Mongolia: Property – bubble or boom?
Confidence that Mongolia’s resource wealth will generate unprecedented expansion in its real estate market has seen prices rise and many of Ulaanbaatar’s prime properties snapped up. However, the experience of other countries that have had similar resource-related property growth suggests it may not last forever.
In September, Export Development Canada, the state-owned export credit agency, warned that due to bank credits rising in excess of 50% year-on-year in 2012, a real estate “bubble” had appeared in the capital, which is likely to have a negative impact on the banking sector. Meanwhile, in October the central bank said the national growth rate in 2012 will slow by up to one-third from the record 17% achieved in 2011, due to a decrease in foreign direct investment (FDI) and reduced demand from China.
Talk of slowing growth and a property bubble clashes with the estimations of real estate agencies, which are predicting that, as copper and coking coal mines come online, the real estate market will see “exponential” growth.
“We expect [our] diversified portfolio of high-quality retail, office and redevelopment property in downtown Ulaanbaatar to compound at 30-50% per year going forward, undergirded by a combination of rapidly rising rental yields and compressing capitalisation rates,” wrote Mongolia Growth Group, a real estate and financial services conglomerate, in an October press statement.
However, the rapid growth scenario for a country of just 3m people, which issued its first mortgage only in 2003, poses a number of issues for investors, including the crumbling state of much of the country’s infrastructure.
Citing further problems, in August the Mongolia Real Estate Blog wrote, “The volatility of housing prices and the potential for a boom-bust is higher if the housing supply is severely constrained by land access and urban regulation problems, which is an issue, considering the short supply of land in Ulaanbaatar”.
A number of players in the industry, who are concerned about the prospects of a real estate bubble in the capital, have pointed to similar circumstances in Kazakhstan in 2008. “Driven by an influx of oil-related FDI and easily accessible mortgages, land prices in downtown Almaty, Kazakhstan’s largest city, surged a whopping 8000% between 2002 and 2008, while the cost per metre of apartments in the downtown area rose 833% in the same period”, noted local news website Mongoliana in July. With the onset of the global financial crisis, the property bubble burst and prices dropped 40% from their peak, and currently are half of what they were in 2007.
However, industry insiders say there is inherently less risk in the Mongolian market. “Despite rising prices, the market in Mongolia remains majority cash-based, so borrowing is not yet a significant risk factor,” said Christopher De Gruben, the CEO of Real Estate Mongolia, in January.
Another important factor to the country’s growth is its emerging middle class. Per-capita GDP in Mongolia more than tripled to $2200 in 2010 from $638 in 2004, and is set to rise further this year, as the government increases all government salaries and pensions by 43%. There are now around 4000 apartments in Ulaanbaatar available to nationals with middle incomes, who will be able to easily access mortgages, according to Frontier Securities, a local investment firm.
According to Mongoliana, the key to avoiding the bubble is enabling growth by lowering lending standards and “encouraging new homeownership, while also managing risk across the mining and financial sectors in the long term”.
In terms of encouraging home ownership among citizens, the government is taking a number of steps, with T. Bayarsaikhan, the minister of construction and urban development, stating in October that a 6% interest loan, implemented by the government for first-time buyers in February, will be extended to all Mongolian citizens. He also said that future buildings will be geared toward heat-loss parameters and energy efficiency, while further noting that planned future construction will have higher standards and better health and safety measures.
However, in the same month, the central bank officially stopped accepting applications for the loans, part of the government’s “100,000 Homes Project”, stating that it needed to acquire the necessary financing to resume the loans from the Trade and Development Bank of Mongolia.
While Mongolia’s rapid growth story indeed raises the spectre of it repeating mistakes made by other resource-wealthy countries in the past, it has the opportunity to learn from their experiences.