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Mongolia’s “Asian Wolf” Economy – on the prowl once again
August 23, 2013Article by Ray Withers
Those of you with longish memories might recall that way back in 2007 Property Frontiers took the international investment real estate market by storm when we started to offer investment property in Ulaanbaatar – the capital and commercial hub of Mongolia.
Yes there were numerous jokes about Genghis Khan and living in Yurts (Gers in Mongolian), but they soon withered away when the astonishing wealth and prospective rental returns in such an unusual destination came to light.
Now we are getting fired up all over again about the incredible opportunities that exist in this exciting melting pot of nomadic tribesmen and fast growing industrialisation.
The bedrock of Mongolia’s move from a third world nomadic herding and agricultural economy is its mining industry, with an estimated US $1.5 trillion in mineral reserves, it is unsurprising that it is being dubbed the “Asian Wolf” economy. The massive Oyu Tolgoi mine alone contains over 37 million tonnes of copper and 1,431 tonnes of gold. Mineral investment propelled the economy forward at an explosive 17% rate in 2011 and existing deposits will keep the locomotive moving at a double digit pace for decades and – with only 30% of the country explored – the likelihood of new discoveries is high.
Boasting a democratic government, a minimalist tax regime, strong property rights and no capital controls, Mongolia was the darling of international investors in 2011. The 2012/13 election-cycle witnessed political confrontations with foreign firms that led to a souring of investor sentiment. With the elections recently over, the market is already showing signs of a recovery. Oyu Tolgoi has been given permission to begin commercial production – this alone is set to increase GDP per annum by over 30%, once it is at its full operational capacity. Parliament is due to sit in the early days of next month and it is expected that more favourable foreign company investment laws will be introduced. This combination of factors has led a number of multilateral institutions to forecast that Mongolia will once again be the fastest growing economy in the world next year.
When we last sold property in Mongolia we focused on top-end residential apartments – designed to be rented to the mining professionals who required modern accommodation in a city that largely consisted of soviet-style flats or Gers. For those fortunate few who bought in the Regency Residence and Olympic Residence developments their purchases have proved a sound and fruitful investment. Rental returns on this high-end property are around 18%, whilst capital appreciation has been running at 15%+ per annum since 2010. One of our happy investors in Mongolia, Martin Goldsworthy, comments in our what-our-clients-say section of this website.
Now the country is becoming one of the hottest destinations for global retail brands. GDP per capita is expected to double over the next five years, having already achieved this between 2005 and 2012 and annual per capita expenditure on clothing alone increased by over 500% between 2003 and 2011. Newly affluent locals are desperate to show off their wealth and it is unsurprising that reputable Western brands have been seeking out opportunities in the capital. Commercial real estate rentals are predicted to triple over the next five years as they enter the market. According to the Mongolia Growth Group (YAK) – the only non-mining related internationally listed company to do business in Mongolia – rental prices in some key areas will exceed $100 per square metre per month by 2018. Given that existing rates are around $30 per square metre per month, this represents a huge increase. If that was not enough, Global Management consultancy A.T. Karney has also placed Mongolia at number seven on its 2013 Global Retail Development Index.
Already three large US food retailers have opened stores in Ulaanbaatar – KFC Ltd, Cinnabon International Inc. and Round Table Pizza Inc., alongside luxury stores such as Louis Vuitton, Burberry, Zegna, Emporia Armani and Hugo Boss.
In addition, new Mongolian Central Bank initiatives have been launched which allow local homeowners to refinance their mortgage loans down to 8% from 15 – 20% and extend the loan period from 5 to 20 years. With mortgage payments now being reduced by some 70-80%, the local Mongolian population is set have a much higher disposable income over the next few years.
Given this golden retail opportunity we are in the process of sourcing a very exciting commercial offering in Ulaanbaatar.
We are currently in the final stages of due diligence, but as a sneak preview:
• Unique mixed-use investment opportunity taking advantage of the growing retail and leisure sector in Mongolia.
• An international award-winning scheme delivered by an established developer in Mongolia that Property Frontiers has worked with in the past.
• A European style standard for retail provision and one of the most promising and anticipated projects.
• Pricing will be in the region of $2,600 per sqm with an opportunity to buy up to 7,000sqm of mixed use space.
• High anticipated project returns: IRRs in excess of 25%.
• An assured 12% rental yield from the developer for the first 24 months.
• Development is currently well under way and completion scheduled for Q4 2013.
We should have more news in the next couple of weeks, but in the meantime if you want to be the first to hear about this new commercial retail investment offering then drop us a line.