I interviewed said, “He’s not lifting up his skirt, and I’m not lifting up mine.” By no means are the three real estate companies discussed the only ways to invest in real estate in Mongolia. The companies discussed offer ways to make plays on Mongolia and Mongolian real estate that are accessible to both retail and private equity investors in some manner. Mongolia Growth Group (MNGGF.PK) Unlike Mr. Cashell and Mr. de Gruben who both invest in real estate anywhere in Mongolia, Mr. Kupperman and his staff at Mongolia Growth Group are focused on investing only in real estate in Ulan Bator. They also are different in that they are not looking to sell property anytime in the near future. Their goal is to buy the highest quality properties they can find, rent them, hold them for 5 to 10 years, and then determine an exit strategy as Mongolia’s economic boom unfolds. Mr. Cashell, Mr. de Gruben, and their teams have been in Mongolia longer than Mr. Kupperman’s team. Mr. Kupperman’s hedge fund staff, who are on board with helping start this company, have a range of experience in developing economies in 5 continents from participating in the best performing economies of a particular year to cutting short an investment junket after negotiating their way out of being held at gunpoint. Staff from Miami’s South Beach to Ontario, Canada, have relocated their lives to Mongolia to invest in their faith both in Mongolia’s economy and Mr. Kupperman. However, success or failure will hinge on their native Mongolian employees. To successfully invest in Mongolia takes more than investment savvy, it takes having a reliable staff negotiating all the on-the-ground details. As Messrs. Cashell and de Gruben did before they arrived, Messrs. Kupperman and Colanego invest a lot of time and financial capital into vetting and training their local staff, an employee base over 40 and growing monthly. They do things with an eye to conflating corporate cultures. They hire native Mongolians into management positions from respected local companies. At the same time, they incorporate western team building strategies and send staff members on educational trips, such as a few who were sent to Berkshire Hathaway’s annual general meeting. I spent more time discussing Mongolia Growth Group’s insurance business in the prior equity investment section. While the insurance business is only one-third of Mongolia Growth Group’s capital investments, it adds a different aspect of risk, or a different opportunity for profit, than the other real estate investment companies have. Mongolia Growth Group’s real estate business plan itself is fairly simple: buy property they believe has the best opportunity for appreciation, rent it out and hold it until management feels the property market is near peak valuation. Ways to invest in the Real Estate market If you want to purchase a publicly traded stock – At this time you are limited to Mongolia Growth Group which is traded in the U.S. (MNGGF.PK) and Canada (YAK). – Sometime in 2012 or 2013, Mr. de Gruben’s R.E.M. fund should become publicly traded, most likely in Hong Kong and London. – Asia Pacific Properties is listing on the Mongolia Stock Exchange (you must open a brokerage account in Mongolia to trade this; and an account with Asia Pacific Securities is the best way to trade it). In the end, APIP will own 70% of APP, and 30% of APP will be floated. APP includes APIP’s Rural Development Corporation assets, Ulan Bator based properties, and property development sites that are medium-end and low-end. APIP owned 92% of APP and is floating another 22% of its APP holdings. – Mr. Cashell’s Asia Pacific Investment Partners (the whole company) should IPO in Hong Kong in 2012 or 2013. Private Equity For private equity participation, if you are an accredited investor, you have broader options. (An accredited investor has income greater than $200k individually, greater than $300k jointly with their spouse, or assets greater than $1m.) – APIP is accepting investors with a minimum investment of $500,000 at this time to raise $20 to $30 million in a private placement prior to its planned Hong Kong IPO. This offering is slated to close by year-end. -Mr. de Gruben’s Real Estate Mongolia fund (R.E.M.) is currently raising capital. You must be investing at least $100,000. They are seeking to raise $50 million in the first round of the private offering scheduled to be closed by February 2012. R.E.M. principals will put in a total of at least $3 million of their own money into the fund. The fund will have a 2% management fee and a 20% performance fee when returns exceed 5%. – In the event that Mongolia Growth Group has another private offering round, the way to be aware of this would be to register at the company’s website for company updates. Buying property You may also consider purchasing property yourself in Mongolia. For this you can either contact Mr. Cashell’s APIP subsidiary Mongolian Properties or Mr. de Gruben’s M.A.D. Investment Solutions. To purchase real estate in Mongolia you should be investing at least $100,000, and understand that the fees charged will in part be paying to deal with local dynamics that cannot be known if you do not live in Mongolia, and furthermore understand the risk of a property that is paid for in cash and has no insurance. There are no significant restrictions on foreign ownership of property in Mongolia, but without the right team assisting your property purchase, you can get entangled in political and bureaucratic problems. Contacts (click on links for company websites): Asia Pacific Investment Partners or contact Will Tindall at firstname.lastname@example.org. Asia Pacific Securities (to invest in Asia Pacific Properties on the Mongolia Stock Exchange): contact “Nick” Narantuguldur Saijrakh at email@example.com. M.A.D. Investment Solutions can be contacted here Mongolia Growth Group Mongolian Properties R.E.M. Fund or e-mail firstname.lastname@example.org Disclosure: I am long Mongolia Growth Group, Origo Partners, and Ivanhoe Mines. I have made no trades or investments in the above listed investments in the week preceding publication of this article and will make no trades in any of the above listed investments in the week after this article’s publication.