Amidst discussions of Mongolian recovery, questions arise as to its implications for the luxury real estate market. Standing next to the Zaisan Monument, overlooking Ulaanbaatar, a casual observer could be forgiven for thinking there is a flurry of activity - perhaps even oversupply. But in this city where explosive growth gave way to recession, most schemes stand little chance of completion, at least in the meantime. The debt market - known for cripplingly high interest rates - has arrested development, placing a premium on newly completed stock in the city centre.
The best premium - at this stage in the cycle - is for rentals. Though, there is increasing transactional activity in the sales market, people are still tentative. Prices for the best buildings are creeping up, but levels are suppressed. House price indices show muted performance in general terms, as certainty and confidence has yet to fully return to the market. But following the excellent performance of coal and gold in the first half of 2017, expatriate workers are returning and demanding high quality rental stock.
Figures from the National Statistics Office (NSO) show coal exports in May were up 264% compared with the preceding year- whilst the volume of gold doubled (NSO). Building on an exceptional first quarter, there has been a furry of announcements from junior and senior miners. Leading the pack, Rio Tinto is not only continuing its planned investments but has restarted exploration after a five-year hiatus. Aspire is raising a private placement to develop its Nurestei coal-coking project; Kincora has won a new exploration license, and Petro Matad, has extended its options. As the government doubles the amount of land for exploration, more expatriate workers are likely to arrive in the city.
Most mining staff come to Mongolia for short periods of time. They tend to not be purchasers, as often they have family and settled lives elsewhere. What they do tend to have, however, is large housing allowances, underwritten by even larger multinationals. Executives crave amenities and convenience. They do not care for long commutes, on congested highways. Their preference, therefore, is the city centre- Sukhbaatar, and to a lesser extent, Chingeltei. APIP believe yields of 9%-12% are still achievable in brand new, prime buildings.
Those who purchase now, are likely to ride the crest of a wave. Yields are strong, but rents are likely to grow rather than decline, meaning better returns on initial acquisition prices. Further, there are strong prospects for capital appreciation too. Prices have tended to reflect economic growth. The International Monetary Fund (IMF) predict an 8% expansion by 2019, placing Mongolia’s among the fastest growing economies in the world (IMF). This combined with the poor financial position of many developers, and a lack of land, will place upward pressure on sales prices.
The luxury market in UB- as it’s known- certainly still faces headwinds Its bailout from the IMF is still being executed, a new wrestler-cum- president has been elected, and Foreign Direct Investment (FDI), remains stubbornly low. But in the peculiar microcosm of luxury real estate, select opportunities present themselves for niche international investors with an eye for adventure.