Despite a number of macroeconomic headwinds, in 2013 and 2014 Mongolia’s real estate market expanded substantially. This growth can be attributed to a range of forces, including government-led construction projects; a state-sponsored mortgage scheme; fast-growing demand for commercial retail space; and, more broadly, increasing urbanisation and rising incomes among the burgeoning middle class.
While the country has seen steadily declining levels of foreign direct investment (FDI) in recent years, GDP growth has remained remarkably buoyant, at 11.6% in 2013 and 7.8% in 2014, according to the National Statistical Office (NSO) – with the Asian Development Bank forecasting 7.5% growth for 2015. Given the low level of supply across most real estate segments, many local players expect to see rising demand for most types of property for years to come, despite a price dip in late 2014 and early 2015. “In recent years, when you drove around Ulaanbaatar you would see many new buildings going up. Prices were high basically across the board,” Christopher de Gruben, managing partner at M.A.D. Investment Solutions, a local property research firm, told OBG. “But given numerous challenges on the horizon this was unlikely to last. Indeed, prices have been slipping from late 2014 due to a market correction.”
History of Development
Mongolia changed dramatically as a result of the collapse of communism in the early 1990s. During the Soviet period, property in Mongolia was communal and controlled by the state. Apartments were assigned to citizens based on a complex system that assessed people’s living conditions, workplace performance and public recognition, among other things. Lack of a capitalist market meant property was not transferred by buyers and sellers as it is today, limiting citizen’s movements and job options. At the same time, rents were extremely low and tenants had the right to housing for life.
Beginning in the early 1990s, the government set out to privatise Mongolia’s stock of real estate. The groundwork for this was laid by the country’s 1992 constitution, under which private property was formally protected by the state. Between 1992 and 2000 the government introduced some 15 new pieces of legislation on real estate, including the 1st Land Law of 1994, the Law on the Registration of Immovable Property in 1997 and the Law on Immovable Property Tax in 2000. Between 1997 and 2004 the state privatised nearly all of Mongolia’s housing stock – chiefly apartments – via a complex system of title transfers and sales that took into account existing residency status. This followed on a series of similar privatisations of other state-owned property stocks. Today, most real estate in Mongolia is privately owned.
Land
Under the nation’s land law – which has been updated several times since it was introduced in 1994 but is still the country’s chief land policy – two types of land tenure are allowed: ownership and possession. Ownership, restricted to Mongolian citizens, allows for the free transfer of land, while possession provides control of a piece of land so long as it is used for a pre-arranged purpose and meets any other legal conditions. Land possession arrangements are overseen by the state, which also issues short-term licences for land leases. Outside of these two categories, many real estate arrangements fall under the nation’s unique immovable property law, whereby buildings and other structures, but not the land on which they are built, can be privately owned, bought and sold.
Most of Mongolia’s other land – nearly three-quarters of its total landmass, according to government data – is classified as agricultural and is state-owned. The majority of this area is open to public use, and herders, who account for a significant portion of the overall population, often live in gers (traditional felt tents, commonly known elsewhere as yurts) and graze their animals on this land. Under the government’s ongoing land privatisation programme, Mongolian citizens may file a request to purchase a limited amount of land anywhere it is available in the country, often at well below market rates. Many of Ulaanbaatar’s new arrivals from rural areas avail themselves of this scheme to acquire land in the rapidly expanding ger districts on outskirts of the capital.
Organisation
Mongolia’s real estate market is centred almost entirely in Ulaanbaatar. The capital’s metropolitan area is home to nearly half of the country’s total population and almost all domestic and foreign commercial institutions, not to mention the bulk of the nation’s residential, commercial office, retail and hospitality real estate.
Peace Avenue, the main east-west thoroughfare and only uninterrupted road through the capital, abuts many of the city’s key central neighbourhoods. At the centre of Ulaanbaatar is the Sukhbaatar area, which encompasses Chinggis Square, many important federal government buildings, and almost all of Mongolia’s grade-A commercial property, this last being divided among a small number of high-rise mixed-use office blocks. To the north-west of Sukhbaatar along Peace Avenue lies the Chingeltei district, which encompasses the State Department Store – a major retail shopping destination for middle-class and wealthy Mongolians and foreigners alike – and a wide array of independent retail, food and beverage and entertainment facilities. To the west of Chingeltei is Bayangol, which is home to one of Ulaanbaatar’s oldest ger districts, not to mention the Gandan Monastery, a major tourist destination.
Other key neighbourhoods in Ulaanbaatar include Bayanzurkh, the largest district in the capital, located to the east of Sukhbaatar; Songino Khairkhan district, to the west of Bayangol; and the Khan-Uul District, located in the city’s south and home to much of its young, growing middle-class and, in the Zaisan area in particular, its wealthy executive class.
Ger Districts
As of the end of 2011, the most recent data available as of March 2015, more than 184,000 families in Ulaanbaatar, or about 60% of the city’s population, lived in the sprawling ger districts that cover the foothills to its north, east and west. Many of the older, more built-up areas of these districts blend into the outskirts of the city proper, as residents have had time to build cement or wood structures. Further out, many residents still live in gers year-round.
Most inhabitants of the ger areas own both the structure in which they live and the hasha (small, fenced-in plot) on which it sits. The government has made a series of efforts to formalise these residential areas. City services have been extended to many of the more central ger districts, though most have yet to be connected to Ulaanbaatar’s power, water or public transport grids. During the frigid winter months, residents heat their tents and cook by burning coal, which is the primary cause of the high levels of air pollution in Ulaanbaatar. According the World Health Organisation’s 2014 ambient (outdoor) air pollution database, Ulaanbaatar ranked among the 30-most-polluted cities in terms of more hazardous ultra-fine particles out of a sample of 1600 top cities.
Residential Development
As of the end of 2014 the ger districts were the focus of 19 property redevelopment projects, which together constitute the largest residential development programmes currently under way in Mongolia. Under these initiatives, the state plans eventually to provide a total of 75,000 new residential units, most of which are to be constructed on the land presently occupied by the ger districts. Alongside the government, which has taken the lead in these development projects, a substantial number of international organisations are involved in projects in the ger districts, including the World Bank and the Asian Development Bank.
As of 2013, Mongolia was home to a total of 11.48m sq metres of formal residential space, up from 1.24m sq metres in 2012. The majority of the new housing that has come onto the market in recent years has been developed by the private sector. In 2013, for example, private developers introduced nearly 1.3m sq metres of new residential property across Mongolia, compared with only around 17,000 sq metres introduced by the public sector, according to the NSO.
In Ulaanbaatar new housing is being developed on a massive scale. In 2013 some 70% of the total construction and repair output in Mongolia took place in the capital city, while the construction sector as a whole grew by 16.3%, according to data from NSO (see Construction chapter). The rapid uptick in construction activity in 2013 can be attributed primarily to the numerous ger redevelopment schemes, a handful of which are currently under way. These include a project led by the Beren Group to build 15,500 new low-cost residential units; a project by the Zag Group to construct nearly 11,000 new units; and another by Gangar Holding to build 5600 new units.
At the end of 2013 the average selling price per sq metre in the capital was $1316, while high-end properties brought in an average of $2050 per sq metre. These figures are down slightly on the previous year, although more broadly, sales prices are expected to post a compound annual growth rate of nearly 12% for the 2014-19 period, according to M.A.D. Investment Solutions, a local property research firm.
Other Segments
The office segment has grown significantly in recent years on the back of rapid GDP growth and steadily rising levels of foreign investment. All of Mongolia’s top grade office space is located in Ulaanbaatar, primarily within the central Sukhbaatar district, which serves as the capital’s main business area. By the end of 2013 there was around 350,000 sq metres of high-quality (grade-A and gradeB) office space in the country, up from less than 300,000 sq metres at the end of 2012, around 220,000 sq metres at the end of 2011 and less than 100,000 in 2008, according to data from M.A.D. Investment. Due to falling demand for high-end space since 2013 – largely due to declining levels of FDI – office space rental rates have recently dropped somewhat. With more than 100,000 sq metres of new space in the development pipeline, prices could potentially continue to fall for the foreseeable future.
As Mongolia’s expanding middle class has become more affluent over the past decade, retail activity has surged. According to the NSO, in 2013 total retail sales reached nearly MNT1.8bn ($11m), up from MNT1.35bn ($8.2m) in 2012, less than MNT900m ($5.4m) in 2011 and just MNT500m ($3m) in 2010. Most formal retail establishments in the country are in Ulaanbaatar, with all of the international retailers located near the city centre. Mongolia’s retail segment is relatively young; the country transitioned to a market economy only in the early 1990s, and for much of that decade consumption rates remained relatively low. In the mid2000s, however, demand began to pick up, and developers launched a substantial number of new projects. By the end of 2013 the total amount of high-quality retail space had topped 216,350 sq metres, more than half of which was built after 2005.
The hotel segment, meanwhile, which is linked to the tourism sector, has seen declining demand in recent years, due largely to diminishing levels of FDI and a concomitant drop in business travel. Although the number of hotel rooms in the country has jumped considerably since 2009, the growth rate is expected to slow in the next five years (see Tourism chapter).
Outlook
The property industry as a whole faces a host of hurdles in the coming years. In mid-2014 the government cut funding to its much-lauded 8% mortgage scheme barely a year after the programme was launched. This is expected to have a negative impact on the progress of construction in future. Mongolia also currently has an oversupply of office space, especially given the rapidly falling FDI figures in recent years. Last, because of a lack of incoming financing, the government has reported declining revenues, which in time could take a toll on publicly financed development. Given the large number of state-led property projects currently under way in the country, the real estate sector is highly exposed in this regard.
Despite these and other challenges, including the dip in real estate prices in late 2014 and early 2015, many property developers and market-watchers remain optimistic about the future. “The market has entered a rough period,” said M.A.D.’s de Gruben, “But this is necessary and, ultimately, beneficial pain. Once the government sorts out the investment and financial issues, developers will eventually be forced to realise that they cannot just build anything whenever and wherever they want. The market will mature, and this is a good thing for everyone involved.”
In a series of high-level meetings between Mongolian leaders and their Chinese and Russian counterparts in late 2014, the three countries agreed to pursue trilateral cooperation in a wide range of areas, including real estate. Such ties could grow closer in future: Russia and China have voiced support for Mongolia to become a full member of the Asia-Pacific Economic Cooperation and for stronger cooperation under the Shanghai Cooperation Organisation (SCO), agreeing to a tripartite meeting at the next SCO summit in July 2015. At the domestic level, demographic trends – including rising urbanisation, a growing middle class and a rapidly expanding population – are poised to drive real estate demand for years to come.
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