real-estate-report-2015.pdf - Mongolian Properties

MONGOLIA

RUSSIA

CHINA

INDIA

NEPALBHUTAN

BANGLADESH

MYANMAR

THAILAND

LAOS

VIETNAM

Figure 1

MONGOLIA COUNTRY DATACOUNTRY BACKGROUND

Official Name Mongolia

Capital City Ulaanbaatar

Language Mongolian

Currency Tugrik

Population 2,930,277 (Jan 2014)

Land Area 1,564,110 km2

Number of Tourists 77,268 (Q12014)

Government Type Parliamentary Republic

Legislature Unicameral - 76 Seats

President Ts. Elbegdorj

Prime Minister Ch.Saikhanbileg

ECONOMIC INDICATORS

2014 Nominal GDP USD 11.52 billion

2014 Q3 GDP Growth 7%

2014 GDP Per Capita 4,056.40 USD (2013)

Foreign direct investment in Mongolia

16,842,879 million USD (2014Q3)

Foreign Reserves 1,398 billion USD (2014.10M)

USD Exchange Rate 1,888 MNT/1 USD (2014.12M)

Main Imports Cars, machinery equipment, construction materials, petrol

Main Exports Copper, Coal, Crude oil, Iron ore, cashmere

Inflation rate 12.1% (2014.10M)

External Trade Total Balance

131.4 USD millions (2014.10M)

CONTENT

Editor and Chief Analyst - Stuart Evans

Editorial Assistant - Ulsbold Harper

Editorial Assistant - Gema Gerelsaikhan

Design & Production - Shugarjav Batkhuyag

International Distribution - Batzul Gerelsaikhan

Analyst - Yanjindulam Tuvd

CHIEF INFORMATION OFFICER

Stuart Evans

[email protected]

HK Tel: (+852) 9177 2984

WEBSITE

www.mongolia-properties.comwww.apip.comwww.invest-mongolia.apip.com

PHOTO CREDITS

Flickr - Creative Commons - licensed content.

DISCLAIMER

Every effort has been made to ensure the accuracy of the information and data contained in this book however, the editors and the publishers accept no responsibility for any errors it may contain, or for any loss, financial or otherwise, sustained or incurred by any person or entity using this publication.

COPYRIGHT OF CONTENT

All rights are reserved in this publication. No part of this publication can be re-produced displayed, stored, or transmitted in any manner without the prior written consent of Asia Pacific Investment Partners.

COPYRIGHT OF MAPS

All maps within this document are the sole property of Asia Pacific Investment Partners. These are not intended for re-production, display, storage or transmission in any manner within the prior written consent of Asia Pacific Investment Partners.

8

303256627484

9294

110126146170

178180194206216228236

Thoughts from the CEO

1. COUNTRY CONTEXT1.1. Macroeconomics1.2. History1.3. Politics1.4. Legal System1.5. Tax System

2. ULAANBAATAR REAL ESTATE – SECTORAL ANALYSIS2.1. An Introduction to Ulaanbaatar2.2. Residential Sector2.3. Office Sector2.4. Retail Sector2.5. Hospitality Sector

3. ULAANBAATAR REAL ESTATE – DISTRICT LEVEL ANALYSIS3.1. Sukhbaatar District3.2. Chingeltei District3.3. Bayangol District3.4. Bayanzurkh District3.5. Songinokhairkhan District3.6. Khan-Uul District

TABLE OF CONTENTS

No. Discription Pg No.

1 World Map 3

2 Map of Ulaanbaatar Districts 26

3 Map of Ulaanbaatar’s Key Locations 28

4 Mongolia’s Explosive GDP Growth 36

5 Mongolia’s Diversifying Economy 37

6 Mongolia’s Experiencing Rapid Wage Growth 37

7 Mongolian Strategic Deposits 38

8 Oyu Tolgoi Ownership Structure 40

9 Oyu Tolgoi Mines 43

10 Mongolia Minerial Exports 45

11 Mongolian Imports 46

12 Mongolia’s Balance of Trade 47

13 Foreign Direct Investment Inflows 48

14 Mongolian Sovereign Bonds 51

15 Gross External Debt Position (USD Millions) 52

16 Mongolia Inflation rate 54

17 Mongolia Tugrik 54

18 Foreign Exchange Reserves (Billions MNT) 55

19 Total Outsanding Mortgage Loan and Year-on-year Growth Rate 55

20 Supreme Court of Mongolia 76

21Average Monthly Temperature in Ulaanbaatar 98

22 Air Pollution in Ulaanbaatar 98

23 Residential Market 103

24 Ulaanbaatar 2030 Master Plan 108

25 Mongolian GDP per Capita 113

26 Morgage Penetration in Ulaanbaatar’s Residential Market 114

27 Average Price (MNT) 119

28 Average Price (USD) 120

29 Price Growth (USD, %) 120


30 Rental Rate Per sqm (MNT) 121

31 Rental Rate Per sqm (USD) 121

32 Annualized Average Rental Yield (%) 121

33Newly Financed Mortgages vs. Refinanced Mortgages (in Million MNT) 122

34 Weighted Average Interest Rate of Mortgage Market (%) 123

35 Central Bank and Government Subsidized Mortgage Pool Status 123

36 Outstanding Mortgage Balance (MM MNT) and growth rate (%) 124

37 Ulaanbaatar Residential Real Estate Price Index 124

38 Ulaanbaatar Office Map 128

39Upcoming Office Supply Distributed by Quality 144

40 Rental Price Average (MNT/SQM) 145

41Average Rental Price of Four Landmark Properties 145

42 Ulaanbaatar Retail Map 148

43Rapidly Rising Wages for all income Categories 151

44 Total Retail Sales 152

45 Nominal GDO of Mongolia 152

46 Ulaanbaatar Retail Space is Undervalued 153

47 International Brands 155

48What would you say about your current performance? 157

49How is your brand doing compared to previous quarter? 157

50 What’s your future outlook on sales? 158

51Are you thinking of expanding current retail space? 158

52 Are you thinking of increasing number of sales outlets? 158

53 Which district are you thinking of expanding? 159

54 Prime Retail Space 162

55 Recent Developments 166

LIST OF FIGURES


56Travel & Tourism Economic Output (MNT Million) 172

57 Foreign visitors to Mongolia and annual change 173

58 Travel & Tourism Spending by Classification 173

59 Average Hotel Occupancy Rate 174

60 Stock of 5-star Hotel Rooms in UB 176

61 Hotel room rates / Occupancy Rates 176

62 Sukhbaatar District Map 182

63 Sukhbaatar District Population 188

64 Ulaanbaatar vs Sukhbaatar District Real Estate Price Index 193

65 Sukhbaatar District Apartments Over 80ms vs Under 80ms 193

66 Chingeltei District Map 196

67 Chingeltei District Population 201

68Ulaanbaatar vs Chingeltei District Real Estate Price Index 204

69 Chingeltei District Apartments Over 80ms vs Under 80ms 205

70 Bayangol District Map 208

71 Bayangol District Population 210

72Ulaanbaatar vs Bayangol District Real Estate Price Index 214

73Bayangol District Apartments Over 80ms vs Under 80ms 214

74 Bayanzurkh District Map 218

75 Bayanzurkh District Population 220

76Ulaanbaatar vs Bayanzurkh District Real Estate Price Index 225

77Bayanzurkh District Apartments Over 80ms vs Under 80ms 226

78 Songinokhairkhan District Map 230

79 Songinokhairkhan District Population 232

80 Ulaanbaatar vs Songinokhairkhan District Real Estate Price Index 234


81Songinokhairkhan District Apartments Over 80ms vs Under 80ms 234

82 Khan-Uul District Map 238

83 Khan-Uul District Population 241

84Ulaanbaatar vs Khan-Uul District Real Estate Price Index 252

85Khan-Uul District Apartments Over 80ms vs Under 80ms 252

THOUGHTS FROM THE CEOThere is no getting around the fact that 2014 was a tough year for Mongolia and consequently, Ulaanbaatar’s real estate market.Despite this, Mongolian Properties continued to perform well, completing the Village @ Nukht and making great progress on the Olympic Residence. The coming year will see the Olympic completed and construction begin on our new project, the Oasis Residence. Looking forward to 2015 in the wider economy, there are plenty of reasons to be positive despite difficulties in 2014.

In December 2014, FDI had fallen offaround 80% y-o-y, GDP growth estimates slowed to around7% for 2014 from 17.5% in 2011, and the local currency depreciated substantially, barely a week passing by without it hitting new highs against the US dollar. All this was set against a backdrop of falling commodities prices and a long running dispute between Rio Tinto and the Government of Mongolia at OyuTolgoi, which continued to rumble on unabated.

A stubbornly high inflation rate and rapidly falling currency reserves in the first half of 2014 caused the government to raise interest rates twice to 13% from 10.5%, the latest rise coming in January 2015. Along with falling FDI, this has caused the local currency to depreciate by 14% since December 2013. Despite this, currency reserves in the second half of 2014 remained fairly stable at around US$1.35bn.

However, there are reasons to be positive. The 2014 balance of trade came in at a US$538m surplus, much better than expected. The total value of exports increased by 45% y-o-y in volume; translating to a 35% increase in US dollar terms and amounting to US$5.78bn. Copper made up the lions share of exports and saw its share of export value double to 45%,despite copper prices steadily dropping throughout the year. Mongolia’s dependence on coal exports was also greatly reduced with volumes only growing 7% y-o-y, falling in export value terms to 15% from 26% in 2013.

The government also increased the “debt ceiling” to 60% of total GDP, self-imposedjust last year at 40%. The revised debt ceiling will gradually taper back to 40% of GDP by 2018 in line with IMF recommendations, but allows the government to borrow now since it is currently below the threshold. The Bank of Mongolia also doubled its gold reserves in 2014 to 6.4 tonnes.

Last November saw former Prime Minister NorovAltankhuyag resign after a vote of no confidence. Two weeks later Mongolia’s Parliament approved a new Prime Minister, appointing acting Cabinet Secretary Saikhanbileg Chimed to the job. Saikhanbileg promised to boost the economy and bring political stability to the country. As part of his acceptance speech, Saikhanbileg stated that his top three priorities were “the economy, the economy and the economy”.

A few weeks later, the opposition party, the Mongolian People’s Party (“MPP”), accepted an offer by the new Prime Minister to join a coalition with the ruling Democratic Party (“DP”). Saikhanbileg urged all to end political divisions and concentrate on improving the economy. Members of both parties now hold various important positions in the cabinet making up what is perceived by most as a true coalition. The “Grand Coalition” should provide a solid foundation for tackling key economic issues, the business communitybenefiting from the added cohesion emanating from the government.

Along with the cabinet reshuffle, the new Prime Minister appointed Minister Enkhsaikhan to solve the ongoing dispute between Rio Tinto and the government. He now leads a team of experts in moving forward strategically important projects such as OyuTolgoi, TavanTolgoi, and the new railway, power plant and airport projects. Since his appointment, real progress has been made at TavanTolgoi, with a tender successfully awarded in January 2015 to China Shenhua, Sumitomo Corporation and Energy Resources, a subsidiary of Mongolian Mining Corporation, to develop the mine.

Progress has also been made at OyuTolgoi. In January 2015 Rio Tinto promised to drop their royalty demands by $1.6bn if the government approved the underground expansion phase of the mine. The recently resolved tax agreement, approval of afeasibility study, and securing of itspower supply are also positive noise for the project. Clear steps have been made on either side of the table to resolve the dispute and one can only hope that an agreement can be reached quickly.

The government’s recent actions demonstrate an increased amount of nuance and flexibility when negotiating with corporates and the international community. This was evident in February 2015 with the presidential pardoning of Justin Kapla and two other former executives at South Gobi Resources, whom hadformerly been imprisoned under questionable tax evasion charges.

Off the back of a state visit by Chinese Premier Xi Jinping in the summer of 2014, Mongoliaconsiderably strengthened it diplomatic relations with China. China signed an agreement with Mongolia giving them preferential terms of use of China’s northeastern seaports, including the use of the railways in which to access them. This is great news for Mongolia as it looks to diversify its revenue streams, with recent high-level state visits from Japan, Korea and Russia compounding its efforts. There is also a three-year RMB15bn currency swap line currently in place with the People’s Bank of China, which will strengthen Mongolia in times of duress.

The property market has remained relatively robust over the past year and was initiallypositively affected by government policy. Although prices dipped in the second half of 2014, the 2013 mortgage program supported prices through the first half of the year, and the speed at which the program’s liquidity dried up is a testament to the appetite for mortgages among residents. Consumption patterns indicate that the new wealth created by the mining boom has created a broader middle class, which will positively impact the real estate market in the long term. The commitment of the government to moving people out of the ger districts will also affect demand for housing.

The tough macroeconomic situation over the past couple of years has no doubt negatively impacted the real estate market and caused pain among the business community in general. However, positive developments in the mining sector and good steps made by the government are reasons for optimism in 2015. Assets are available at depressed prices at a time when exports are increasing and real progress is being made at OyuTolgoi.

Mongolia remains one of the most exciting places in the world to invest and real estate remains the best and safest way to gain exposure.

Lee Michael Cashell

Chief Executive OfficerMongolian Properties LLC

April 2015

OUR PROFESSIONALSANDREW McGregor

Chief Financial Officer Expertise: Real Estate Sales & Purchase, Project Finance, Corporate Finance and Private EquityE-mail: [email protected] Skype ID: andrew.apip1 MN Mobile: (+976) 9595 1899HK Mobile: (+852) 9866 5294 Fax: (+976) 7730 0880

BATGEREL Erdenebaatar

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: batgerel.mp Tel: (+976) 7011 1800Mobile: (+976) 9595 7510 Fax: (+976) 7011 8100

BATZUL Gerelsaikhan

Business Development Manager Expertise: Real estate sales & purchase, property consultancy & market research E-mail: [email protected] Skype ID: gbatzul HK Mobile: (+852) 9841 8871MN Mobile: (+976) 9917 8790 Fax: (+852) 2805 7801

BAYARSAIKHAN Purevsuren

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: bayarsaikhan.mp Tel: (+976) 1132 4545Mobile: (+976) 9907 5797 Fax: (+976) 7011 8100

DAVAADORJ Sukhbaatar

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: davaadorj.mp Tel: (+976) 7730 0660Mobile: (+976) 9908 6899 Fax: (+976) 7011 8100

DANIEL Hanson

Director of Property Development Expertise: MRICS, Project Delivery, Development Management, Shopping Centre Delivery, Commercial Leasing, Asset ManagementE-mail: [email protected] ID: daniel.apip12 Tel: (+976) 7730 0550Mobile: (+976) 9499 2030 Fax: (+976) 7730 0880

DANIEL Press

Deputy COO Expertise: Commercial Sales, Private Equity Real Estate, Mergers & Acquisition, Project ManagementE-mail: [email protected] ID: danny.apip Tel: (+44) 207495 6611Mobile: (+44) 7540550655

ENKHBAYAR Chimeddorj

Vice Director Expertise: Real estate sales & purchase, property consultancy & market researchE-mail: [email protected] ID: enkhbayar.mp Tel: (+976) 7730 0550Mobile: (+976) 9908 2757 Fax: (+976) 7730 0880

ENKHMUNGU Damdinbal

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: enkhmungu.mp Tel: (+976) 1132 4545Mobile: (+976) 9595 7400 Fax: (+976) 7011 8100

GERELMAA Gerelsaikhan

Sales & Marketing Manager Expertise: Real estate sales & purchase, property consultancy & market researchE-mail: [email protected] ID: gerelmaagerelsaikhan HK Mobile: (+852) 9547 1204SG Mobile: (+65) 8122 5180 Fax: (+852) 2805 5781

GERELCHIMEG Batsaikhan

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: gerelchimeg.mp Tel: (+976) 7011 1800Mobile: (+976) 9406 1017 Fax:(+976) 7011 8100

KHULAN Batgerel

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: khulan.mp Mobile: (+1) 425 623 6225

LEE MICHAEL Cashell

Chief Executive Officer Expertise: Commercial Sales, Private Equity Real Estate, Property Investment Strategy, ResearchE-mail: [email protected]

ORGIL Ariunbold

Sales and Marketing Manager Expertise: Real Estate Sales & Rentals, Property Tours and ConsultancyE-mail: [email protected] ID: orgil.mp Tel: (+976) 7730 0660Mobile: (+976) 9900 5969 Fax: (+976) 7730 0880

OTGONBAYAR Ganbayar

Senior Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: otgoo.mp Tel: (+976) 7011 1800Mobile: (+976) 9595 7540 Fax: (+976) 7011 8100

OYUNDARI Enkhbat

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: oyundari.mp Tel: (+976) 1132 4545Mobile: (+976) 9595 7580 Fax: (+976) 7011 8100

STUART Evans

Chief Information OfficerExpertise: Real Estate Sales & Purchase and Market ResearchE-mail: [email protected] Skype ID: stuart.evans89 Tel: (+852) 2805 7792HK Mobile: (+852) 9177 2984 Fax: (+852) 2805 7801

TSENDSUREN Bordukh

President Expertise: Commercial Sales, Mergers and Acquisition of Real Estate and Land, Project ManagementE-mail: [email protected]

TULGA Enkhbat

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] Skype ID: tulga.mp Tel: (+976) 1132 4545Mobile: (+976) 9595 7570 Fax: (+976) 7011 8100

UDVAL Tulga

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: udval.mp Tel: (+976) 7730 0660Mobile: (+976) 9595 7520 Fax: (+976) 7011 8100

ULSBOLD Harper

Associate - Business Development Expertise: Real Estate Sales & Purchase and Market ResearchE-mail: [email protected] ID: ulsbold.apip Tel: (+44) 207495 6611Mobile: (+44) 7501919392

UYANGA Tumurgan

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: uyanga.mp Tel: (+976) 1132 4545Mobile: (+976) 9595 7560 Fax: (+976) 70118100

URANGOO Narankhuu

Real Estate Agent Expertise: Real Estate Sales & Purchase and Long and short term rentalsE-mail: [email protected] ID: urangoo.mp Tel: (+976) 7011 1800Mobile: (+976) 9595 7530 Fax: (+976) 7011 8100

Real Estate Sales & Purchase AssistanceLong & Short Term RentalsProperty ManagementProperty ConsultancyArchitecture & Interior Design Advisory

Website: www.mongolia-properties.com, E-mail: [email protected]

HEAD OFFICE:Suite 202, Regency Residence16 Olympic Street, 1st Khoroo, Sukhbaatar DistrictUlaanbaatar 1422016, MONGOLIATel: (+976) 7730 0550Fax: (+976) 7730 0880

CIRCUS OFFICE:48/14 Seoul Street, 4th Khoroo Sukhbaatar DistrictUlaanbaatar 14250, MONGOLIA Tel: (+976) 1132 4545Fax: (+976) 7011 8100

TEMPLE VIEW OFFICE:1/F, Temple View Residence12 Jamyan Gun Street1st Khoroo, Sukhbaatar DistrictUlaanbaatar 14240 MONGOLIATel: (+976) 7011 1800Fax: (+976) 7011 8100

Real Estate & Market ResearchFurnishing ServicesOverseas Property TransactionsProperty ToursLegal ServicesRelocation Assistance

THE NUMBER #1 REAL ESTATE AGENCY IN MONGOLIA

HONG KONG OFFICE: Unit 301 Winsome House, 73 Wyndham Street, Central, Hong KongTel: (+852) 2805 7792Fax: +852 2805 7801E-mail: [email protected]

LONDON OFFICE: 47 Charles Street, MayfairLondon, W1J 5EL Tel: +44 207495 6611E-mail: [email protected]

THE OLYMPIC RESIDENCE WILL FEATURE:

• 97 luxury apartments, including penthouses• Four floors of prime retail• IRR in excess of 30% for the first 3 to 5 years• Projected rental yields of 14.2%A limited number of duplexes and penthouses are now available at a special rate.

If you are interested in the Olympic Residence, please feel free to contact us at the following:

Mobile: (+976) 9595 7570, 9908 9950, 9595 7580Tel: (+976) 1132 4545 & (+976) 7011 1800E-mail: [email protected]: www.theolympicresidence.com

A LIMITED NUMBER OF DUPLEXES AND PENTHOUSES ARE NOW AVAILABLE AT A SPECIAL RATE.

OLYMPIC RESIDENCE

Government Palace

Central TowerUlaanbaatar Hotel

Regency Residence

DHL

Temple View

Monnis Tower

Blue Sky TowerState Department Store

Mongolian Properties

Naran Mall

Ulaanbaatar DepartmentStore

Central Post Office

National Amesument Park

Peace avenue

Olympi

c stre

et

Peace avenue

Peace avenue

Peace avenuePeace avenue

LOCATION

80%sold

VILLAGEThe

@ Nukht

The Village @ Nukht

Located between Ulaanbaatar and Chinggis Khaan International Airport, the scheme nestles in a small valley adjacent to the Bogd Khaan Mountains.

Nukht has traditionally served as a holiday destination for former government officials and their families. In recent years, a number of prominent families and affluent Mongolian businessmen have relocated to the area and have built large, Western-style, single-family homes and condominiums.

In accordance with the city masterplan, Ulaanbaatar is growing out west along the Yarmag Road. The Nukht valley lies just off this road and thus has potential to become a new luxurious hub outside of the central business district.

NOW LEASING

The VILLAGE @ Nukht feature:• 8 penthouse suites• 7,500 sqm of mixed use retail space• Only commercial space at Nukht Valley• Leasing incentives available

If you are interested in the Village @ Nukht, please feel free to contact us at the following:

Mobile: (+976) 9595 7540, 9595 7560, 9595 7520Tel: (+976) 1132 4545 & (+976) 7011 1800 E-mail: [email protected] Website: www.village-nukht.com

Location:

VILLAGEThe

@ Nukht

Duplex penthouse at THE REGENCY RESIDENCE

Master Bedroom with En-suite Bathroom and Terrace 4 Further Bedrooms, 4 Further Bathrooms, Dressing Room, Living/Dining Room, Kitchen, Office Room, Spacious rooftop terraces, Underground parking space.

Apartment size: 429m2

This duplex penthouse apartment is at the top floor of The Regency Residence and features high-specification contemporary interiors, generous outside space and breathtaking panoramic views. City living doesn’t get much better than this with a bird’s eye view of Ulaanbaatar from your own rooftop terrace.

The property comprises a hugely generous reception room, contemporary kitchen with open-plan dining space, spacious entrance hall, luxurious master bedroom with en suite facilities, four additional bedrooms with en suite shower rooms, utility room, four terraces.

If you are interested in the Regency Residence please feel free to contact us at the following:

Mobile: (+976) 9900 5969, 9907 5797, 9908 6899Tel: (+976) 1132 4545 & (+976) 7011 1800 E-mail: [email protected] Website: www.regencypenthouse.com

Lower Floor Layout Upper Floor Layout

FOR SALE

With a total GFA of 6,300 sqm, the 12 storey mixed-use Oasis Residence project will become one of the most sought after luxurious residential buildings in the heart of Ulaanbaatar.

The project occupies a prime location within the CBD, situated among the famous 40k & 50k apartments and in the heart of the entertainment district Seoul Street. Oasis is convenient to the Mongolian National Circus, many commercial arteries and all the main tenrtainment areas of Ulaanbaatar.

The mixed use development is aimed at middle and upper middle class families looking at settling in a great area, conveniently located walking distrance from the CBD and all major entertainment destinations.

OASIS RESIDENCE

OASIS RESIDENCE WILL FEATURE:

• 28 high quality residential units• Three floors of commercial space• Projected IRRs in excess of 30%• Projected yields of 13.9% per annum

If you are interested in the Oasis Residence, please feel free to contact us at the following:

Tel: (+976) 1132 4545 & (+976) 7011 1800E-mail: [email protected]: www.mongolia-properties.com/property-development/oasis-residence

LOCATION

Olympic Residence

Shangri-La

Temple View

Park View

State Department Store

Ulaanbaatar Department Store

Naran Mall

Grand Plaza

OASIS RESIDENCE

Blue Sky Tower

Government Palace

Central Tower

Regency Residence

Chinggis Khaan Square

State Circus

National Amesument Park

OFFICE SPACES, SERVICED APARTMENTS AND FUNCTION HOUSE.

FOR SALE AND

RENT

NORTH SPRING CAPITAL BLUE BUILDING

NSCB is a mixed-use building located along the Sun Road beside Traffic Police Headquarters.

Featuring : • Office Center located in Class A, semi-business district• Tall building in Ulaanbaatar. 13 story building with glass facade • Prime Office Suites: 7 floors of office space • Services Apartment: Luxury furnished 32 apartments • Convenience: Board meeting room, conference rooms, parking facilities • Recreation: Gym facilities, Entertainment lounge and roof top alfresco areas with

panoramic view of Ulaanbaatar city

If you are interested in the North Spring Capital Blue Building, please feel free to contact us at the following:

Tel: (+976) 1132 4545 & (+976) 7011 1800E-mail: [email protected]: www.mongolia-properties.com

Lobby

Office

SONGINOKHAIRKHAN DISTRICT

CHINGELTEI DISTRICT

SUKHBAATARDISTRICT

BAYANGOLDISTRICT

KHAN-UULDISTRICT

YARMAG AREA

ZAISAN AREA

STADIUM AREA

MAP OF ULAANBAATAR DISTRICTS

SUKHBAATARDISTRICT

BAYANZURKHDISTRICT

Bogd KhanMountain

ZAISAN AREA

STADIUM AREA

Figure 2

TBD Anduud

MAP OF ULAANBAATAR’S KEY LOCATIONS

Tengis MovieTheatre

Gandan Monastery

Bileg DefartmentStore

Urgoo MovieTheatre

UB PalaceMax Mall

Grand Plaza

Naran Mall



State Circus

Bogd Khan Museum

MongolianProperties

Viva City

Village @Nukht

YARMAG AREA

Bogd KhanMountain

Figure 3

Government Palace

IT Center


State Circus


Central Tower

Bogd Khan Museum

MongolianProperties

Temple ViewAcademic Theatre of Drama

Bayangol Hotel

Naran Plaza

Shangri-LaOlympic Residence

Regency Residence

Mon House

BayanmongolKhoroolol

Chinggis Hotel

SOS Medical Ulaanbaatar

Wrestling Place

Park View

SECTION 1

COUNTRY CONTEXT

32

MACROECONOMICS

SECTION 1.1

33

MACROECONOMICS

MACROECONOMICS

34

MACROECONOMICS

Executive Summary

Since 1992, Mongolia has adopted democratic ideals and free market principals, creating a stable business environment for the recent mining boom. As a result, the economy grew 17.5% in 2011, 12.4% in 2012, 11.7% in 2013 and is forecast to grow at a healthy pace for many years to come. Much of this growth has been powered by the huge copper/gold project at OyuTolgoi, owned by Rio Tinto and the Government of Mongolia. Ore extraction began at OyuTolgoi in February 2013, with commercial shipments beginning a few months later. However, progress has not been so straightforward.

Huge FDI inflows began to cool in 2012 with the introduction of a controversial foreign investment law. The drop off in FDI was exacerbated by poor commodities prices, a general retreat of capital from emerging markets, and the winding down of expenditures at OyuTolgoi. In October 2013, Parliament passed a new investment law much more open to foreign investment, revoking the old investment law in the process. But significant damage to investor sentiment was already done, with much of the investment community preferring to wait for progress at the OyuTolgoi mine, using the project as a litmus test for how the government would treat foreign investors in the future. Investors are still waiting for a resolution of the outstanding issues at the mine. Recent sounds and actions from the government have been positive, the newly appointed prime minister and his “grand coalition” making the delivery of stage II a priority.

By December 2014 FDI had fallen around 80% y-o-y. Despite this the 2014 balance of trade came in at a US$538m surplus, much better than expected. The total value of exports increased by 45% y-o-y in volume; translating to a 35% increase in US dollar terms and amounting to US$5.78bn. Copper made up the lions share of exports and saw its share of export value double to 45%, despite copper prices steadily dropping throughout the year.

Overview

Since at least the second millennia B.C., nomadic pastoralism has constituted the primary mode of existence in Mongolia. Despite intervening centuries of conquests, political upheavals, and technological development, the traditional nomadic herding economy continues to shape Mongolia up to the present day.

This nomadic outlook has fostered a flexible and pragmatic mindset amongst Mongolians, perhaps most evident in the nation’s willingness to experiment with novel institutional forms. Mongolia was the first country in Asia to adopt communism and the first to abandon it in favor of capitalism.

Shortly after the fall of China’s Qing Dynasty in 1911, Mongolia declared its independence. However, the nascent Mongolian state was quickly put under pressure by resurgent Chinese republican forces and various Russian factions. In order to preserve the nation’s independence,

“The economy grew 17.5% in 2011, 12.4% in 2012, 11.7% in 2013 and is forecast to grow at a similar pace for many years to come”

“Huge FDI inflows began to cool in 2012 with the introduction of a controversial foreign investment law”

“In October 2013, Parliament passed a new investment law much more open to foreign investment, revoking the old investment law in the process”

“Mongolia was the first country in Asia to adopt communism and the first to abandon it in favor of capitalism”

35

MACROECONOMICS

Mongolian leaders allied themselves with the burgeoning red Bolshevik army. In the process, Mongolia became a Soviet satellite, adopting a Soviet political structure and a command style economy based on collectivized herding, agriculture and state directed industry.

When the Soviet Union finally collapsed in the early 1990s, Mongolia was one of the first satellite nations to jump ship. A new constitution enshrining democratic ideals and free market principles was adopted in 1992. The transition to capitalism was not easy, however, as a large portion of the nation’s economic activity had been supported by direct and indirect Soviet subsidies. The sudden removal of these subsidies and the opening of the nation’s borders to international trade devastated local enterprises. The economy spiraled into a deep recession and Mongolians suffered though a number of very lean years as the country gradually learned to adapt to international competition and free market modes of production.

The mining boom of recent years has transformed Mongolia’s landscape both literally and figuratively. Modern skyscrapers and shopping complexes block out views of the steppe, whilst the entrance of international corporate giants has demanded sweeping reform in order to create a compliant business environment. In many ways, modern Mongolia seems as dynamic and cosmopolitan as any other emerging market. However, it is important to remember that dynamism and tradition are not conventional bedfellows, and such radical change is not without its challenges.

Traditional Mongolian nomadic life

Horse racing on the steppes

“The transition to capitalism was not easy, however, as a large portion of the nation’s economic activity had been supported by direct and indirect Soviet subsidies”

“The mining boom of recent years has transformed Mongolia’s landscape both literally and figuratively”

“Modern Mongolia seems as dynamic and cosmopolitan as any other emerging market”

36

MACROECONOMICS

Mongolia’s Growth Economy

Mongolia may never have registered on the radar of international investors if it was not for the explosive growth rates of the country’s gross domestic product (GDP) over the past several years. As the graph below demonstrates, Mongolia has been among the top economic performers in the world for most of the last decade and looks set to maintain its position as a growth powerhouse for many years to come.

The economy expanded at a staggering 17.5% pace in 2011. Growth has remained extremely strong if somewhat more moderate in subsequent years – 12.4% in 2012 and 11.7% for 2013. The growth rate for 2014 is projected to be 6.3% according to the World Bank, which reduced its forecast from around 9% in late 2014. The reason for the drastic reduction in growth rates over the past few years is largely due to political issues and an ongoing dispute between the government and Rio Tinto, explored in detail later in the chapter.

The 2012 election cycle gave rise to political conflicts and legal reforms that placed constraints on foreign investment in the minerals sector. 2012-13 also witnessed the beginning of a slowdown in China, which placed downward pressure on global commodity prices, thus limiting the profitability of Mongolian mineral exports. Despite these short run challenges, Mongolia remains one of the fastest growing economies in the world. With new investment promoting legislation and cost reducing infrastructure projects in the works, the potential is there for Mongolia to continue its unparalleled track record of growth for many years to come.

The country’s past and future performance is predicated upon significant discoveries in the mineral resource sector. Mongolia is now estimated to hold more than US $1.5 trillion in proven mineral reserves. The massive Oyu Tolgoi copper-gold mine in the southern Gobi Desert is alone is estimated to contain more than 37 million tonnes (81 billion pounds) of copper and more than 1,431 tonnes (46 million ounces) of gold.

10.6

7.38.6

10.28.9

-1 .3

6.4

17.5

12.4 11.7

6.3

-5 .0

0.0

5.0

10.0

15.0

20.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

GDP per capita (US$ current) Annual Growth %

Figure 4. Source: IMF

EXPLOSIVE GDP GROWTH

“Mongolia has been among the top economic performers in the world for most of the last decade”

“The economy expanded at a staggering 17.5% pace in 2011”

“Mongolia is now estimated to hold more than US $1.5 trillion in proven mineral reserves”

37

MACROECONOMICS

All this amazing mineral wealth has already been discovered with less than 30% of the country’s surface area explored. Initial investments in Mongolia’s mineral wealth propelled the economy forward at an explosive 17.5% growth rate in 2011. The development and exploitation of the deposits already uncovered are projected to keep the country’s growth locomotive moving forward at a double digit pace for the next several decades and the high probability of new discoveries in the future will only add fuel to the fire.

It would be a mistake to view Mongolia as a pure natural resource economy, however. Mining and corollary activities still make up less than 20% of gross domestic product and their predominance in the overall economy has actually fallen during the boom years. The mineral sector has served primarily as liquidity generating engine, which has spilled over, stimulating demand in other sectors of the economy. In fact, in recent years, the pace of expansion in the retail and financial sectors has been significantly faster than in the mining sector.

Despite perceptions of widening income equality, broad based economic expansion has trickled down to the general populace. Average monthly wages have more than doubled since 2009 and, with the exception of the financial crisis years, unemployment has fallen every year since it began to be recorded, in the mid 2000s.

This has led to the rise of a burgeoning consumer economy. Retail malls and exotic restaurants have sprung up alongside luxury housing developments and real estate prices have consequently soared.

0.0

5.0

10.0

15.0

20.0

25.0

2008 2009 2010 2011 2012 2013

AgricultureMiningManufacturingRetail

% o

f Tot

al G

DP

Figure 5. Source: NSO

MONGOLIA’S DIVERSIFYING ECONOMY

“All this amazing mineral wealth has already been discovered with less than 30% of the country’s surface area explored”

“the pace of expansion in the retail and financial sectors has been significantly faster than in the mining sector”

“Average monthly wages have more than doubled since 2009”

“Retail malls and exotic restaurants have sprung up alongside luxury housing developments and real estate prices have consequently soared”

1.000.0

800.0

600.0

400.0

200.0

0.0

20091/4

20093/4

20101/4

20103/4

20111/4

20113/4

20121/4

20123/4

20131/4

20143/4


MONGOLIA IS EXPERIENCING RAPID WAGE GROWTH

38

MACROECONOMICS

STRATEGIC DEPOSIT ESTIMATED RESOURCES LOCATION COMPANY STATE OR PRIVATE

OYU TOLGOI Copper 37 million tonnes, Gold 1.3 thousand tonnes Umnugobi, Khanbogd Turquoise Hill Resources, Rio Tinto,

Erdenes MGLState & Private

TAVAN TOLGOI Coal 1.4 billion tonnes Umnugobi, Tsogttsetsii Erdenes MGL, Erdenes TT, Energy Resource stock company

State & Private

NARIIN SUKHAIT Coal 500 million tonnes Umnugobi, GurvanTegs Qinhua-MAK-Nariin Sukhait LLC, South Gobi Energy Resources LLC Private

TSAGAAN SUVARGA Copper 324 thousand tonnes Dornogobi, Mandakh MAK Private

SHIVEE OVOO Coal 554.7 million tonnes Gobisumber, Shiveegobi Erdenes MGL, Shivee Ovoo JSC, State Grid Corporation of China

State & Private

ASGAT Silver 2.247 thousand tonnes, Copper 76.746 thousand tonnes BayanUlgii, Nogoon Nuur Mongolrostsvetmet LLC State

TUMURTEIN OVOO Zinc 885.3 thousand tonnes Sukhbaatar, Khuder Tsairt Mineral LLC Private

DORNOD Uranium 28.868 thousand tonnes Dornod, DashbalbarKhan Resources dispute Atom Mon and Russian state firm Atom Red Met Gold

Private

GURVAN BULAG Uranium 16.073 thousand tonnes Dornod, Dashbalbar CNNC China Private

MARDAI Uranium 1.104 thousand tonnes Dornod, Dashbalbar CNNC China Private

BAGANUUR Coal 240 million tonnes Ulaanbaatar, Baganuur Baganuur Joint Stock Company State

TUMURTEI Iron 229.5 million tonnes Sukhbaatar, Khuder Darkhan Black Iron Industry State

BOROO Gold 38 tonnes, Silver 5 tonnes Sukhbaatar, Bayangol Boroo Gold Private

ERDENET Copper 4.8 million tonnes, Molybdenum 131.034 thousand tonnes Orkhon, Bayan-Undur Erdenet Mining Corporation State

BUREN KHAAN Phosphorite 162.56 million tonnes Khuvsgul, Alag-ErdeneTalst Margad LLC, Tefas Mining LLC, Sutaikhentso LLC (China), Topruokhentso LLC (China)

Private

Mongolian strategic deposits

ABC DE FGI HJK LM Oyu Tolgoi ABC DE FGI HJK LM Shivee Ovoo

ABC DE FGI HJK LM Tavan Tolgoi ABC DE FGI HJK LM Asgat

ABC DE FGI HJK LM Nariin Sukhait ABC DE FGI HJK LM Tumurtein Ovoo

ABC DE FGI HJK LM Tsagaan Suvarga ABC DE FGI HJK LM Baganuur

ABC DE FGI HJK LM Mardai Dornod and Gurvan Bulag ABC DE FGI HJK LM Erdenet

ABC DE FGI HJK LM Tumurtei ABC DE FGI HJK LM BurenkhaanABC DE FGI HJK LM Boroo

39

MACROECONOMICS

STRATEGIC DEPOSIT ESTIMATED RESOURCES LOCATION COMPANY STATE OR PRIVATE

OYU TOLGOI Copper 37 million tonnes, Gold 1.3 thousand tonnes Umnugobi, Khanbogd Turquoise Hill Resources, Rio Tinto,

Erdenes MGLState & Private

TAVAN TOLGOI Coal 1.4 billion tonnes Umnugobi, Tsogttsetsii Erdenes MGL, Erdenes TT, Energy Resource stock company

State & Private

NARIIN SUKHAIT Coal 500 million tonnes Umnugobi, GurvanTegs Qinhua-MAK-Nariin Sukhait LLC, South Gobi Energy Resources LLC Private

TSAGAAN SUVARGA Copper 324 thousand tonnes Dornogobi, Mandakh MAK Private

SHIVEE OVOO Coal 554.7 million tonnes Gobisumber, Shiveegobi Erdenes MGL, Shivee Ovoo JSC, State Grid Corporation of China

State & Private

ASGAT Silver 2.247 thousand tonnes, Copper 76.746 thousand tonnes BayanUlgii, Nogoon Nuur Mongolrostsvetmet LLC State

TUMURTEIN OVOO Zinc 885.3 thousand tonnes Sukhbaatar, Khuder Tsairt Mineral LLC Private

DORNOD Uranium 28.868 thousand tonnes Dornod, DashbalbarKhan Resources dispute Atom Mon and Russian state firm Atom Red Met Gold

Private

GURVAN BULAG Uranium 16.073 thousand tonnes Dornod, Dashbalbar CNNC China Private

MARDAI Uranium 1.104 thousand tonnes Dornod, Dashbalbar CNNC China Private

BAGANUUR Coal 240 million tonnes Ulaanbaatar, Baganuur Baganuur Joint Stock Company State

TUMURTEI Iron 229.5 million tonnes Sukhbaatar, Khuder Darkhan Black Iron Industry State

BOROO Gold 38 tonnes, Silver 5 tonnes Sukhbaatar, Bayangol Boroo Gold Private

ERDENET Copper 4.8 million tonnes, Molybdenum 131.034 thousand tonnes Orkhon, Bayan-Undur Erdenet Mining Corporation State

BUREN KHAAN Phosphorite 162.56 million tonnes Khuvsgul, Alag-ErdeneTalst Margad LLC, Tefas Mining LLC, Sutaikhentso LLC (China), Topruokhentso LLC (China)

Private

Figure 7

40

MACROECONOMICS

Mineral Sector

During the Soviet era, Russian geologists were well aware of Mongolia’s vast mineral potential but for strategic reasons, few deposits aside from the Erdenet copper mine in the north of the country and a few coal occurrences near the capital were ever developed. Following the transition to capitalism, the sector began to develop gradually and organically, on a small and often informal artisanal level at first with ever larger and more organized interest entering the exploration field. Following the discovery of several world-class deposits in recent years, a number of large multinational corporate miners have entered the market. The result has been an explosion of foreign direct investment (FDI), which has made mineral exploration and extraction the new driving engine of the Mongolian economy.

To date, more than 1,170 mineral deposits and in excess of 7,654 mineral occurrences have been identified. It is estimated that Mongolia hosts more than $1.5 trillion USD in mineral reserves. This buried wealth includes deposits of copper, gold, silver, thermal and coking coal, iron, molybdenum, uranium, tungsten, tin, fluorspar, and the full suite of rare earths – to name just a few. The largest deposits discovered to date have been found in the southern Gobi desert region. However, less than 30% of the country’s surface area has been properly explored. Many more discoveries are expected in coming years, especially in the relatively underdeveloped western regions.

Of the many deposits currently in production or development, two deserve specific mention. The first of these is the internationally renowned ‘OyuTolgoi’ (meaning “Turquoise Hill”) gold and copper mine, often referred to simply as “OT”. OT is the third largest operating copper mine in the world and is ideally situated just 80km from the Chinese border. The project is managed through a joint venture between a consortium of international investors led by Rio Tinto who have a 66% stake in the project, whilst the Mongolian government controls the remaining 33% through its subsidiary firms Erdenes MGL and ErdenesOyuTolgoi. Research by Ivanhoe Mines estimates that the deposit contains more than 37 million tonnes (81 billion pounds) of copper and more than 1,431 tonnes (46 million ounces) of gold.

“To date, more than 1,170 mineral deposits and in excess of 7,654 mineral occurrences have been identified”

“Mongolia hosts more than $1.5 trillion USD in mineral reserves”

“The largest deposits discovered to date have been found in the southern Gobi desert region”

“OT is the third largest operating copper mine in the world”

Figure 8

Erdenes MGLLLC

Erdenes OyuTolgoi (33%)

Turquoise HillResources (64%)

RioTinto

Other stockholders

Oyu Tolgoi LLC

Mongolia

41

MACROECONOMICS

Extraction of ore at OT began in February 2013 and the first commercial shipments of copper concentrate commenced in July of the same year. Currently, only the Southern Oyu open pit section of the mine is in operation. Development of the much larger Hugo North underground section of the mine - where more than 70% of the ore is located - is on hold at the moment, pending the resolution of a dispute (details below) between the mine’s main operator, Rio Tinto, and the Mongolian government. When the mine is completed and fully operational, it is expected to contribute more than 30% of Mongolia’s GDP.

Standoff in the Gobi Desert: A breakdown of the Oyu Tolgoi Dispute

The Music Starts

The initial Investment Agreement (IA) was signed in October 2009, and the resulting FDI kicked off the initial mining boom that led to the record growth rates in 2011. The initial IA is effective for 30 years with the option to extend a further 20 years covering the majority of the projected life cycle of the mine. By the terms stipulated, the Government of Mongolia has the option to increase its holding to 50% with terms agreed with Rio Tinto controlled subsidiary Turquoise Hill (TRQ) at the time.

Key Terms of October 2013 IA:

1. Government Terms

• 25% corporate income tax• 5% royalties• 10% Value added tax• 5% customs duties• 20% withholding tax (subject to double taxation treaty reduced rates)

2. Additional Terms

• 2% royalty payable to TRQ• 6% of operating and capital costs payable to the Management Team

(Rio Tinto). This had been 6% and 3% of operating and capital costs respectively up to commercial production (September 2013)

Deposits at Oyu Tolgoi after 10 years of drilling shown to scale over Manhattan, NY

“When the mine is completed and fully operation, it is expected to contribute more than 30% of Mongolia’s GDP”

“The initial Investment Agreement (IA) was signed in October 2009, and the resulting FDI kicked off the initial mining boom that led to the record growth rates in 2011”

42

MACROECONOMICS

• The 34% funding provided by OT to the government will be repaid from the government’s share of cash flow accruing quarterly interest at LIBOR plus 6.5%

The Music Stops

The controversy started in 2011, at a time when Mongolia and the government were riding high on an economy stimulated by record levels of FDI. Parliamentary members demanded a renegotiation of the IA with Rio Tinto, requesting that royalty payments should be increased to 20% from the 5% initially stipulated in the agreement.

Phase I of the development was by this point well underway, and by September 2013 the mine came into commercial operation, triggering a clause in the 2009 IA relating to management pay as well as at last beginning to contribute to Mongolia’s current account in the form of exports. Although this was a huge milestone for the project, the vast majority (70%) of its resources lay in the underground portion of the mine, which would be financed in “Phase II”.

As the economy slowed in 2012 and 2013 amid legislation rashly passed by the government in response to a Chinese SOE takeover attempt of a key asset, the government’s challenges to Rio became more vociferous, culminating in Parliament submitting 22 points of dispute to Rio Tinto in July 2013. The main issues as seen by the government were:

• Cost of project financing (LIBOR + 6.5%) • Management Fee (6% of operating and capital and costs) • Phase I cost overrun from $4.1bn to $6.2bn • Disparities in pay between locals and expats • Repatriation of earnings and the structure of $5.1bn in funding

for phase two of the development • Unilateral cancellation of four dual taxation treaties in 2013,

including with the Netherlands (where OT is incorporated) • Amount due in taxation

Rio Tinto’s response to the points of dispute was to delay the financing of the more lucrative second phase of the project. In 2013, $4.1bn in project finance organized with the World Bank, US-EXIM and other commercial lenders was delayed. OyuTolgoi then paused its underground works and laid off 1,700 of its approximately 10,000 workers.

Fast forward into 2014 and still an agreement could not be reached. The furor at OT had observers in the foreign investment community waiting for a resolution before themselves committing capital, treating the project as a litmus test for how future investors would be treated by the government. As a result of this cautionary approach and stalled progress at the mine site, annual FDI had collapsed around 70% by September 2014.

“The controversy started in 2011, at a time when Mongolia and the government were riding high on an economy stimulated by record levels of FDI”

“Phase one of the development was by this point well underway, and by September 2013 the mine came into commercial operation”

“Rio Tinto’s response to the points of dispute was to stand firm and delay the financing of the more lucrative second phase of the project”

43

MACROECONOMICS

Progress at Last

Q3 and Q4 2014 saw real progress made in negotiations for the first time since the dispute began, as well as important political developments, which look likely to affect the project going into 2015. September 2014 saw the resolution of a tax dispute in which the Government of Mongolia reduced the bill to Rio Tinto to $30m from $130m. The newly appointed Prime Minister has also made it his mandate to restore growth in the economy, and has made explicit his desire to get OT moving forward as quickly as possible in order to do so. One suspects he will have to move quickly, with campaigning for the election in 2016 set to begin in earnest in the summer of 2015.

So what needs to happen? As of the end of 2014 there are still four major outstanding issues:

1. Resolving Shareholder Matters: From an outsider’s point of view, this is probably the most unclear of the outstanding issues. All issues are currently being debated behind closed doors but it is suggested that they are to do with value sharing. The current share split is relatively favorable to the Mongolian government, with Rio Tinto essentially running a Greenfield project for an effective 34% stake. That being said the government has legitimate concerns about cost overruns in Phase I and how to prevent such a scenario in Phase II.

2. Funding for Phase II: There are currently 15 banks participating in the $4bn debt facility – the largest ever project financing in the mining sector. They have already extended the loan terms twice (December 2013 and June 2014) and the current facility expired in September 2014.

3. Feasibility Study: The completed feasibility study has been submitted to the OT board but not to the Mongolian Government.

4. Permits: Some permits are yet to be award however this will probably be a minor obstacle.

Going into 2015, things are looking much more positive for OyuTolgoi. There seems to be a renewed commitment among the new Parliament members to get the situation resolved and secure the development of Phase II of the mine.

“Q3 and Q4 2014 saw real progress made in negotiations for the first time since the dispute began”

“September 2014 saw the resolution of a tax dispute in which the Government of Mongolia reduced the bill to Rio Tinto to $30m from $130m”

“Going into 2015, things are looking much more positive for Oyu Tolgoi”

Figure 9. Source: Turquoise Hill

44

MACROECONOMICS

Other Resources

Copper and gold have undoubtedly played a crucial role in the development of Mongolia’s mineral sector. However, it is likely that coal will be the country’s most important resource over the coming years. Mongolia possesses an estimated 163.2 billion tonnes of the mineral as opposed to just 77.3 million of copper.

The largest known deposit is at the ‘Tavan Tolgoi’ (meaning “Five Hills” in Mongolia) or “TT” site, located in the same southern province as OT, just 200 km from the Chinese border. The site is believed to be the second largest untapped reserve of coking coal in the world and contains more than 6.4 billion tons of the resource. Extraction of coal began as far back as 1960, but until recently, the mine has been functioning far below capacity and is subject to severe inefficiencies.

To develop the TT coalfield’s potential, the government has decided to split the project in two. The Eastern Tsankhi section it will develop alone, while the other “Western Tsankhi” branch will be opened up to foreign investment. The public sector operation is to be financed through a three way international equity IPO that will list shares in London, Hong Kong and Ulaanbaatar. Unfortunately, the much- vaunted IPO has been delayed several times. Political parties reportedly raided the companies coffers to help fund their 2012 election promises. The finances of TT are currently in rough shape and it does not seem likely that an IPO will occur before late 2015 at the earliest. In 2012, the government began courting international investors to fund the development of the private “West Tsankhi” venture. However, after carrying out an initial tender process, the government decided to backtrack and start over. The West Tsankhi branch is currently being mined on a short-term contract by a consortium of local Mongolian companies. A new international tender process to award long term operating rights to the western block commenced in late 2014.

With its vast mineral wealth and strategic location between Russia and China, Mongolia has the potential to supply the raw materials needed to sustain the development two of the largest BRIC growth economies.

“Mongolia possesses an estimated 163.2 billion tonnes of the mineral as opposed to just 77.3 million of copper”

“The largest known deposit is at the ‘Tavan Tolgoi’ (meaning “Five Hills” in Mongolia) or “TT” site”

“The public sector operation is to be financed through a three way international equity IPO that will list shares in London, Hong Kong and Ulaanbaatar”

“Unfortunately, the much- vaunted IPO has been delayed several times”

“The finances of TT are currently in rough shape and it does not seem likely that an IPO will occur before late 2015 at the earliest”

Work continues at OyuTolgoi

45

MACROECONOMICS

At the moment, China receives more than 90% of Mongolia’s exports. China’s monopsony is a constant cause for concern and consternation for Mongolian leaders. Resource revenue is perceived to be at the mercy of Chinese protectionism, infrastructural bottlenecks and imperfectly competitive price setting regimes. Mongolian leaders are eager to diversify their revenue base and export to new markets.

Even more than diversification, the Mongolian minerals industry desperately needs to develop its transportation infrastructure. To date, the majority of mineral ore exports are trundled to the Chinese border across miles of unpaved desert terrain in large trucks and lorries. Inefficient transport raises the price of Mongolian exports and limits the country’s ability to compete as a low cost producer in distant markets.

The government is undertaking rail and road network renewal projects in order to ease some of these concerns. Expanded service links to both China and the Trans- Siberian Railway will logistically connect OT and TT to the ports’ of Russia’s Pacific Coast. Access to naval trade through both of Mongolia’s neighbors is being negotiated and is expected to ensure a fair price is met for the country’s extracted minerals. The threat of Chinese monopsonistic abuse will be greatly reduced once these projects are realized. Competitive international commodity prices will allow Mongolia to convert its mineral exports into real tangible wealth that will benefit its people.

Imports and Exports

Mongolia’s main exports consist of mineral ores used to produce industrial commodities and precious metals. Coking coal is by far the most significant in terms of both volume and value. Copper comes in second followed closely by iron ore. Gold and Zinc concentrates are also a significant source of export revenue and foreign exchange.

Exports of secondary importance include other minor metal concentrates as well as textiles produced from wool and cashmere products. More than 90% of the country’s exports go directly to China, a fact which fuels a sense of dependence and insecurity regarding the southern neighbor.

“China receives more than 90% of Mongolia’s exports”

“Mongolian leaders are eager to diversify their revenue base and export to new markets”

“The government is undertaking rail and road network renewal projects in order to ease some of these concerns”

“Coking coal is by far the most significant in terms of both volume and value. Copper comes in second followed closely by iron ore”

0.00200.000.00400.000.00600.000.00800.000.00

1.000.000.001.200.000.00

2005.06

2006.06

2007.06

2008.06

2009.06

2010.06

2011.06

2012.06

2013.06

2014.06

USD

thou

sand

s

CoalCopper concentrateIron ores


MONGOLIAN MINERIAL EXPORTS

46

MACROECONOMICS

In 2011, Mongolian exports achieved an all time high, riding on the back of the global commodities boom and a local FDI-led mineral extraction bonanza. In this year, Mongolia exported $2.27 billion USD worth of coking coal, $968 million USD in copper concentrate and more than $100 million USD in gold products. However, 2012 witnessed a slowdown in China, which took the wind out of the commodity boom’s sails. Mongolia’s export revenue dropped sharply in response. The country exported just $1.9 billion USD worth of coking coal and $838 million USD in copper. Gold, in its critical role as a store of value, held onto its high price position until early 2013 and as a result Mongolian gold exports actually expanded slightly over the course of the year, to $122 million USD. Export volumes moved faster in 2014 with the open phase of Oyu Tolgoi in operation. In Q2 2014 OT recorded a 320% year-on-year increase in copper exports.

Export prices and volumes look set to grow modestly going into 2015. As China’s slowdown stabilizes and industrial inventories are drawn down, copper and coking coal should recoup lost ground.

In the meantime, the fall in export revenue is placing severe strain on the Mongolian economy. The country relies on imports to meet some of its most basic necessities, including fuel, electricity, most durable goods and even dietary staples like flour. The prices of these goods do not fall in tandem with industrial commodities. As a result, Mongolia’s import demand is much less elastic than its export supply. Mongolian mineral extractors are unwilling to export at a loss during global commodity price downturns but local consumers are forced to bring in products from abroad to maintain their standard of living, regardless of global conditions. Import demand soared even faster than exports as Mongolians became wealthy during the commodity boom years of 2010-2011 but demand has been slow to adjust in response to the decline in exports. Import volumes actually expanded over the course of 2012 and remained robust throughout 2013 and 2014. As a result, the country’s trade balance deteriorated, dragging down the current account. Throughout most of 2011 and 2012, the decline in the current account was offset by the massive flood of FDI into the capital and financial accounts. However, the sudden decline of FDI in the second half of 2012 led to a scarcity of foreign exchange entering the economy. As a result, the currency depreciated rapidly and foreign reserves began to decline in 2013, which eased pressure on current account in 2014.

“In this year, Mongolia exported $2.27 billion USD worth of coking coal, $968 million USD in copper concentrate and more than $100 million USD in gold products”

“The country exported just $1.9 billion USD worth of coking coal and $838 million USD in copper”

“Mongolian gold exports actually expanded slightly over the course of the year, to $122 million USD”

“As a result, Mongolia’s import demand is much less elastic than its export supply”

0.00

20.000.00

40.000.00

60.000.00

80.000.00

2005.01

2006.01

2007.01

2008.01

2009.01

2011.01

2012.01

2013.01

2014.01

USD

thou

sand

s

ElectricityFlourPetrol


MONGOLIAN IMPORTS

47

MACROECONOMICS

The 2014 balance of trade came in at a US$538m surplus, much better than expected. The total value of exports increased by 45% y-o-y in volume; translating to a 35% increase in US dollar terms and amounting to US$5.78bn. Copper made up the lions share of exports and saw its share of export value double to 45%, despite copper prices steadily dropping throughout the year. Mongolia’s dependence on coal exports was also greatly reduced with volumes only growing 7% y-o-y, falling in export value terms to 15% from 26% in 2013.

Foreign Direct Investment

In many ways, foreign direct investment has been the real driver of growth over the past decade. Gross capital formation has expanded faster than any other form of economic expenditure and the majority (more than 70%) of the funds used to expand the capital stock have come from foreign sources.

Foreign investment has been directed primarily into the minerals sector but the rising tide of FDI has spread outward to contractors and service providers, lifting all sectors of the economy. Significant amounts of foreign capital have also been injected into the banking sector (e.g. Goldman Sachs in Trade and Development Bank), the telecom sector (Sumitomo Corporation in NewCom Group), and the real estate sector (Asia Pacific Investment Partners in Mongolian Properties).

The single largest foreign invested project, indeed the single largest project in Mongolia’s history, is the OT copper gold mine, described above. As the graph below illustrates, the OT project is responsible for a very large portion of the FDI that has entered the country over the past several years. The sudden decline of foreign investment in 2012 is due in large part to the winding down of expenditures related to the open pit first phase of OT’s construction. The global retreat of capital from emerging markets as developed economies recover is another factor that contributed to the fall in FDI. However, shifts in Mongolia’s domestic investment policy and local electoral politics also played an important role.

“Gross capital formation has expanded faster than any other form of economic expenditure”

“Foreign investment has been directed primarily into the minerals sector”

“Significant amounts of foreign capital have also been injected into the banking sector (e.g. Goldman Sachs in Trade and Development Bank), the real estate sector (Asia Pacific Investment Partners in Mongolian Properties)”

Figure 12. Source: www.tradingeconomics.com | Mongol bank

MONGOLIA’S BALANCE OF TRADE

48

MACROECONOMICS

As the politics section below discusses, Mongolia has had an uneasy and occasionally violent historical relationship with its large southern and northern neighbors. As recently as a century ago, Mongolia was a province of China’s Qing Empire. Mongolia has long feared that its southern neighbor’s hunger for resources would eventually drive it to re-assert control and violate the nation’s independence. This tense relationship with foreign powers combined with the new era of free market capitalism and FDI driven growth has triggered a wave of xenophobia. Locals, shocked by the flood of foreign investors buying up Mongolian assets, have become concerned that the nation’s resources are being unfairly exploited. Populist politicians have taken advantage of this sentiment to stir up fear in order to win elections and maintain power.

This sentiment came to a head in early 2012, when the Aluminum Corporation of China Limited (CHALCO), a Chinese state owned company, made a bid to acquire control of South Gobi Resources, a major local coal producer. China already buys more than 90% of the coal that Mongolia produces and Winsway Coking Coal, another Chinese company, is the biggest player in the purchasing and transportation market for Mongolian coal. Politicians stirred up fears that if Chinese companies obtained significant production stakes in addition to dominating sales and transport, they would control the entire supply chain of a very critical national industry. In the build-up to the 2012 parliamentary elections, most members of parliament were eager to show their nationalist credentials and score populist points in order to gain votes. As a result, the Chalco deal, which would have been a hot button issue at any point in time, started a political furor. In May of 2012, just a few weeks before the parliamentary elections, Mongolia passed the now infamous Strategic Entities Foreign Investment Law (SEFIL) by a wide margin. The law stated that any foreign investment of over $75 million USD or any foreign investment of any size that targets the mining sector or other sectors deemed “strategic” must be reviewed and approved by Parliament. The government simultaneously launched an aggressive legal campaign against South Gobi and several members of its foreign employees.

“China already buys more than 90% of the coal that Mongolia produces”

“Politicians stirred up fears that if Chinese companies obtained significant production stakes in addition to dominating sales and transport”

“The government simultaneously launched an aggressive legal campaign against South Gobi”

0

500

FDI has fallen even as exports have declined. The majority of the downturn is due to OT.

OT Investment Agreement Signed

SEFIL Passed

Total FDI Estimate of OT FDI Contribution

Q1-

2009

Q3-

2009

Q1-

2010

Q3-

2010

Q1-

2011

Q3-

2011

Q1-

2012

Q3-

2012

Q1-

2013

Mill

ions

USD

1,000

1,500

Figure 13. Source: Mongolbank, APIP Estimates

FOREIGN DIRECT INVESTMENT INFLOWS

49

MACROECONOMICS

Although its passage was motivated by valid concerns, the SEFIL’s ambiguous and aggressive provisions elicited a strong negative reaction from foreign investors. FDI inflows immediately began to cool.

In December of the same year, foreign investment received another blow when President Ts. Elbegdorj introduced a “Draft Law” designed to reform the nation’s mineral sector. The draft, though well intentioned, contained a number of provisions that investors found unpalatable, including binding production targets; the state’s right to take an ownership stake in many projects without contributing capital, and strict community approval guidelines.

A few months later, the President was on camera again, exhorting the government to pay more attention to development of the OyuTolgoi mine saying, “It is important that the government take the OyuTolgoi matter into its own hands.” The international press ran away with the story. Coming on top of the unfavorable laws passed earlier, the 2013 dispute with Rio Tinto and the other developers of the OyuTolgoi mine further soured the investment community’s sentiment on Mongolia.

“The draft, though well intentioned, contained a number of provisions that investors found unpalatable”

Parliament meets in the Great Khural

APIP

Foreign Invested Companies in Mongolia

50

MACROECONOMICS

In 2013 FDI dropped off more than 40% since year on year since the Chalco incident and, even on the passing of a new investment law in late 2013, FDI had dropped almost 70% year on year in late 2014.

However, the effect of the Chalco incident is greatly exaggerated. The most important exogenous factor is the simple fact that construction of the first open pit stage of the OT project began to wind down in mid 2012, around the same time as the Chalco controversy set off. Initial investments in OT accounted for a very large portion of the FDI upsurge in 2009-2011. The 2012 drop-off in expenditures was largely planned and had little connection to the ongoing political controversies. Delays in the second underground stage of the mine’s development are, however, directly related to domestic politics (discussed above).

Cognizant of the drop off in FDI and its dramatic negative impact on the economy, Mongolia’s Parliament called an emergency session in late September 2013. No regulations were passed during the session but a number of bipartisan proposals were floated regarding legislative changes that might help to lure capital back to Mongolia. During the first week of the regular fall session staring in October, parliament passed a new investment law designed to encourage FDI. The new law supersedes all prior investment laws, canceling the controversial SEFIL, and erases many of the former distinctions between foreign and local investors, limiting restrictions to foreign state owned firms. It is based on “stability agreements” that lock in tax rates, royalty payments and other regulations for investors of capital that pass predetermined thresholds.

The stability agreements delivered under the law provide investors with a guarantee that the profitability of their projects will not be subject to the whims of future elected regimes, thus significantly reducing sovereign risk. The exact length of the stability agreement guarantee depends on the amount of capital invested and the region where the project is developed, capital invested in Mongolia’s less developed provinces receiving preferential treatment. Its world-class mineral reserves hold incredible allure and will almost certainly be developed by one source of financing or another. However, if the country cannot maintain the confidence of large institutional investors from the developed world, it may be forced to turn to China for the capital required to develop its deposits. Ironically, by aggressively attempting to fend off advances from its southern neighbor, Mongolia may have played directly into its hands.

Pivot to the North and South

Against a backdrop of plummeting FDI, a local currency in free-fall and with negotiations stalled at Oyu Tolgoi, mid-late 2014 saw a number of high profile visits from neighboring heads of state. In August, Xi Jinping became the first Chinese President to visit Mongolia in more than a decade, pledging to double trade to $10bn by 2020 with a focus on infrastructure, transportation and financing requirements.

“In 2013 FDI dropped off more than 40% since year on year since the Chalco incident”

“FDI had dropped almost 70% year on year in late 2014”

“Delays in the second underground stage of the mine’s development are, however, directly related to domestic politics”

“The stability agreements delivered under the law provide investors with a guarantee that the profitability of their projects will not be subject to the whims of future elected regimes, thus significantly reducing sovereign risk”

“If the country cannot maintain the confidence of large institutional investors from the developed world, it may be forced to turn to China”

“In August, Xi Jinping became the first Chinese President to visit Mongolia in more than a decade, pledging to double trade to $10bn by 2020”

51

MACROECONOMICS

South Korean Foreign Minister Yun Byung-se followed with cooperation agreements on bilateral trade and national security, and Russia’s President Vladamir Putin visited in early September. Many hope that these visits, and a resolution at Oyu Tolgoi, will be enough to encourage foreign investment to return.

The Tugrik showed signs of stabilizing off the back of Xi Jinping’s visit, rallying for the first time in recent memory to around MNT1820 to the US dollar. The Chinese president increased the value of the currency swap agreement between the central banks from RMB10bn to RMB15bn, bolstering Mongolia’s weak external position. Hastened perhaps by western sanctions, Putin agreed to lift import duties on Mongolian meat, which should help develop the agricultural sector. There were also a number of trilateral agreements made with agreements on future infrastructure projects as part of China’s “new silk road” venture.

Fiscal Policy

With its booming resource sector, robust economic growth and moderate tax code, Mongolia has all the basic elements in place needed to achieve fiscal solvency and sustainable public finance. Unfortunately, in recent years, fiscal policy has deviated from its ideal path and public debt has started accumulating at a rapid rate.

In theory, public expenditure is meant to be countercyclical – with the government running surpluses when commodity prices are high and financing deficits from the saved funds when commodity prices are low. In reality, spending tends to be pro-cyclical and more closely related to the election cycle than the price of global commodities.

Mongolian Sovereign Bonds (Chingis Bonds)

S&P FITCH MOODY’sSIZE RATE MATURITY

Rating Outlook Rating Outlook Rating Outlook

B+ Stable B+ Stable B2 Negative1

Billion USD

5.125 5/1/2018

B+ Stable B+ Stable B2 Negative500

Million USD

4.125 5/12/2022

2012 saw an acceleration of expenditure going into and coming out of the elections. The year wrapped up with a record fiscal deficit equal to 8.4% of GDP. Nearly 30% of expenditure went to finance subsidies and social transfer programs. In response, the legislature passed a new fiscal sustainability law (FSL), which stipulated that future deficits could not exceed 2% of GDP.

Figure 14. Source: Bloomberg .com, Moody’s investor’s service materials

52

MACROECONOMICS

The fragile fiscal outlook becomes even less appetizing when off budget expenditures are included. In 2012, the government and the Development Bank of Mongolia (DBM) issued more than 1.5 billion dollars in international bonds - including the so-called Chingis Bond – in order to finance large-scale infrastructure projects. If expenditures related to these bonds were to be accounted for in the budget, it would likely add an additional 7% of GDP on top of the deficit of the approved budget, pushing the total fiscal deficit up to nearly 14% percent of GDP. An IMF Mission to Mongolia echoed these fears in an October 2013 announcement:

“At the same time, the mission noted that an increasing amount of government spending is taking place outside the budget. This is not consistent with the Fiscal Stability Law’s main objective of “ensuring fiscal stability.” The off-budget spending is implemented by the Development Bank of Mongolia (DBM), and is financed from the sovereign bond proceeds. It is essential to establish a legal framework for the inclusion of DBM spending in the budget.”

“It is recommended that the authorities draw up an ambitious and credible fiscal consolidation plan aimed at meeting the 2-percent of GDP ceiling for the structural deficit (including DBM operations) over the medium term. In this regard, it is encouraging that the government is planning to slow the pace of DBM spending during the remainder of this year and is reviewing relevant plans going forward.”

By the second quarter of 2013, public sector debt had risen to nearly 60% of GDP, the majority in foreign denominations. DBM placed a ¥30bn ($290m) 10-year samurai bond in December 2013, the money raised for much needed infrastructure projects. This, combined with the current account and currency depreciation difficulties noted above as well as the fact that most revenue is in local currency, put the government in a rather vulnerable position going into 2014. Despite this Mongolia’s debt-to-GDP ratio came down considerably in 2014. The FSL stipulates that the ratio must not exceed 40% and, although at around 50% at the beginning of 2014, by September the ratio had come down to around 44% according to the former finance minister.

“In 2012, the government and the Development Bank of Mongolia (DBM) issued more than 1.5 billion dollars in international bonds - including the so-called Chingis Bond”

“It is essential to establish a legal framework for the inclusion of DBM spending in the budget”

“By the second quarter of 2013, public sector debt had risen to nearly 60% of GDP”

“BM placed a ¥30bn ($290m) 10-year samurai bond in December 2013”

5.000.0

-

2010

.Q1

2010

.Q2

2010

.Q3

2010

.Q4

2011

.Q1

2011

.Q2

2011

.Q3

2011

.Q4

2012

.Q1

2012

.Q2

2012

.Q3

2012

.Q4

2013

.Q1

2013

.Q2

2013

.Q3

2013

.Q4

2014

.Q1

2014

.Q2

10.000.0

15.000.0

20.000.0

25.000.0

Gross External Debt Position (USD millions)

Figure 15. Source: Mongolbank

GROSS EXTERNAL DEBT POSITION (USD MILLIONS)

53

MACROECONOMICS

“The Trade and Development Bank of Mongolia raising around RMB700m ($115m) at a 10% yield”

“The Mongolian financial sector consists of 14 commercial banks, 188 nonbank financial institutions (NBFIs)”

“The four largest banks – Khaan Bank, Golomt Bank, Trade and Development Bank and Xac Bank – control more than 75% of the loan market”

However, with the changing of the government in late 2014 came a change of direction, the government increased the “debt ceiling” to 60% of total GDP. The revised debt ceiling will gradually taper back to 40% of GDP by 2018 in line with IMF recommendations, but allows the government to borrow now. In the same period the Bank of Mongolia also doubled its gold reserves in 2014 to 6.4 tonnes.

January 2014 saw Mongolia get its first taste of RMB denominated dim-sum bonds, the Trade and Development Bank of Mongolia raising around RMB700m ($115m) at a 10% yield. Moody’s rating agency estimates that Mongolia’s total external debt was around $20bn at the start of 2014, or 167% of GDP. This is up from 158% of GDP in 2013. As a share of current account receipts, the external debt rose much more steeply to 325% in 2013 from 162% in 2011.

Closed Deals

Offering Year Issuing Entity Amount Type

2010 Trade Development Bank $25 million

US Dollar Denominated

Bond

2012 Development Bank of Mongolia $580 million

2012 Mongolia Mining Corporation $600 million

2012 Trade Development Bank $300 million

2013 Development Bank of Mongolia JPY 30 billion ($300 million) Samurai Bond

2014 Development Bank of Mongolia RMB 700 million ($115 million)

Dim Sum Bond

Mongolia’s incredibly strong tax base and growth fundamentals should allow the government to correct its fiscal position, provided the FSL is respected and politicians can resist the lure of continued off budget spending moving forward.

Monetary Policy & Banking Sector

The Mongolian financial sector consists of 14 commercial banks, 188 nonbank financial institutions (NBFIs), and about 207 savings and credit cooperatives (SCCs). The four largest banks – Khaan Bank, Golomt Bank, Trade and Development Bank and Xac Bank – control more than 75% of the loan market. All financial institutions undergo strict supervision by Mongol Bank, the country’s central bank.

54

MACROECONOMICS

Mongol Bank’s mandate is focused almost entirely on maintaining price stability both in the local economy – through careful monitoring of local consumer prices – and in the external sector – through market-oriented management of the exchange rate.

On the local side, in 2012 the bank successfully introduced a price control program, which brought inflation down below 10% for the first time in nearly three years. On the external side, Mongol Bank learned a harsh lesson during the 2009 financial crisis when it tried, unsuccessfully, to intervene in the foreign exchange market.

The bank emerged from this ordeal with severely reduced reserves. Mongol Bank’s directors learned not to fight the market head-on and have instead been intervening on a more subtle and limited scale during the 2013 exchange rate spike. The bank has been acting to curb panic and maintain overall liquidity in the system instead of trying to hammer the exchange rate down.

The increasing current account deficit noted in the import and export section above combined with the recent drop in FDI have placed downward pressure on the Mongolian Tugrik, which the fall in reserves has only partially offset.

The local financial community received a jolt in July 2013 when Savings Bank, anointed the “Best Managed Bank in Mongolia” by The Asian Banker magazine just a few months earlier, announced that it was insolvent and would be taken over by the Mongolian government and restructured.

1000

1200

1400

1600

1800

2000

1000

1200

1400

1600

1800

2000

Jan/10 Jan/12 Jan/14

Figure 17. Source: wwww.tradingeconomics.com, OTC Interbank

MONGOLIA TUGRIK

“Mongol Bank’s directors learned not to fight the market head-on and have instead been intervening on a more subtle and limited scale”

-5Jan/10 Jan/12

Annual Change Consumer Price Index

Jan/14

0

5

10

15

20

25

-5

0

5

10

15

20

25

Figure 16. Source: wwww.tradingeconomics.com, Mongolbank

MONGOLIA INFLATION RATE

55

MACROECONOMICS

“Savings Bank was undoubtedly a small outlier case of poor corporate governance, but its failure raised concerns regarding the rest of the banking sector”

“One of the fastest growing areas of Mongolia’s financial sector is the local mortgage market”

“Housing prices in the lower and mid range of the market have appreciated in response to this policy”

It was later revealed that bank had made several large failed loans to its parent company, Just Group. Savings Bank was undoubtedly a small outlier case of poor corporate governance, but its failure raised concerns regarding the rest of the banking sector, which witnessed a 40% YOY expansion in loan volume during the first half of 2013. Mongol Bank has since taken steps to tighten supervision and increase reserves and there would appear to be little systemic risk.

One of the fastest growing areas of Mongolia’s financial sector is the local mortgage market. In July of 2013, the government announced a new subsidized loan policy that reduced the average mortgage interest rate down from 20% to 8%. In just a few short months since the policy was implemented, more than 8,000 new mortgages had been issued and more than 16,000 existing mortgages had been refinanced.

The initial capital allocation (around $700m) provided by the Chingis bonds for the policy was fully used up by the end of 2013. The government since has been trying to raise money from other sources to fund the program.

The policy has lowered market wide rates, effectively increasing disposable income for middle class families. Housing prices in the lower and mid range of the market have appreciated in response to this policy (see Residential Sector)

0

500

1,000

1,500

2,000

2,500

3,000

-15

-15

5

25

45

65

85

125

145

2468 10 12 2468 10 12 2468 10

Financed by "Housing Mortgage Program"Financed by other sources

Financed by commercial bank own capitalYear-on-year growth rate (secondary axis)

Figure 19. Source: wwww.tradingeconomics.com, Mongolbank

TOTAL OUTSANDING MORTGAGE LOAN AND YEAR-ON-YEAR GROWTH RATE

0500

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

1410001500200025003000350040004500

Chingis Bond Issued

Figure 18. Source: Mongolbank

FOREIGN EXCHANGE RESERVES (BILLIONS MNT)

56

HISTORY

SECTION 1.2

57

HISTORY

HISTORY

58

HISTORY

Executive Summary:

Mongolia’s most famous leader, Chingis Khan, ruled in the 13th century over an empire which at its peak stretched from modern day Iraq to the Korean peninsula. Chingis Khan, though brutal on the battlefield, was a great leader in the civil realm, promoting trade, technology and religious tolerance, resulting in a period of political stability known as “PaxMongolica”. Mongolia fell under control of the Ming dynasty at the end of the 14th century, and it remained under Chinese rule until the early 20th century. In 1911 Mongolia was swept up into the Soviet empire, becoming the second communist nation in the world and the first in Asia. After the collapse of the Soviet Union, Mongolia’s ruling party stepped down and democratic elections were held later the same year. Since 1990 Mongolia has embraced democratic ideals and free market principals.

Overview

The territory of modern day Mongolia has been occupied by human inhabitants since the Paleolithic era. Archeological evidence indicates that agricultural practices arrived as early as 5,000 BC. With the introduction of the horse in in the third millennium BC, pre-historic Mongolia underwent a major revolution. Horse dependent pastoral nomadism rapidly became the primary mode of existence in the region and has remained so through to the present day.

At various points in their history, the nomads of Central Asia have united to form prominent warlike confederations,usually centered around a great chieftain or warlord. The story of the Mongolian nation begins with the greatest of these chieftains, Chingis (Genghis) Khan, in the early 13th century.

In the West, Chingis is largely remembered for his brutality and military acumen. In Mongolia, however, Chingis is revered as the founding father of the nation and is celebrated for his wisdom and civilizing influence even more than for his martial prowess. Chingis and his warriors, of course, slaughtered millions during the course of their campaigns, and eventually

Mongol Empire

“Chingis Khan, ruled in the 13th century over an empire which at its peak stretched from modern day Iraq to the Korean peninsula”

“Chingis Khan, though brutal on the battlefield, was a great leader in the civil realm, promoting trade, technology and religious tolerance, resulting in a period of political stability known as “PaxMongolica”

59

HISTORY

came to rule over an empire that at its peak extended from modern day Iraq to the Korean peninsula. Chingis and his descendants rarely get credit for their non-military accomplishments, however. Once established, the Mongolian empire and the descendent Yuan Chinese dynasty fostered trade and technology while promoting religious tolerance, resulting in a period of political and economic stability known as the “PaxMongolica.”During this period, merchants could safely travel the Silk Road from Baghdad to Beijing without fear of pillage or robbery. The security offered by the Mongol empire fostered an unprecedented era of cultural interaction between East and West, allowing technology and ideas to flow between the two and promoting innovation that paved the way for the enlightenment era.

Mongolian Democratic Revolution

The reign of Chingis’ descendants came to an end in the 14th century, a short century after its rise. Mongolia came under the domination of the native Ming and subsequent Qing Dynasties of China. The Ming and Qing imposed harsh taxation laws and divided local power between various religious and aristocratic figures, leaving the country impoverished and politically weak. When revolution rocked China in 1911, Mongolia declared independence. However, the newly independent nation’s institutions andmilitary did not have the strength to hold the borders firmly. For a decade, Mongolia hosted a motley crew of adventurers and warlords from Russia and China, playing various invaders and allies off each other in an attempt to maintain independence.

In 1921 Mongolia’s leadership finally decided to throw in with the ascendant red Bolshevik army and the nation soon found itself swept up into the Soviet empire, becoming the second communist nation in the world and the first in Asia. For close to seventy years, the country was dominated by Moscow, becoming a virtual puppet state of the USSR. Mongolian monks, aristocrats and independent intellectuals were slaughtered and repressed, in some of the most brutal and underreported purges that the Soviets ever carried out.

Mongolia under Soviet rule in the early 20th century

“The security offered by the Mongol empire fostered an unprecedented era of cultural interaction between East and West, allowing technology and ideas to flow between the two and promoting innovation that paved the way for the enlightenment era”

“When revolution rocked China in 1911, Mongolia declared independence”

60

HISTORY

In the late 1980s, with economic and political turmoil rocking the homeland, the grip of the Russians finally began to weaken. A new generation of young, Mongolian leaders were quick to rise to the challenge presented by Soviet obsolescence.

On December 10th, 1989 (International Human Rights Day), a small crowd of around 200 political dissidents began protesting in front of the government palace on Sukhbaatar Square. Slowly but surely, Mongolians from all walks of life began traveling to the capital to gather in political opposition to the regime. The small peaceful protest eventually became too large to ignore. On March 9th, 1990 Mongolia’s ruling communist party quietly stepped down thanks to a combination of pressure from Moscow and a desire to avoid repeating the Tiananmen Square atrocities that has shaken Beijing just the previous year. The crowd of protesters celebrated their victory. Democratic elections were held for the first time later that same year. The former ruling party, Mongolian People’s Revolutionary Party (MPRP), made efforts to ensure that the elections were transparent and legitimate, publicly cutting ties with the military and police well before Election Day. As a result, or perhaps in spite, of such efforts, the Mongolian People’s Revolutionary Party won a resounding electoral victory, securing 86% of the IkhKhural (“Great Assembly”, the newly established Mongolian Parliament). With no well-organized opposition in sight, the MPRP remained in power until 1993 when the nascent Democratic Party (DP) was finally able to establish itself as a viable political force and secure an electoral victory in the presidential election. Three years later, the DP won control of the parliament in the general election.

Unlike most other former Soviet satellite states, Mongolia’s democratic revolution was uncharacteristically peaceful. No military conflicts took place and no blood was shed. The relatively underdeveloped state of the national armed forces prevented the rise of military dictators and the nation’s extreme ethnic homogeneity (nearly 95% Mongol, most Khalkh) obviated the existence of ethnic conflicts. In addition, Mongolia’s literacy rate was very high, especially for women. Historically, literacy rate and gender equality have been two good predictors of success in transitioning to a free-market orientated democracy.

Protests outside parliament circa 1990

“On December 10th, 1989 (International Human Rights Day), a small crowd of around 200 political dissidents began protesting in front of the government palace on Sukhbaatar Square”

“The small peaceful protest eventually became too large to ignore. On March 9th, 1990 Mongolia’s ruling communist party quietly stepped down thanks to a combination of pressure from Moscow and a desire to avoid repeating the Tiananmen Square atrocities that has shaken Beijing just the previous year”

“Unlike most other former Soviet satellite states, Mongolia’s democratic revolution was uncharacteristically peaceful”

61

HISTORY

Mongolia entered a new political era with all its considerable human, social and intellectual capital intact – a fact that would prove useful during the challenging years to come.

Unfortunately, Mongolia’s economic system did not pass through the transition as easily as its political system. Already one of the poorest nations in the world, the withdrawal of Soviet subsidies caused Mongolia’s GDP to decline by more than 20%. Rampant inflation set in and there were severe food shortages that required state managed rationing. It took Mongolia nearly 8 years to return to its pre-independence levels of economic activity.

During the lean years of the 1990s, Mongolia frequently relied on support from multilateral organizations –primarily the IMF and the World Bank- for financial support. In exchange, Mongolia embraced many of the best practice Washington Consensus era legal in institutional frameworks espoused by the technical experts and economists at the organizations. As a result, Mongolia’s current legal and tax code are surprisingly pro-business and forward looking.

Mongolians gather in Sukhbaatar square to protest against Soviet rule

Current President Elbegdorj during 1990s protest

“Unfortunately, Mongolia’s economic system did not pass through the transition as easily as its political system”

“It took Mongolia nearly 8 years to return to its pre-independence levels of economic activity”

62

POLITICS

SECTION 1.3

63

POLITICS

POLITICS

64

POLITICS

Executive Summary

Mongolia has a “semi-presidential” political system with parliamentary and presidential elections held every four years. Mongolia has built one of the longest lasting and most successful democracies in Central Asia. The majority party in the unicameral legislature selects the Prime Minister, and the President is elected directly by the public. The Ikh Khural or Parliament of Mongolia is made up of 76 members; 48 of whom are elected directly and the remaining 28 allocated via proportional representation. Mongolia’s largest political parties have relatively similar political platforms and ideology, meaning parliament rarely suffers from paralysis. The main political parties of Mongolia are the Mongolian People’s Party (MPP), Mongolian People’s Revolutionary Party (MPRP) and the Democratic Party (DP). The 2008 parliamentary elections were followed by accusations of corruption, which led to violence and protests. The MPRP’s official headquarters was burnt down as a result. Just months after the political crisis the government completed negotiations on an agreement with Rio Tinto to develop the mine at OyuTolgoi. The 2012 parliamentary elections passed without incident and saw the DP take control of the Ikh Khural. The 2013 presidential elections saw DP candidate and incumbent Ts. Elbegdorj win with 50.23% of the vote. The election cycle came to a head in the past two years and saw heated populist political rhetoric employed in order to win votes. Much of this rhetoric was directed towards the FDI powered flagship OyuTolgoi mine. Since the election, Mongolia has changed its tune and attempted to appease foreign investors by revoking the controversial Strategic Entities Foreign Investment Law (SEFIL). 2014 saw the resignation of the replacing of the Prime Minister after a vote of no in the former. The newly installed Prime Minister then formed a “Grand Coalition” with the intent of getting the economy back on track.

Institutional Structure

Mongolia’s political system is usually described as “semi-presidential”. The President is the nominal head of state and is directly elected every 4 years. However, the president’s executive and legislative powers are fairly limited. The Prime Minister and his appointed cabinet control most of the executive functions of the state through their jurisdiction over the various ministries. The majority party that wins the largest number of seats in the uni-cameral parliamentary elections appoints the Prime Minister himself. Parliament contains 76 seats and direct elections are held every 4 years, traditionally in the summer time when temperatures are permissive.

Semi-presidential regimes of this type are common in the former Soviet bloc, and have often resulted in authoritarian regimes with powerful executives that become virtual dictators. Mongolia is an exception to this trend and has managed to build one of the longest lasting and most successful democracies in Central Asia.

The main political parties of Mongolia are the Mongolian People’s Party (MPP), Mongolian People’s Revolutionary Party (MPRP) and the Democratic Party (DP). The 2008 parliamentary elections were followed by accusations of corruption, which led to violence and protests.

“Parliament contains 76 seats and direct elections are held every 4 years, traditionally in the summer time when temperatures are permissive”

65

POLITICS

Executive Branch

Executive power is split between the Prime Minister, who is the main driver of policy, and the President, who is commander in chief of the military and acts as Mongolia’s ceremonial head of state. The President appoints ambassadors and judges. He or she also holds limited veto rights over laws passed by the legislative body. The President’s veto can be overruled by a two-thirds majority vote from Parliament.

The Prime Minister is selected from the majority party in Mongolia’s unicameral legislature (the Ikh Khural or Parliament of Mongolia). The President has the right to nominate the Prime Minister, the Ikh Khural ultimately decides who takes up the office.

In contrast, the President is elected directly by the country’s population once every four years. To win, a candidate must earn more than 50% of the vote. If no candidate earns 50%, the top two candidates must compete in a run-off election. Presidents are allowed to serve up to two terms in office. Once in office the President is constitutionally obliged to renounce the membership of any political party to which they were previously affiliated. Despite the office drawing its mandate from the people as opposed to parliament, legislative checks on the position are in place. If a two-thirds majority of the Ikh Khural deems the President to have abused the position, or violated their oath of non-partisanship, he or she faces removal from ffice.

Legislative Branch

The Ikh Khural, the Parliament of Mongolia, consists of 76 members, 48 of which are elected directly from 26 multi-member districts. The parties elect the remaining 28 seats via a system of proportional representation. The country’s electoral convention stipulates that a legislative election is only to be considered valid if 50% of the electorate turns up to the ballot box, placing emphasis on the importance of participation.

Chingis Khan’s statue stands on the steps of Parliamentary Palace

“The Ikh Khural, the Parliament of Mongolia, consists of 76 members, 48 of which are elected directly from 26 multi-member districts”

66

POLITICS

The body is charged with drawing up and approving new laws in conjunction with the government, which also passes a yearly national budget with a simple majority. Super majorities of two thirds are required to overrule the presidential veto and ratify constitutional change.

Party System Overview

The Madisonian dispersal of power across branches of government tends to lead to accusations of political ineffectiveness, with decisive action being replaced by stagnation and paralysis. Mongolia has largely avoided the ineffectiveness frequently associated with the regimes of the United States and France, because Mongolia’s largest political parties have relatively similar political platforms and ideology. Indeed, the balance of power between the legislative and executive branches safeguards against dictatorship while not severely constraining policy effectiveness.

The Mongolian People’s Party (MPP)

The Mongolian People’s Party is Mongolia’s oldest political organization. Formed in 1921 to facilitate the Mongolian revolution, the party enjoyed a monopoly of power through the country’s socialist period, and a majority in the IkhKhural until 1996.

Despite a lasting commitment to its socialist origins, since the democratic transition the party has embraced liberal economic reforms and democratic principles. Describing itself as a ‘center left political force,’ based on social democratic ideals, the party has demonstrated an ideological pragmatism rare among its ex- Communist peers throughout the former Soviet world.

The commitment towards modernization in the democratic world is demonstrated by the group’s decision at its 26th Party Congress in 2010 to remove the ‘Revolutionary’ component of its name, being supported by 99.3% of delegates. It should be noted that from the minority of members who did not support the amendment, a splinter organization was created, headed by the group’s former leader and ex-President NambarynEnkhbayar. This splinter party claimed the name “Mongolian People’s Revolutionary Party” (MPRP) and was awarded legitimate party status on June 24th, 2011 by the Mongolian Supreme Court, the two entities should not be confused.

“Describing itself as a ‘center left political force,’ based on social democratic ideals, the party has demonstrated an ideological pragmatism rare among its ex- Communist peers throughout the former Soviet world”

Democratic Party (left), Mongolian People’s Party (middle) and Mongolian People’s Revolutionary Party (right)

67

POLITICS

The Democratic Party of Mongolia (DP)

Founded by those who pioneered the democratic revolution of the 1990s, the Democratic Party of Mongolia was the product of the merging between the Mongolian National Progressive Party and the Mongolian Social Democratic Party. These two parties were the ruling coalition in the IkhKhural after democratic forces first gained a parliamentary majority in 1996. The party describes itself as a conservative party that promotes the continuation of Mongolia’s transformation into an open and democratic society, and the facilitation of the country’s economic development. This commitment was demonstrated by the group’s influential role in securing the OyuTolgoi investment agreement in 2008.

The effectiveness of the party however has been subject to constraints stemming from its continued changes in membership and composition. The party’s current composition stems from a series of mergers and splits since 1990. Unfortunately, the party’s constant changes have cost them elections in the past, since its main rival, the MPP, is one of the most structurally consistent and ideologically unified political organizations in the country.

Currently, the DP controls the President and the Prime Minister through its majority of the seats in Parliament.

MPRP (Mongolian People’s Revolutionary Party)

The Mongolian People’s Revolutionary Party (“MPRP”) is a left wing political party in Mongolia. Nambaryn Enkhbayar who served as the Prime Minister of Mongolia in 2000 – 2004, the Speaker of the Parliament in 2004 – 2005 and the President of Mongolia in 2005 – 2009, established the party in 2011. He is the first person to have held all of top three positions in Mongolian government.

The party received approval to use the old name of the Mongolian People’s Party from the Supreme Court of Mongolia and Mr Enkhbayar became its current leader.

MPRP missions are to implement integrated policies aimed at creating human-centred social welfare, pro-development economic growth, the nation and citizen-oriented public governance system, the country and its people will achieve prosperity and progress.

As of 2013, MPRP has over 80,000 members, which made it the third largest party in the country.

“the Democratic Party of Mongolia was the product of the merging between the Mongolian National Progressive Party and the Mongolian Social Democratic Party”

“The party describes itself as a conservative party that promotes the continuation of Mongolia’s transformation into an open and democratic society”

“This commitment was demonstrated by the group’s influential role in securing the OyuTolgoi investment agreement in 2008”

68

POLITICS

The 2008 Parliamentary Election

One of the few significant crises in Mongolia’s democratic political trajectory was the infamous aftermath of the 2008 parliamentary election. On June 30th, preliminary election results were released. International observers and state sources of information purported that the MPRP (current MPP before the name change) had won handily, but the Democratic Party’s chairman, Ts.Elbegdorj declared that the election was fixed and refused to accept the results as true. Elbegdorj suggested that there were irregularities in the counting process, along with the bribing of the electorate, which was corroborated by other smaller political parties. With this in mind, protesters gathered the following day in front of MPRP headquarters (situated between the Ulaanbaatar Hotel and Sukhbaatar Square). What was originally intended to be a peaceful demonstration sadly escalated into violence as a group of rioters broke into MPRP headquarters and looted a small liquor store situated on the ground floor, while also lighting the building on fire. As the fire spread across the entirety of the building, police clashed with the protestors waiting outside the structure. Batons, water cannons, tear gas, rubber bullets, and even live ammunition were deployed in a vicious police reaction. Tragically, five protesters were killed in the ensuing mayhem. A series of myopic arrests followed, the bulk of those taken into custody being peaceful protestors who played no part in the arson for which the incident is famed. At midnight, President Enkhbayar declared a national state of emergency that was to be in effect for 96 hours. Armored personnel carriers were immediately deployed to the streets, a curfew was put into effect, and a media blackout was declared.

Within a few days, the situation stabilized and the harsh measures were revoked. Although brief, the episode did much to damage the country’s impressive democratic reputation. Commentators and investors alike speculated that the incident was to mark a change in direction for Mongolia’s political development. This however, was not the case. After a short period of political posturing, all members of the Democratic Party, including Elbegdorj himself were sworn into parliament, S. Bayar being elected prime minister of a coalition government, supported by both the MPP and the DP.

Fortunately, parliament was able to form a majority and signed some of the most important political policies in the country’s young democratic history. The two parties worked together in order to negotiate the terms of the OyuTolgoi Agreement just months after the crisis, which effectively kick started foreign direct investment in Mongolia and the headline grabbing growth figures that the country has witnessed in recent years.

The crisis of 2008 should not be seen as manifestation of a fundamental problem in Mongolia’s democratic culture. Rather, it should be viewed as an isolated extreme response in an overall peaceful process of democratic development.

“One of the few significant crises in Mongolia’s democratic political trajectory was the infamous aftermath of the 2008 parliamentary election”

“Ts.Elbegdorj declared that the election was fixed and refused to accept the results as true”

69

POLITICS

No incidence of significant electoral fraud has ever been reported by international observers in Mongolia since independence in 1990. Despite the commonplace accusations of defeated politicians, no international monitoring agency has ever recorded any irregularities.

The 2012 Parliamentary Election

Mongolia’s most recent parliamentary elections, taking place on June 28th of 2012, were viewed as something of a litmus test of the country’s political stability in the aftermath of the 2008 debacle. For the first time in its history, the country used an electronic voting system, to remove any possibility of a repeat of the 2008 of the allegations that caused minor civil unrest occurring. The electoral seat allocation mechanism was also changed from a “first past the post” system to proportional representation, significantly benefiting the interests of the country’s smaller parties and independent candidates, who managed to secure 16 out of the 76 positions on offer. A quota system was also introduced - designed to ensure that no less than 20% of candidates running were women. This was a significant progressive concession by the Mongolian regime.

A major political scandal erupted in the months preceding the election when former President and Prime Minister, N. Enkhbayar, leader of the splinter MPRP, was arrested in connection with allegations of corruption and misconduct during his time in office.

Despite this scandal, the election proceeded peacefully and without incident. The DP gained 31 seats, representing the largest parliamentary grouping, while the MPP came closely behind, with 25 seats. The Justice Coalition - a combined effort from the MPRP and the MNDP - acquired a sizable 11 seats, with support somewhat fueled by a public outcry over N. Enkhbayar’s treatment. The minority Civil Will Green Party and independent candidates obtained two and three seats respectively.

The closeness of the 2012 electoral race and the acrimonious partisan air that prevailed in the wake of Enkhbayar’s arrest made it difficult for the new government to form. Because the Democratic Party did not obtain the 39-seat majority necessary for it to form its own cabinet, proceedings were delayed whilst coalition negotiations played out. The Democratic Party, the Justice Coalition, and the Civil Will Party eventually formed a coalition but it took nearly two months for the newly elected Parliament members to come to a consensus regarding the Prime Minister. Finally, on August 25th, Prime Minister N.Altankhuyag chaired the first cabinet meeting of the country’s sixth government.

2013 Presidential Elections:

The presidential election campaign season began in summer 2013. Three candidates, incumbent and eventual winner Ts. Elbegdorj of the Democratic Party (DP), B. Bat-Erdene of the Mongolian People’s Party (MPP), and N. Udval of the Mongolian People’s Revolutionary Party (MPRP) competed for the top spot.

“No incidence of significant electoral fraud has ever been reported by international observers in Mongolia since independence in 1990”

70

POLITICS

Personalities, not policies, tend to take center stage in Mongolian elections and 2013 was no exception. In a June 18th survey, 56% of those polled on the election said they base their decisions on the candidate, not on the party or its platform.

For this reason, platforms for each of the three candidates looked thin on substance. Each candidate, however, embodied a different direction for the country to take. Elbegdorj, with a master’s degree from Harvard Kennedy School, represented the foreign investment-friendly, pro-business strain of Mongolian political thought. Since his election in 2009 he has steered Mongolia away from strong resource nationalism. Bat-Erdene, on the other hand, appealed to more traditional values. The most decorated wrestler in Mongolian history, the current parliamentary representative favored an inward looking policy orientation centered on Mongolian culture and values. A staunch resource nationalist, he gained legislative fame for the “Law with the Long Name” which aimed to protect Mongolia’s natural environment from mining and exploitation. N. Udval, the country’s first female presidential candidate, entered the race as a strong supporter of former president N. Enkhbayar-now jailed on corruption charges-and a two-time Minister of Health. In her platform she highlighted “Five Dangers”-ranging from ‘insidious’ foreign influence to environmental problems-which she presented as the main problems she would resolve as president.

Two key differences between the 2013 election and the 2009 election-automatic vote counting and the participation of Mongolians abroad-established a more sophisticated and broader based electoral process. New rules leveled the playing field for advertising, and the widespread use of social media showed that Mongolia hosts a mature democracy with an active and engaged civil society.

The economy remained the most important issue for the electorate. Over fifty percent of those surveyed in the June 18th survey considered improving standard of living and reducing unemployment as the most important steps for the country’s future.

Elbegdorj was able to clinch a majority of the vote (50.23%) and seal victory in the first round based on his credentials and track record presiding over the strongest period of economic expansion in the nation’s history.

Mongolia’s New Political Trajectory

The lead up to the 2012 Parliamentary election and the 2013 Presidential election witnessed a ramp up in anti-foreign, anti-business political rhetoric and legislation. Political candidates, eager for votes, were often quick to resort to bombastic populist and nationalist statements.

“The presidential election campaign season began in summer 2013. Three candidates, incumbent and eventual winner Ts. Elbegdorj of the Democratic Party (DP), B. Bat-Erdene of the Mongolian People’s Party (MPP), and N. Udval of the Mongolian People’s Revolutionary Party (MPRP) competed for the top spot”

“Two key differences between the 2013 election and the 2009 election - automatic vote counting and the participation of Mongolians abroad - established a more sophisticated and broader based electoral process”

“The lead up to the 2012 Parliamentary election and the 2013 Presidential election witnessed a ramp up in anti-foreign, anti-business political rhetoric and legislation”

President Ts. Elbegdorj

71

POLITICS

The international press decided to focus on the sensationalistic scandals stirred up by the election cycle, such as the Chalco debacle, the series of recent draft laws seen as unfavorable to FDI, and the government’s much publicized disagreements with Rio Tinto.

However, in the aftermath of the elections, cooler heads have prevailed. The extremely damaging Strategic Entities Foreign Investment Law (SEFIL), that required all major foreign investments in key sectors of the economy to be approved by parliament, was amended in May 2013 and entirely revoked in October 2013. In place of SEFIL, Mongolia’s parliament has implemented a new law that provides tax and legal stability to all sizeable foreign investments that come into the country. Investors are guaranteed that the laws and regulations that were in place when the investment was originally made will not be subject to the vacillations of future regimes. The new law requires a two-thirds majority vote of parliament to alter or revoke, which should provide extra stability and continuity in future years.

In a further attempt to curry favor with the foreign investment community, in Q2 2014 Prime Minister NovovynAltankhuyag launched the “100 day action plan”, a stimulus package aimed at boosting economic activity.In addition, the Mongolian government and Rio Tinto reached an agreement over a protracted$127m tax dispute in Q3regarding the OyuTolgoi mine. Despite missing a deadline in September for financing phase 2 of the project, the feasibility study for the more lucrative, underground phase has been completed. In addition, the operational phase 1 of the mine posted its best results to date in Q2 2014, producing 40% more copper concentrate than the previous quarter, a 320% increase year-on-year.

The second half of 2014 saw a number of high profile visits from neighboring heads of state. In August, Xi Jinping became the first Chinese President to visit Mongolia in more than a decade, pledging to double trade to $10bn by 2020 with a focus on infrastructure, transportation and financing requirements. South Korean Foreign Minister Yun Byung-se followed with cooperation agreements on bilateral trade and national security, and Russia’s President Vladamir Putin came for a visit in early September. Many hope that these visits, and a resolution at OyuTolgoi, will be enough to encourage foreign investment to return. The Tugrik showed signs of stabilizing off the back of Xi Jinping’s visit, rallying for the first time in recent memory to around MNT1820 to the dollar.

2014: A Change of Team

Economy, Economy & Economy

In November 2014, Mongolian Prime Minister AltankhuyagNorov lost a no-confidence vote over his handling of the economy and stepped down along with the rest of his cabinet. Mr. Altankhuyag had faced mounting pressure from the public and lawmakers from both parties as economic growth slumped from a high of 17.5% in 2011 to approximately 6.3% in 2014.

“The extremely damaging Strategic Entities Foreign Investment Law (SEFIL), that required all major foreign investments in key sectors of the economy to be approved by parliament, was amended in May 2013 and entirely revoked in October 2013”

“In a further attempt to curry favor with the foreign investment community, in Q2 2014 Prime Minister Norovyn Altankhuyag launched the “100 day action plan”, a stimulus package aimed at boosting economic activity. In addition, the Mongolian government and Rio Tinto reached an agreement over a protracted$127m tax dispute in Q3regarding the Oyu Tolgoi mine”

“In August, Xi Jinping became the first Chinese President to visit Mongolia in more than a decade, pledging to double trade to $10bn by 2020 with a focus on infrastructure, transportation and financing requirements”

“The Tugrik showed signs of stabilizing off the back of Xi Jinping’s visit, rallying for the first time in recent memory to around MNT1820 to the dollar”

72

POLITICS

“Mongolian People’s Party (“MPP”), agreed to accept an offer by new Prime Minister Chimed Saikhanbileg to join a coalition with the Democratic Party (“DP”)”

“Mr. Saikhanbileg has urged all parties to end political divisions and concentrate on improving the economy”

“Parliament voted in favour of Mr. Saikhanbileg’s new cabinet structure of 15 ministries and 19 ministers”

Foreign investment had also plummeted amid a protracted dispute between the government and Rio Tinto Group over the second phase underground expansion of the OyuTolgoi copper and gold mine.

Two weeks after the removal of the Prime Minister Altankhuyag, Mongolia’s parliament approved a new prime minister after lawmakers voted 42-2 to appoint acting Cabinet secretary Saikhanbileg Chimed to the job. Mr. Saikhanbileg promised to boost the economy and bring political stability in the country. As part of his acceptance speech, MrSaikhanbileg stated that his top three priorities were “the economy, the economy and the economy”.

Background: Saikhanbileg Chimed

Mr. Saikhanbileg was born in Dornod province and initially went to study history at the Moscow State University for Humanities,proceeding to study Law at the National University of Mongolia. He continued his law practice at George Washington University in the United States.

Saikhanbileg came into politics in the early 1990’s and was an MP from 1996-2000, serving as Minister for Education between 1998-2000. Since 2012, he had been the Minister of the Cabinet Office under the previous Prime Minister N.Altankhuyag

Grand Coalition and New Cabinets

In late November 2014, the opposition party, Mongolian People’s Party (“MPP”), agreed to accept an offer by new Prime Minister Chimed Saikhanbileg to join a coalition with the Democratic Party (“DP”). The DP has 35 lawmakers in the Great Khural, while the MPP has 26. Mr. Saikhanbileg has urged all parties to end political divisions and concentrate on improving the economy. In general, foreign analysts interpret the grand coalition as a step in the right direction, agreeing that if both parties are together there is more chance that they will go ahead and resolve the Oyu Tolgoi dispute.

Parliament voted in favour of Mr. Saikhanbileg’s new cabinet structure of 15 ministries and 19 ministers, composed of the Prime Minister, Deputy Prime Minister, Secretary of the Cabinet and 16 other ministers. The previous Prime Minister had reduced the number of ministers from 19 to 15, as part of his plans to restore economic growth, until he was voted out by the Mongolian parliament. Only two ministers from Altankhuyag’s cabinet have been re-nominated.

Prime Minister Ch.Saikhanbileg

73

POLITICS

Oyu Tolgoi Disputes

The newly appointed Prime Minister has chosen Minister Mr. Enkhsaikhan to solve the ongoing disputes between the Oyu Tolgoi and the government. He will lead a team of experts and will also move forward other strategically important projects such as Oyu Tolgoi, Tavan Tolgoi, and the new railway.

MINISTERS PREVIOUS NEW

Prime Minister N. Altankhuyag Ch. Saikhanbileg (“DP”)

Deputy Prime Minister D. Terbishdagva U. Khurelsukh (“MPP”)

Cabinet Secretary Ch. Saikhanbileg S. Bayartsogt (“DP”)

Minister of Environment, Green Development, and Tourism S. Oyun D. Oyunkhorol

(“MPP”)

Minister of Foreign Relations L. Bold L. Purevsuren (“DP”)

Minister of Finance Ch. Ulaan J. Erdenebat (“MPP”)

Minister of Justice Kh. Temuujin D. Dorligjav (“DP”)

Minister of Industry Newly established D. Erdenebat (“DP”)

Minister of Defense D. Bat-Erdene Ts. Tsolmon (“MPRP”)

Minister of Construction and Urban Development Ts. Bayarsaikhan D. Tsogtbaatar

(“MPP”)

Minister of Education, Culture and Science Lu. Gantumur Lu. Gantumur

Minister of Roads and Transport A. Gansukh N. Tumurkhuu

(“MPP”)

Minister of Mining D. Gankhuyag R. Jigjid (“DP”)

Minister of Labor Ya. Sanjmyatav S. Chinzorig (“MPP”)

Minister of Population Development and Social Welfare

S. Erdene S. Erdene (“DP”)

Minister of Food and Agriculture Sh. Tuvdendorj R. Burmaa (“DP”)

Minister of Energy M. Sonompil D. Zorigt (“DP”)

Minister of Health and Sports N. Udval G. Shiilegdamba (“MPRP”)

Minister of Mongolia Newly established M. Enkhsaikhan (“MNDP”)

74

LEGAL SYSTEM

SECTION 1.4

75

LEGAL SYSTEM

LEGAL SYSTEM

76

LEGAL SYSTEM

“The legal system is generally favorable to foreign investors with foreigners enjoying exactly the same immovable property rights as Mongolian citizens”

“In addition, the local currency (MNT) is fully convertible and there are no capital controls. However, only Mongolian citizens can obtain freehold ownership rights to land”

“Experts from the IMF and the WB helped Mongolia reform its legal system based on modern best practices from developed western countries”

Executive Summary

At the time of its transition from Soviet satellite to free-market democracy, experts from several multilateral organizations, such as the World Bank and IMF, helped Mongolia reform its legal system based on successful western models. The court is organized into three branches and is overseen by the Supreme Court. The legal system is generally favorable to foreign investors with foreigners enjoying exactly the same immovable property rights as Mongolian citizens. In addition, the local currency (MNT) is fully convertible and there are no capital controls. However, only Mongolian citizens can obtain freehold ownership rights to land. Land tenure is divided into three classes; the first class (Land Ownership) is only available to individual Mongolian citizens; Land Possession rights are temporary ownership rights and can only be held by local legal entities; Land Usage gives a party the right to undertake concrete activity on the land. Mongolia employs a ‘floating freehold’ system with regard to immovable property. The floating freehold provides foreign investors and locals alike with strong and inalienable freehold rights to immoveable property. There is not a single recorded case of the government successfully exercising its power to expropriate real estate from a Mongolian or foreign citizen.

Overview

Mongolia is part of the civil law tradition. The present day system is a combination of Russian, German, and US legal practices with some local variations thrown in. Following the collapse of the Soviet Union, Mongolia enlisted the help of several multilateral organizations – namely, the International Monetary Fund (IMF) and the World Bank (WB) - to provide technical and financial support as the country transitioned to capitalism. Experts from the IMF and the WB helped Mongolia reform its legal system based on modern best practices from developed western countries. The regulations put in place were specifically designed to promote investment and create a stable environment for private enterprise.

The court system is organized into three branches: civil, administrative and criminal. Each branch has representative units and judges at the urban district or rural soum (a sub-provincial administrative unit roughly equivalent to a county in the US) level. A superior appellate court unit for each branch exists in each province and in the capital city. The system is overseen by the Supreme Court, which handles high profile cases passed on from lower units.

Aimag and capitalcity’s appellate

court for criminalcases

Aimag and capitalcity’s appellate

court for civil cases

Appellate courtfor administrative

cases

Soum, intersoum,and district criminal

court of fi rstinstance

Soum, intersoum,and district civil

court of fi rstinstance

Administrativecourt of fi rst

instance

Figure 20.SUPREME COURT OF MONGOLIA

77

LEGAL SYSTEM

“The rights international investors exercise over immovable property assets are identical to those enjoyed by Mongolian citizens”

A number of adjunct special agencies support this central regime. The Mongolian National Arbitration Court (MNAC) is perhaps the most relevant for foreign investors. The MNAC was originally founded during the Soviet period and forms part of the Mongolian National Chamber of Commerce and Industry (MNCCI). In 1995, a Foreign Trade Arbitration Court was established at the MNCCI and tasked with resolving disputes between Mongolian citizens and business entities, foreign citizens and foreign entities arising from foreign trade agreements; disputes between foreign investors and local partners, and disputes between foreign business entities arising in Mongolia. On May 09, 2003 a new Law on Arbitration, based on the World Trade Organization’s UNCITRAL law, was approved by Parliament, replacing the previous law.

Mongolian courts, lawyers and judges have a tradition of supporting arbitration and arbitration has a long history in Mongolia.

A full review of all aspects of Mongolia’s legal system is obviously beyond the scope of this publication. The remainder of this section will focus specifically on those aspects of the legal system most relevant for investors in the real estate sector.

The Property Rights of Foreigners in Mongolia

In general, the legal system is quite favorable to foreign investors. Foreign citizens enjoy similar legal rights as Mongolians, meaning those interested in investing in real estate are provided with a wide range of legal protection. The rights international investors exercise over immovable property assets are identical to those enjoyed by Mongolian citizens.

Article VIII of ‘The Law of Mongolia on the Legal Status of Foreign Citizens’ outlines the basic principles of the rights and duties of foreign citizens:

Only Mongolian citizens can obtain free hold ownership rights to land, however, and only under particular circumstances.

Inside Mongolia’s supreme court

78

LEGAL SYSTEM

“The 1992 Constitution allowed for different forms of private land and immoveable property tenure. Apartments were privatized by the thousands, as were industrial centers, farms and livestock”

“As an alternative to freehold ownership, land possession rights are offered to Mongolian legal entities, both state owned and private”

“Land possession rights offer significant protections upon the claims of thepossessor over their land, and as such are seen as a satisfactory alternative to ownership”

“The maximum size of land awarded by a license to companies is at the discretion of the Mongolian government”

Land Tenure in Mongolia

Under the Soviet regime, all land in Mongolia was owned and collectively managed by the state. The 1992 Constitution allowed for different forms of private land and immoveable property tenure. Apartments were privatized by the thousands, as were industrial centers, farms and livestock. However, due partially to low population densities, the vast majority of land remained public property. A number of land administration laws were passed throughout the 1990s but large gaps remained in the system. The most significant reform came in 2002 with the new Land Law of Mongolia.

The 2002 Land Law divided land rights into three distinct classes:

1. Land Ownership, meaning legitimate freehold control of land with the right to sell, alter, subdivide, and will the land to heirs or descendants.

2. Land Possession, meaning temporary (usually 5 or 15 years) licensed control of land in accordance with its purpose of use. In practice, possession certificates can be bought or sold to local entities.

3. Land Usage, meaning the right to undertake concrete activity and make use of some of the land’s characteristics in accordance with contracts made between the owners and/or possessors of land.

These three types of rights are severable and can be mutually exclusive. The 2002 law states that the first class of rights, land ownership, is only available to individual Mongolian citizens, who are entitled to claim small plots of between 0.35 hectares and 0.7 hectares in size within the limits of urban centers, free of charge. These plots can be traded freely and passed down to familial relatives. Mongolian governmental agencies, private Mongolian companies, and registered foreign investment companies do not qualify for land ownership rights under Mongolian law.

As an alternative to freehold ownership, land possession rights are offered to Mongolian legal entities, both state owned and private. Registered foreign investment companies operating within Mongolia are not permitted full direct possession rights. However, foreign invested firms can gain de facto control of possession right by obtaining control of local legal entities. Land possession rights offer significant protections upon the claims of the possessor over their land, and as such are seen as a satisfactory alternative to ownership.Possession certificates are typically issued for a period of 5-15 years and can generally be bought from or sold to local Mongolian legal entities.

Land Possession Rights in Mongolia

Land possession rights are established through procurement of a ‘license for land possession’, a document bestowing the holder with the authority to possess land in accordance with Mongolian law. The maximum size of land awarded by a license to companies is at the discretion of the Mongolian government.

79

LEGAL SYSTEM

“The tender process for land functions is like any other government tender.Applicants are generally required to submit a proposal, which is then evaluated by a committee”

Governors of the soum (a rural administrative unit one level down from the provincial level, similar to a county in the US) or district (an urban administrative unit that now exists only in Ulaanbaatar, where there are 6 contiguous districts in in the city and an additional 3 non-contiguous districts) are tasked with the identification of land to be auctioned off for possession. The selected plots are published in the annual land management plans of the respective authorities. Plots thus delineated can be either auctioned off to the highest bidder or granted through a competitive tender process. A tender process is usually predicated upon the ability of the selected firm to deliver a specific project related to the land.

The 2002 Law of Mongolia on Land outlines two basic requirements that must be met for a possession license to be considered:

• Applicants for land possession licenses must be Mongolian (either citizens, companies, or organizations).

• The location of the land requested for possession shall have been marked in the annual land management plan of the capital city or soum as available.

Applications are initiated for companies and organizations by submitting a request to the governors of the appropriate soum or district. In addition to the application itself, it is necessary to submit the following information:

• The name of the company or organization, jurisdiction to which the company belongs, its address and location, and a copy of the state registration certificate;

• The code of the territorial unit(s) requested which shows the territorial and administrative jurisdiction upon which the land where the company intends to undertake production or services provision belongs, along with its size and location;

• The desired purpose and duration of land possession; • Proof of creditworthiness A successful applicant will then be entered into the tender process or participate in a silent auction for the plot.

The tender process for land functions is like any other government tender. Applicants are generally required to submit a proposal, which is then evaluated by a committee.

The silent auction process awards the land to the bidder who initially offered the highest cash payment for the land. The highest bidder will receive a notification of their success, along with their payment obligations. If payment is not received within a predetermined time scale, the right to possession of the plot of land in question is automatically passed down to the next highest bidder. If upon the second attempt payment is not received, the license is put up for auction once again.

80

LEGAL SYSTEM

“Readers of this guide should note that the option of land possession licensetransferal, and the ability to use the documents are legally only open to Mongolian citizens, companies, and organizations”

“The licenses are typically extended for a term of 5 to 15 years but can, in theory, be renewed for up to 60 years at a time”

Any entity that has acquired the right to possess land for undertaking the production of goods or the provision of services must complete a general environmental assessment within 90 working days of receiving the right. If the results are positive, a contract on land possession will be made, the license issued, and a record of ownership noted in the Mongolian national registry.

The Rights and Duties of Land Possession License Holders

Those who hold possession licenses are endowed with the following rights:

The right to use the land according to the purposes set forth in the contract;

• The right to obtain a registered Possession Certificate for the plot • The right to transfer the license or use it as collateral • The right to have the license extended upon expiration, provided that

the license holder has duly fulfilled their obligations

In return, the holder of a land possession license has the following obligations:

• To comply with terms and conditions set forth in the land possession contract;

• To use the land efficiently and comply with legislation regarding environmental protection environment and other regulations issued by government authorities;

• To pay all land fees in a timely manner • To register liens and debts at National Registry if the license is used

as collateral.

Readers of this guide should note that the option of land possession license transferal, and the ability to use the documents are legally only open to Mongolian citizens, companies, and organizations.

Extending the Land Possession License

The license holder is guaranteed the right to extend the term of the license, provided they have fulfilled the obligations of their contract. The licenses are typically extended for a term of 5 to 15 years but can, in theory, be renewed for up to 60 years at a time.

An extension request must be submitted to the governor of the soum or district a minimum of thirty days prior to the license expiration. The application must be supported by the following documents:

• The initial land possession license; • Documents proving that land fees have been paid on a timely basis; • The status of implementation of the recommendations made upon

the environmental impact assessment test.

81

LEGAL SYSTEM

“The relevant authority may only remove land prior to the scheduled expirationdate for special state purposes once an agreement has been reached with the owner of the license”

“For the typical foreign investor, immoveable property rights are far moresignificant than land possession rights, especially in the real estate sector”

“the prevailing system implemented across post-Soviet land is that of the ‘floating freehold’. This system allows the owner of the building or apartment to control the land upon which their property is built, without actually owning the land themselves (in legal terms, they have a “usage right”)”

Once received, the appropriate official will review the documents and reach a verdict within 15 days. A renewal fee must also be paid. Provided the duties of land possession have been met, little difficulty should be expected.

Expiration and Termination of Land Possession Rights

Governors of soums and districts are allowed to terminate land possession licenses in the following circumstances:

• If the land possession license expires naturally, and no request is made for it to be extended;

• If a license holder makes a request to terminate his/her possession license;

• If the license holder has consistently or seriously violated obligations set forth in the land legislation, or if national security or human health have been compromised;

• If a license is illegally transferred; • If the license holder has not paid land fees according to the law; • If compensation is paid in full to the license holder, in the event of the

plot being taken into state control to fulfill exceptional government needs (also known as expropriation).

The relevant authority may only remove land prior to the scheduled expiration date for special state purposes once an agreement has been reached with the owner of the license. The removal request is then submitted to the State Cabinet, who must consent to the proposal. Reimbursement calculation depends upon the value of immovable properties on the plot estimated at current prices. If the license holder remains unsatisfied with the offer, the decision can be challenged in the Mongolian courts.

License holders have a ten-day window to appeal to the court if they consider a contract termination to be illegitimate or unlawful. However, such cases are rare and extraordinary.

Immovable Property Rights in Mongolia

For the typical foreign investor, immoveable property rights are far more significant than land possession rights, especially in the real estate sector. In most Western countries ownership of the land beneath a given piece of real estate naturally accompanies the ownership of the building or apartment. However, the prevailing system implemented across post-Soviet land is that of the ‘floating freehold’. This system allows the owner of the building or apartment to control the land upon which their property is built, without actually owning the land themselves (in legal terms, they have a “usage right”). The actual owner of the land must be Mongolian (either a private citizen, a business entity, or a governmental agency). In the case of apartments or condos, the owner of the land is usually the residents’ or owners’ association. This structure is found to operate across the majority of the Mongolian market, making it the only option for foreign investors interested in purchasing Mongolian real estate.

82

LEGAL SYSTEM

“In essence, the floating freehold provides investors with strong and inalienable freehold rights to real estate and immoveable property in Mongolia”

“Mongolia’s Immovable Property Registration law holds that the right toown immovable property takes force immediately upon registration at the Immovable Property Office”

“Applications from non-permanent residents of Mongolia should technically be made through an authorized permanent resident of the country, in the owner’s name”

The Mongolian government has ‘eminent domain’ powers as outlined in Article 37 of the 2002 land law. However, there is not a single recorded case of the government successfully exercising this power to expropriate residential, commercial or office real estate from a Mongolian or foreign citizen.

In essence, the floating freehold provides investors with strong and inalienable freehold rights to real estate and immoveable property in Mongolia. Investors may not technically own the land that their immoveable property is built upon, but they have usage rights that preclude fundamental alterations of the underlying land. These protections are so sturdy that the government has found implementation of town and city planning initiatives and the development of Ulaanbaatar’s many ger districts highly impractical.

The foundation of immovable property rights in Mongolia lie in Article V of the Mongolian constitution, which stipulates:

• Mongolia shall have an economy based on different forms of property rights consistent with universal trends of world economic development and the country’s own specific traditions;

• The state recognizes all forms of public and private property right and shall protect the rights of the owner by law.

In order to obtain the inviolable protection offered by the Mongolian constitution and supporting property law, it is necessary to register all property transactions through the appropriate legal channels. If these transactions are not carried out properly, Mongolia’s legal institutions will not acknowledge ownership rights.

Registration of Real Estate through the Immovable Property Office

Mongolia’s Immovable Property Registration law holds that the right to own immovable property takes force immediately upon registration at the Immovable Property Office.

The registration process is initiated when an individual, legal entity or associated agent provide the Immovable Property Office with the following items:

• A notarized document certifying the applicant’s ownership of the immovable property – usually a purchase contract;

• A notarized document from a recognized authority establishing the dimensions and valuation of the property;

Applications from non-permanent residents of Mongolia should technically be made through an authorized permanent resident of the country, in the owner’s name.

83

LEGAL SYSTEM

The Immovable Property Office will process the application within 30 days. The typical processing time is usually closer to 5 days. The State Registrar and the Assistant Registrar will endorse the resulting certificate.

Capital Controls

Unlike many developing Asian markets, Mongolia does not enforce any form of capital controls. Foreign investors are free to inject or remove capital from the country at will. The currency is fully convertible and the exchange rate is freely floating.

Expropriation

Theoretically, the Mongolian government has the right to expropriate private property and immovable assets under specific special circumstances. Governments in many western countries also wield such powers. For example, the US government has access to ‘eminent domain’; ‘compulsory purchase’ is the rule in the UK, and the Canadian.

The Mongolian government’s powers of expropriation are outlined in Article 37 of ‘Law on Allocation of Land to Mongolian Citizens’, and may only be utilized in the case of natural or industrial disasters.The law stipulates that owners deprived of their property under such circumstances shall be compensated at full market rate, in cash or in kind. Owners of expropriated land have recourse to the court system, if they do not agree with the compensation package offered.

To date, there is not a single recorded case of the government successfully exercising this power to expropriate real estate from a Mongolian or foreign citizen.

“Mongolia does not enforce anyform of capital controls. Foreign investors are free to inject or remove capital from the country at will. The currency is fully convertible and the exchange rate is freely floating”

84

TAX SYSTEM

SECTION 1.5

85

TAX SYSTEM

TAX SYSTEM

86

TAX SYSTEM

Executive Summary

The Mongolian tax system is simple, transparent and not burdensome. Due in part to pressure from multilaterals and in part to a real need to attract and sustain foreign capital, the Mongolian government has implemented one of the most generous foreign investor tax regimes in the world.

Overview

There is no concept of capital gains tax in Mongolia.

There are only five types of taxes that foreign investors need be concernedwith:

1. Personal Income Tax – Income tax is flat at 10% and is levied on wages as well as rental income from property or other activities. Individuals who reside in Mongolia for more than 183 days a year are counted as resident tax payers and are required to pay the 10% on their global income. Individuals who do no reside in Mongolia or visit the country less than 183 days a year are classified as non-resident taxpayers and are only required to pay the 10% tax on the portion of their income that comes from activities in Mongolia.

2. Corporate Income Tax – The corporate tax is not flat but mildly progressive. Mongolian corporation and foreign invested companies with headquarters in Mongolia are charged a tax of 10% on their first 3 billion MNT (roughly $1.8 million USD) of income and 25% on all income in excess of the 3 billion MNT threshold.

3. Property Tax – Annual property tax is set at a 0.6-1%, depending on the area, of the asset value as registered with the immoveable property office. In city center, it is 1% and outside of the city it is 0.6%.

4. Value Added Tax – VAT is charged on and ad valorem basis on all sales and purchases at a flat rate of 10%.

5. Withholding Tax – Sales of immoveable assets are charged a flat withholding tax of 2%. Other types dividend, royalties and rental income are charged a flat rate of 10%.

Personal Income Tax

There are effectively two types of individual entities in Mongolia as laid out by The Mongolian Law on Personal Income Tax: permanent resident taxpayers and non- resident taxpayers.

A permanent resident taxpayer is defined by The Mongolia Law on Personal Income Tax as:

• Individuals with residence in Mongolia or • An individual who resides in Mongolia for 183 days or more a year

“Due in part to pressure from multilaterals and in part to a real need to attract and sustain foreign capital, the Mongolian government has implemented one of the most generous foreign investor tax regimes in the world”

“Income tax is flat at 10% and is levied on wagesas well as rental income from property or other activities”

“Annual property tax is set at a flat 0.6% rate of the assetvalue as registered with the immoveable property office”

87

TAX SYSTEM

Conversely, the same document identifies a non-resident taxpayer as:

• An individual who has no residence in Mongolia and has not resided in Mongolia for 183 or more days in a tax year.

The legislation goes on to state that any individual classified as a permanent resident taxpayer must pay tax to the Mongolian authorities on their worldwide income. Those who manage to qualify as non-resident taxpayers (by fulfilling neither of the conditions stipulated above), are required to only pay the Mongolian authorities a proportion of their income earned within Mongolia.

The Mongolian Law on Personal Income Tax sets the personal income tax rateat a flat rate of 10% (reduced for foreigners from a rate of 20% as part of the country’s 2007 tax rationalization). This flat rate of 10% is applicable to the following income streams that may affect the real estate investor:

• Salaries, wages, and bonuses; • Total taxable income from activities; • Total taxable income from property; • Total taxable income from sale of property;

Total taxable income is defined in The Mongolia Law on Personal Income Taxas aggregate annual income minus all allowable expenses. This is applied to real estate incomes through the following framework:

• The total taxable income from property is determined by deducting the cost of leasing from the total income from leasing;

• The total taxable income from the sale of property is classified as the total proceeds from the assets sale.

• Any individual interested in purchasing real estate should note one exception to the total 10% flat tax rate:

• The total taxable income from the sale of property is to be charged at a rate of 2%

Corporate Income Tax

The Economic Entity Income Tax Law of Mongolia governs the taxation of profits acquired by the following different forms of taxable entity:

• An economic entity formed under Mongolian law, and their subsidiaries; • A foreign economic entity headquartered in Mongolia; • A foreign economic entity earning income in Mongolia, and its

representative offices. The first two categories are charged a variable rate of corporate income tax subject to the following rates:

• All annual income between 0 and 3 billion Mongolian Tugriks is to be charged at a rate of 10%;

“The legislation goes on to state that any individual classified as apermanent resident taxpayer must pay tax to the Mongolian authorities on their worldwide income”

“The Mongolian Law on Personal Income Tax sets the personal income taxrateat a flat rate of 10% (reduced for foreigners from a rate of 20% as part of the country’s 2007 tax rationalization)”

88

TAX SYSTEM

• All annual income which exceeds 3 billion Mongolia Tugrik is to be charged at a rate of 25%

The final category (foreign economic entities earning income in Mongolia, and its representative offices) however face the following completely separate rate of tax, their activity being classified as a repatriation of funds:

• All annual income transferred out of Mongolia by foreign economic entities is to be taxed at a flat rate of 20%

The above condition does not apply to FIFTA registered companies and joint ventures who reinvest their profits within the Mongolian economy.

Property Tax

Entities facing property ownership taxes upon immovable assets are:

• Any company that owns property in Mongolia; • Any NGO that owns property in Mongolia; • Any citizen that owns property in Mongolia; • Any non-citizen that owns property in Mongolia

Owners are liable to pay property tax according to The Immovable Property Tax Law of Mongolia on all immovable assets except:

• The immovable property of legal entities financed by central and local budgets;

• Immovable property in the form of apartments; • Immovable property in the form of buildings for public use.

Those required to pay property tax on the immovable assets are to be taxed in accordance with the following conditions:

• Property tax from the 1st January 2013 and beyond is to be charged based upon a variable scale that begins at 0.6% of the property’s value, and is capped at 1% of the property’s value.

The value of the property necessary to determine the total property tax liability is determined by data from the one of the following sources, listed in order of legal preference:

• The value of the property as it is listed with the immovable property state registry;

• If no such information is available, then the value is to be determined based on the properties assessed worth for insurance purposes;

• If neither of the above are available, then the value of the property is to be based upon the estimated book value of accounting record.

89

TAX SYSTEM

Value Added Tax

V.A.T. is charged on an ad valorum basis in Mongolia, at a rate of 10% The Mongolian Law on Personal Income Tax stipulates that:

• Income tax reports are to be compiled by either the individual or their tax agent;

• Income tax reports are required to have both hard and electronic copies submitted;

• Both the electronic and the paper copy of the income tax report must be submitted in Mongolian, or alongside certified Mongolian translations

The Economic Entity Income Tax Law of Mongolia stipulates that:

• Annual corporate income tax statements are due by the 10th February of each year

• Quarterly corporate income tax statements are due before the 21st of the month immediately following the end of the previous tax quarter

• Corporate income tax payment schedules are to be issued by the authorities by the 25th of the month

• When total corporate income tax paid exceeds a companies total corporate tax liability, the company in question can credit the excess against future payments

The Immovable Property Tax Law of Mongolia stipulates that • Taxpayers must submit immovable property tax returns to the

Mongolian tax office before the 10th February each year • Legal persons and corporate entities are liable to pay property tax

before the 15th of the last month of each quarter

Tax Ambiguity

Although theoretical tax rates are clearly desirable, the Mongolian tax regime has on a number of instances been known to suffer from a degree of ambiguity. In the real estate market the most commonly cited example of this occurring is undoubtedly with regards to determining when VAT is applicable.

The confusion arises over ambiguity concerning the use of the word residential within The Value Added Tax Law of Mongolia. Some clauses of the document suggest that ‘residential’ assets (which do not face the 10% tax) are simply those used to house people in any capacity, whilst others lead the reader (and some members of the tax authorities) to the conclusion that ‘residential’ real estate requires that the owner physically live in the property.

The way in which the Mongolian tax authorities interpret this equivocality is anecdotally reported to vary case by case, depending upon the individual tax inspector.

“Although theoretical tax rates are clearly desirable, the Mongolian taxregime has on a number of instances been known to suffer from a degree of ambiguity”

“The confusion arises over ambiguity concerning the use of the wordresidential within The Value Added Tax Law of Mongolia”

90

TAX SYSTEM

Some investors have eventually been charged 10% V.A.T. on their properties rental income, whilst others have been charged none, with both outcomes still facing the 10% income tax on their income from immovable property.

Although it is important to be aware of issues such as these, the lack of definitional clarity is a problem facing many tax regimes in developing countries around the world. As Mongolia develops, it is expected that such inconsistencies will be ironed out, in a way that largely mirrors the progression of Kazakhstan’s tax regime.

International comparison

The low taxes and absence of capital controls makes Mongolia one of the most favorable investment environments in the world.

Mongolia China Kazakhstan Hong Kong Russia

Income Tax Flat tax at 10%

Variable tax from 3% to 45%

10% tax on employment income, 15% on capital gains, 20% on ‘other income’

Variable tax from 2% to 17%

Flat tax of 30%

Corporate Income

Tax

Variable tax ranging from 10% to 25% if incorporated in Mon- golia, 20% otherwise.

Flat rate of 25%

Flat rate of 20%

Flat rate of 16.5% (15% for unin- corporated businesses)

Flat rate of 20%

Property Ownership

Tax

Variable be-

tween 0.6% and 1% as of 1st January 2013

NoneVariable between 1% and 1.5%

Standard rate of 15% of net assessable property value as determined by rent, minus 20% maintenance allowance

Up to 1.5% depending upon cadastral value

Value Add- ed Tax 10% 17% 12% None 18%

Capital Gains Tax None 20% 15% None 30%

Income tax in Mongolia is competitive with the other nations used in this study in both the Asia Pacific and the post Soviet space. The amount payable is a flat tax at a lower rate than is found in either Kazakhstan or Russia, whilst the progressive thresholds in China and Hong Kong make it likely that larger investors will end up facing similar, if not increased bills. Exceptions to the flat tax rule for the Mongolian real estate investor (primarily in the form of sales income tax) are all designed to lower the tax rate; under no circumstance should a legal person expect to pay more than 10% income tax in Mongolia.

“Although it is important to be aware of issues such as these, the lack ofdefinitional clarity is a problem facing many tax regimes in developing countries around the world”

“Exceptions to the flat tax rule for the Mongolian real estate investor(primarily in the form of sales income tax) are all designed to lower the tax rate; under no circumstance should a legal person expect to pay more than 10% income tax in Mongolia”

91

TAX SYSTEM

The Only Cement Producer in Ulaanbaatar

Central Asian Cement, founded in 2005, is the third largest cement producer in Mongolia, with total production in 2013 was 50,000 tons. Revenues are generated through production and sale of cement in Mongolia. The cement production facility is located on a 3-hectare plot of land with a long-term lease in Ulaanbaatar with circa 40 employees. The plant is connected to the local power grid and the plant has its own power (transformer) station and a deep well for water supply. The production is expected to increase to 80,000 tons this year.

Address: Uliastai street 51, 10th khoroo, Amgalan, Bayanzurkh DistrictUlaanbaatar 13260, MONGOLIATel: (+976) 5515 6153, 7711 6553, 9475 5555, 9476 5555 Fax: (+976) 7011 8100Website: www.centralasiancement.comE-mail: [email protected] & [email protected]

92

TAX SYSTEM

ULAANBAATAR REAL ESTATE SECTORAL ANALYSISSECTION 2

93

TAX SYSTEM

ULAANBAATAR REAL ESTATE SECTORAL ANALYSISULAANBAATAR REAL ESTATE

SECTORAL ANALYSIS

94

AN INTRODUCTION TO ULAANBAATAR

SECTION 2.1

95



96


Executive Summary

Ulaanbaatar is the unchallenged political, economic and cultural center of the nation. The vast majority of the county’s housing stock is located in the capital. Provincial cities will offer significant growth opportunities in the future but, for now, Ulaanbaatar offers the only market with reliable data and investment opportunities.

The city consists of nine administrative districts, six of which are contiguous. All nine districts are divided into smaller sub units, called as Khoroo. The real estate market can be divided into four main zones: the central business district, peripheral residential areas, the underdeveloped urban sprawl “ger districts” and the new southern suburbs.

Ulaanbaatar has changed rapidly in recent years as a result of rapid economic growth and rural urban migration. Economic growth and new-found wealth have led to the construction of modern sky scrapers and luxury homes. On the other end of the spectrum, the rural migrants who have flocked to the city in search of opportunity often end up residing in rather poor conditions with the city’s ger districts.

Ulaanbaatar and Provincial Cities

Ulaanbaatar is the dense urban heart that pumps the blood of Mongolia’s sparsely populated rural economy. Its name, which translates roughly as “Red Hero”, serves as a reminder of the nation’s communist past and the city’s connection to the red Soviet sponsored revolution that secured Mongolian independence in the early 20th century. Since that time, Ulaanbaatar has remained the unchallenged political, economic and cultural center of the nation. No other urban agglomeration even remotely rivals the capital city in terms of size (the second largest city, Erdenet, is more of a large town, with a population of just 90,360) or economic productivity (the capital accounts for nearly 64% of the nation’s annual GDP). Located in the Tuul River valley just slightly to the north and east of the country’s geographical center, the city is the locus at the center of the country’s road, rail and air networks. All roads literally lead to Ulaanbaatar.

Peace Avenue along the State Department Store during 1960s

“The city consists of nine administrative districts, six of which are contiguous. Allnine districts are divided into smaller sub units”

“The real estate market can bedivided into four main zones: the central business district, peripheral residential areas, the underdeveloped urban sprawl “ger districts” and the new southern suburbs”

“Economic growth and new-found wealthhave led to the construction of modern sky scrapers and luxury homes”

97


As a result, most of the housing stock and virtually all of the high value real estate is concentrated within the confines of the capital city. To say that the Ulaanbaatar is the core of the nation’s real estate market would be a dramatic understatement.

APIP strongly believes that as the Mongolian economy develops and diversifies, the real estate market outside of Ulaanbaatar will become more sophisticated. The mineral resource projects that will serve the engines of growth in decade to come are scattered throughout the country. As these projects come to fruition and begin to produce and generate income, the secondary cities and towns servicing them will begin to develop. This process has already begun in Dalanzadgad, the capital of Umnu Gobi aimag – where the OT and TT mines are located. Dalanzadgad has grown remarkably in recent years. New hotels and higher quality housing have also sprung up in Sainshand, where a massive mineral processing center and a railway spur system connecting Tavan Tolgoi to the Trans-Mongolian railway is expected to bring in billions of dollars in investment over the coming years. The demographic pull of high wage skilled jobs is likely fuel real estate demand, and price appreciation over the coming years. The current prosperity and tidiness of Mongolia’s second largest city, Erdenet, was built on the same development patter, fueled by just one moderately sized mineral project.

A construction project in Ulaanbaatar

Erdenet City, next to Erdenet Copper Mine

“APIP strongly believes that as the Mongolian economy develops anddiversifies, the real estate market outside of Ulaanbaatar will become more sophisticated”

“The mineral resource projects that will serve the engines ofgrowth in decade to come are scattered throughout the country”

“a railway spur system connecting Tavan Tolgoi to the Trans-Mongolian railway is expected to bring in billions of dollars in investment over the coming years”

“The demographic pull of high wage skilled jobs is likely fuelreal estate demand, and price appreciation over the coming years”

98


However, for the moment, the development of regional cities is still at an infant, one might even say fetal stage of development. At this time, no representative survey information or historical market data is available regarding prices and it would thus be impossible to an accurate model to forecast future trend.

For this reason, APIP will again focus strictly on the Ulaanbaatar market in this 2015 edition of its real estate report. The team hopes to expand the analysis to provincial cities in future years.

Ulaanbaatar Overview

The past two decades have seen Ulaanbaatar transform itself from a sleepy backwater of just over 500 thousand inhabitants to a bustling and rapidly modernizing metropolis that hosts more than 1.3 million residents. Sparkling glass skyscrapers, exotic restaurants and modern high-end apartment blocks have sprung up all over the downtown area. Luxury villas adorn the slopes of the hills south of the city center. But Ulaanbaatar is a city of contrasts and infrastructure development has lagged behind the city’s ambitions. The majority of the population shelters in temporary housing and felt tents on the outskirts of the city, relying on coal fired stoves to fight off the bitter winter chill.

-30

-25

-20

-15

-10-5

0

5

10

15

20

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

Deg

rees

Cel

sius


AVERAGE MONTHLY TEMPERATURE IN ULAANBAATAR

“APIP will again focus strictly on the Ulaanbaatar marketin this 2015 edition of its real estate report. The team hopes to expand the analysis to provincial cities in future years”

“The past two decades have seen Ulaanbaatar transform itself from asleepy backwater of just over 500 thousand inhabitants to a bustling and rapidly modernizing metropolis that hosts more than 1.3 million residents”

“Sparkling glass skyscrapers, exotic restaurants and modern high-end apartment blocks have sprung up all over the downtown area. Luxury villas adorn the slopes of the hills south of the city center”

0

50

100

150

200

250

300

Beijing Ulaanbaatar

Aver

age

Annu

al P

M10

Con

cent

ratio

n pe

r Cub

ic M

eter

Figure 22. Source: World Bank, ADB

AIR POLLUTION IN ULAANBAATAR

99


“Ulaanbaatar is the coldest and, according to some estimates, most polluted capital city in the world”

“The coal smoke emanating from the tents andtemporary structures on the edges of the city collects in the bowl of the valley, turning the winter air in these areas hazy and acrid”

Ulaanbaatar is the coldest and, according to some estimates, most polluted capital city in the world. Summers are warm, sunny and mild but winters can be brutally cold with temperature regularly plunging below -40 degrees Celsius (negative 40 degrees Fahrenheit, the two temperature scales cross at this point) in the winter. The coal smoke emanating from the tents and temporary structures on the edges of the city collects in the bowl of the valley, turning the winter air in these areas hazy and acrid.

The city is divided into nine administrative districts (Duuregs in Mongolian). Six of these districts - Bayangol, Bayanzurkh, Chingeltei, Khan-Uul, Songino khairkhan and Sukhbaatar District – are contiguous and connected with the city center. The remaining three – Nailakh, Baganuur and Bagakhangai – are peripheral and unattached to the downtown area.

Each district is a cohesive administrative unit with a local governor and local support staff from most of the major national ministries. The governor is appointed by the local citizen’s council and approved by the Prime Minster. Districts are subdivided into administrative units called “khoroos”, which also have locally appointed governors and administrative staff. Ulaanbaatar currently has 144 khoroos spread across its nine districts. Khoroos are further divided into smaller units, called “khesegs”, which lack a formal administrative structure or governing head. Khesegs usually consist of 300-500 households but much smaller and much larger khesegs also exist.

The administrative units do not always align with physical or market realities, however. The spinal column of the city is its central thoroughfare, Peace Avenue, which runs east to west along the valley floor. All of the 6 central districts other that Khan-Uul to the south, touch Peace Avenue at some point. Conceptually, the city can be divided into four main areas or market zones:

1. The central business district (CBD), running roughly from the western to the eastern crossroads downtown. This area hosts the most prestigious and expensive residential, office and retail properties. The CBD is concentrated almost entirely within Sukhbaatar and Chingeltei Districts.

2. The peripheral residential areas are less developed regions that surround the CBD, particularly to the east and west, along the portion of Peace Avenue that extend beyond the crossroads. These areas consist primarily of older Russian apartments and lower quality construction of more recent origin. Though much less developed than the CBD, these areas still host some important government offices, like the ministry of defense in Bayanzurkh District, and vibrant retail centers, like khoroolol in Bayangol District. Most of the peripheral housing lies in Bayanzurkh, Songinokhairkhan and Bayangol Districts.

100


3. The ger districts are new and much less developed areas of urban sprawl where most of the inhabitants live in traditional felt tents (called “gers”) or temporary wooden/concrete structures. The ger districts are not administrative or geographical. They often lack paved roads, potable water and occasionally even electricity. The ger areas mix in with the other more developed areas of the city in a chaotic and organic fashion. However, they tend to be concentrated to the north of the CBD and to the east and west of the peripheral residential areas. Bayanzurkh, Songinokhairkhan and Bayangol Districts host the majority of the ger areas. However, all the other administrative districts also have limited numbers of ger residents.

4. South of the CBD, in the Zaisan and the Yarmag area, along the road to the airport are the prosperous new suburbs of Ulaanbaatar. Though some ger areas and peripheral housing is mixed into the city’s southern area, concentrated almost entirely in Khan-Uul District, has more open green spaces and more modern, luxurious homes than the rest of the city.

For the sake of convenience and coherence, this report will provide an analysis of the real estate market organized along the lines of the city’s administrative districts. However, it is important to understand that market conditions and levels of development can vary radically within districts.

The Demographics of Ulaanbaatar

Two opposite but complementary forces have combined to radically transform Ulaanbaatar since the nation embraced democracy and capitalism.

The first of these forces is the astounding pace of economic growth. At the beginning of its capitalist experiment, Mongolia was one of the poorest countries in the world. Since then the economy has exploded, consistently posting double-digit growth rates. In just two short decades, Mongolia has nearly attained the rank of a middle- income country. This stupendous economic growth has made hundreds of local millionaires and fostered

Low income housing developments

“The ger districts are new and much less developed areas of urbansprawl where most of the inhabitants live in traditional felt tents (called “gers”) or temporary wooden/concrete structures.”

“the economy has exploded, consistentlyposting double-digit growth rates. In just two short decades, Mongolia has nearly attained the rank of a middle- income country”

101


the incubation of a burgeoning new middle class. The newly affluent have in turn demanded the finer things in life. They have constructed shopping centers that import that latest fashions, built up skyscraper to house high tech offices, and built modern apartments and luxury homes to raise their families. The developments have transformed the face of Ulaanbaatar.

The second of the major forces that has reshaped the capital city in recent years is the rapid pace of rural urban migration. Nomadic by culture, Mongolians have never been afraid to pack up the shop and move elsewhere to take advantage of an opportunity that presents itself. The booming business and service centers in the city offer such opportunities on every street corner. As a result, every year, thousands of Mongolians abandon the traditional rural herding lifestyle and move to the capital city in search of opportunity.

With incomes unstable, conditions harsh, and even the most basic of infrastructure non-existent for much of Mongolia’s rural population, it is unsurprising that so many have decided to try their luck as city dwellers. External perceptions of Ulaanbaatar’s labor market are positive, with most Mongolians being acutely aware of the country’s extraordinary economic transformation.

In addition to this pull factor, there are also push factors that force individuals to relocate to Ulaanbaatar, further fueling urbanization. Mongolia has a harsh climate that can destroy even the hardiest of life forms. Occasionally, a particularly severe winter (or a dzud) can destroy an unlucky herding family’s entire livelihood by killing off their livestock, which is usually the family’s only source of income and sole store of wealth. A herder family that has effectively lost its income and life savings often has no choice but to relocate to the city in pursuit of temporary or contract work.

Currently, nearly 48% of Mongolia’s population lives in Ulaanbaatar, a proportion that is expected to increase over the medium term. Forecasts anticipate that by 2020, over half of the country’s population will be based within the capital city.

“They have constructed shoppingcenters that import that latest fashions, built up skyscraper to house high tech offices, and built modern apartments and luxury homes to raise their families”

“The booming business and service centers in the city offer such opportunities on every street corner”

“Mongolia has a harsh climate that can destroy even the hardiest of life forms. Occasionally, a particularly severe winter (or a dzud) can destroy an unlucky herding family’s entire livelihood by killing off their livestock, which is usually the family’s only source of income and sole store of wealth”

“Currently, nearly 48% of Mongolia’s population lives in Ulaanbaatar, a proportion that is expected to increase over the medium term”

Grade A retail and office space

102


Ulaanbaatar’s Ger Districts

For many of the migrants who abandon their flocks and flock to Ulaanbaatar, reality falls short of expectation. Most migrants aspire to move into an apartment but that dream has largely been out of reach until recently. New migrants usually find themselves joining the semi-permanent ‘ger districts’ that house approximately 60% of the city’s population.

Plots of land across Ulaanbaatar’s ger districts are arranged into “khashaa’s”, or small fenced plots of land. These plots are typically owned by the family, or group of families, residing on the land. Small holder land

“For many of the migrants who abandon their flocks and flock to Ulaanbaatar, reality falls short of expectation. Most migrants aspire to move into an apartment but that dream has largely been out of reach until recently”

What is a Dzud?

Dzud is the Mongolian term for a set of extreme weather conditions, which negatively impact large numbers of the country’s livestock. With the fate of Mongolia’s rural population intrinsically connected to the health of their animals, the occurrence of a dzud usually marks a significant change in the socio-economic conditions across the country. Locals usually differentiate between three different types of Dzud: Black, White, and Ice. ‘Black Dzuds’ are usually seen when summers are hot and rain infrequent, leaving low-lying plants weak. When winter sets in and snow begins to fall, animals are incapable of locating fodder, leading many to starve. The ‘White Dzud’ is caused simply by unusually heavy snowfall, which stops livestock feeding on otherwise accessible frozen grass. The ‘Ice Dzud’ is brought about if freezing rain covers the landscape with a layer of ice making the feeding of livestock impossible.

Usually infrequent occurrences, over the past two decade Mongolia’s rural communities having to deal with these conditions on four occasions. The winters of 1990-2000, 2000-2001, and 2001-2002 saw the country hit by three consecutive dzuds, killing an estimated 11 million head of livestock nationwide. The infamous white winter dzud of 2009-2010 is still sending shock waves through the Mongolian economy. Heavy snowfall and temperatures as low as minus 50 were witnessed across the country. The UN estimates that a minimum of 8,000,000 cows, yaks, camels, horses, goats, and sheep perished, representing around 17% of the country’s total livestock.

What is a ‘Ger’?

Mongolian ‘gers’ are traditional tents that have housed the country’s nomadic herdsmen for centuries. Similar to the ‘yurts’ of Kazakhstan, they are constructed out of felt and durable white canvas stretched over a wooden lattice substructure. ‘Gers’ tend to be small in size (with floor space representing roughly 30 sqm.) and consist of a single room.

103


ownership registration procedures were made explicit in the 2005 land law, mentioned in Part I. However, many plots are still held informally and a large number of plots have title with overlapping or multiple claims.

The sheer scale and diversity of Ulaanbaatar’s ger areas precludes the possibility of treating them as a homogenous development. It is thus useful to follow the tripartite framework developed by the World Bank, which breaks the ger areas down into three tiers based their characteristics and proximity to the city center.

‘City center’ ger districts are those situated within or close to Ulaanbaatar’s more developed urban areas, and will usually border with apartment blocks and fixed urban structures. It is estimated that 78% of the structures within city center ger districts are small, detached house constructions, 18% are traditional felt tent gers, whilst the remainder are represented by modern apartment blocks that have spilled over from Ulaanbaatar’s more developed core. Characterized by a strong sense of community, these regions are well established and tend to represent migrant families whose ancestors moved to Ulaanbaatar years ago, whilst free space was still freely available close to what is now the city centre. In central ger districts it is typical to observe residents investing much time in the maintenance and development of their properties. Land and the properties occupying it are likely to be owned by the family in question (around 99% of plots are in the ownership of their residents) meaning that they are secured as inter-generational investments, potentially allowing for long term gains in quality of life to be made from short term investment.

‘Mid-tier gers’ are typically slightly further out than the central ger district, although many are still within walking distance of the Ulaanbaatar’s central, developed areas. Around 71% of the housing these mid tier neighbourhoods are detached semi-permanent houses or buildings. The remainder consists of gers. Household assets in these slightly more inaccessible regions are considerably less than those of their more centrally located peers.

“many plots are still held informally and alarge number of plots have title with overlapping or multiple claims”

“‘City center’ ger districts are those situated within or close to Ulaanbaatar’s more developed urban areas, and will usually border with apartment blocks and fixed urban structures”

“‘Mid-tier gers’ are typically slightly further out than the central ger district, although many are still within walking distance of the Ulaanbaatar’s central, developed areas”

Figure 23.

RESIDENTIAL MARKET

Accommodation in Ulaanbaatar

Westren style apartment 10,000 residents

Traditional felt ger 140,000 residents Detached construction in district 600,000 residents

Soviet apartment block 500,000 residents

104


Many living in these ‘mid tier’ Ger districts are reasonably comfortable with their standard of living. 36.3% and 38.6% of those asked in a 2010 World Bank sample stated that they were either ‘very satisfied’ or ‘moderately satisfied’ with their living environment, as opposed to a mere 2.3% who claimed to be ‘very dissatisfied’.

‘Fringe’ Ger areas are those on the periphery of Ulaanbaatar, hosting the city’s most recent migrants. Roughly 58% of families in UB’s ‘fringe’ districts live in traditional ‘ger’ style accommodation according to the World Bank, with the remainder living in basic detached structures. Only 81.5% of households actually own the property they live on. Poverty is widespread in fringe districts, with households reporting assets being just 35% of those possessed by individuals living in the country’s central ger areas.

Developing the Ger Districts

As more and more migrants move to the city, the long-term consequences of Ulaanbaatar’s peri-urban sprawl become increasingly pressing. Infrastructure outside the center of the city is extremely limited. Virtually no ger district households are connected to the main water supply. Roads amidst the sprawl of gers and detached structures are often impassable, prone to gridlock, and subject to severe drainage problems.

“Ger districts are reasonably comfortable with theirstandard of living. 36.3% and 38.6% of those asked in a 2010 World Bank sample stated that they were either ‘very satisfied’ or ‘moderately satisfied’ with their living environment, as opposed to a mere 2.3% who claimed to be ‘very dissatisfied’”

“Poverty is widespread infringe districts, with households reporting assets being just 35% of those possessed by individuals living in the country’s central ger areas”

A view over a city center ger district

A fringe ger district

105


Solid waste management represents a significant concern to health, being achieved solely through the use of collection vehicles. The service is infamously unreliable, with waste being collected as infrequently as once every three months. The most pressing issue is that 85% of ger district properties are not connected to any centralized heating network and are forced to keep warm through winter temperatures as low as -50 degrees Celsius by utilising cheap cast iron stoves. These stoves typically burn wood, raw coal, or lignite, causing poor air quality and health concerns both inside the properties where the combustion takes place, and for the city as a whole.

Numerous proposals for redeveloping the ger districts and reigning in air pollution have been floated by various government officials and multilateral agencies. These range from handing out improved stoves and insulation equipment, to building massive blocks of state managed housing.

However, gradually, consensus seems to be forming around a market based solution focused on providing subsidies to construction firms and consumers in order to incentivize the development of low cost apartments. Just last year the government passed a new mortgage regulation that locks in annual rate at 8% (plus or minus 1%). The policy is targeted at the lower end of the market and is only available to those purchasing an apartment smaller than 80 meters, effectively locking luxury properties out of the subsidy. The stock of outstanding mortgages has nearly doubled since the policy’s inception in July and is likely to continue boosting demand and moving residents up the housing chain, out of semi- permanent structures and into apartments, for the foreseeable future.

Ulaanbaatar Real Estate as a Store of Value

Investment in the ownership of immovable property differs fundamentally from investment in financial assets, as the investor acquires possession and use rights to a tangible and useful physical object.

In developed western markets, real estate’s value is derived from its ability to fulfill a physical purpose, and to be utilised as a useful structure in some capacity. As the requirements of high net worth individuals worldwide have begun to change, so has the reasoning behind their real estate investment decisions. Many wealthy investors, especially in countries where domestic legislation is placing constraints upon investment opportunity, are turning to real estate simply as an effective way of storing their wealth. In these cases, the focus of real estate investment becomes simply the act of storing and growing capital; the tangible benefits of the assets physical ownership disregarded.

This international trend has begun to impact the Ulaanbaatar market in recent years as investors from all over the world have read the growth headlines and become eager for a piece of the action.

“Numerous proposals for redeveloping the ger districts and reigning in airpollution have been floated by various government officials and multilateral agencies”

“international trend has begun to impact the Ulaanbaatar market inrecent years as investors from all over the world have read the growth headlines and become eager for a piece of the action”

106


However, a similar trend has begun to manifest itself in the local market as well. The mining boom of recent years has made many Mongolians into millionaires overnight. The local stock market is still underdeveloped and local wealth management services are practically non-existent. Eager to gain a return on their wealth and without many viable local options, Mongolia’s new moguls have increasingly turned to the real estate market as a way to store and manage their capital. Real estate is an asset that relatively unsophisticated investors can understand intuitively without complex formulas or strategies. In a rising market, real estate offers not only capital appreciation but also considerable income and patronage value. Homes and apartments that are not being used directly by the owner can be rented out for extra income or lent to family members and friends in the owner’s patronage network. For this reason, real estate is often the investment of choice for Mongolian nouveau rich.

Similar trends have manifested themselves in other resource boom economies around the world like Inner Mongolia, Kazakhstan and Australia. Unlike these markets, however, Mongolia’s resource economy is still in its infancy and the local housing market is likely to receive a considerable boost from this added source of local capital for years to come.

Upmarket homes in Ulaanbaatar

“The mining boom of recent years has made many Mongolians into millionaires overnight”

“Real estate is an asset thatrelatively unsophisticated investors can understand intuitively without complex formulas or strategies. In a rising market, real estate offers not only capital appreciation but also considerable income and patronage value”

107


Ulaanbaatar Master Plan 2030

Over the course of Ulaanbaatar’s history the government has developed several different masterplans for the city, the most recent of these being in 2012.

In the government’s view, the development centers of the city are currently far too clustered around the CBD. This is indicated in the diagram below with the red circles highlighting where most of the city’s development is concentrated.

The plan, to be attained by 2030, is to spread these development centers evenly across the city as in the diagram below.

The government plans to do this with significant infrastructure investment over the coming years. A new six-lane highway has already opened in the south of the city to facilitate access to the southwest. There are also plans to develop a new bus and underground rail network stretching from both north to south and east to west.

upmarket homes in Ulaanbaatar

108

AN INTRODUCTION TO ULAANBAATARULAANBAATAR 2030 MASTER PLAN

109


Figure 24

110

RESIDENTIAL SECTOR

SECTION 2.2

111

RESIDENTIAL SECTOR

RESIDENTIAL SECTOR

112

RESIDENTIAL SECTOR

Executive Summary

Ulaanbaatar hosts a diverse residential market. In general, the market is on a strong upward trajectory but location, location, location is the key. The district-by-district analysis provided in Section 3 of this gives a much more detailed breakdown of the demand and supply forces affecting prices in different city locales.

Overall, strong economic growth and rising wages continue to buoy demand for modern residential space. A recent government subsidized mortgage policy has provided additional stimulus in the past year, the extent of which is explored below and in section 3. The small amount of existing stock, the limited supply of available land, and the financial limitations of developers lead to a long development cycle and severely constrained supply.

APIP believes that sales and rental prices will continue to appreciate strongly in coming years, as move up demand from the growing middle class coupled with increased mortgage penetration continues to buoy the market.

Overview

Ulaanbaatar’s residential real estate market is extremely diverse. On one end of the market you have high-end, luxury apartments and homes, often in excess of 500 meters square, with full modern amenities and sweeping views of the countryside. On the other end of the market, you have individuals residing in temporary felt tents without running water, heat, or electricity. Often both of these extremes can be found within a few hundred meters of each other. Between them exists a whole range of Soviet era and modern developments.

Diversity aside, the entire residential sector has been on a sharp upward trend for the past decade. Supply has increased dramatically and, with the exception of the period surrounding the 2008 global financial crisis, both rental and sales prices have increased substantially almost every year.

APIP’s Approach to Residential Market Analysis

Over the years, APIP has gathered a wealth of data on residential real estate transactions as well as supply and demand forces in the residential market. Aggregated up to the city level, this data provides a rich overview of the past trends.

However, as with many complicated developments, the devil is in the details. There are parts of the city, like Sukhbaatar District and the Zaisan area of Khan-Uul District, where residential real estate has dramatically outperformed the general market. Differing idiosyncratic supply and demand factors will lead to a different mix of locations outperforming others in the future. As the old adage goes, “There are three things that influence a home’s value – location, location and location.”

113

RESIDENTIAL SECTOR

For this reason, APIP has chosen to organize its analysis of the residential market along locational lines. Specifically, this report will provide an analysis stratified on the six contiguous districts that make up the core of the capital city. The wealth of historical residential market transactions in our database allows us to provide a detailed analysis of past trends and make statements about likely future evolutions in each of these districts and their associated neighborhoods. Section 3 of this report provides a comprehensive statistical analysis of residential price trends, by district. The report also strives to provide accurate district level analysis of the office, hospitality and retail sector in each of these districts. However, the paucity of detailed historical transaction data in office, hospitality and retail precludes the possibility of developing effective models on a district-by-district level.

City Wide Trends in the Residential Market

The real value of this report lies in the district level analysis featured in Section 3. There are, however, certain city-wide forces acting upon both the demand and supply side of the residential market that have shaped the way the market has developed and will continue to develop in coming years.

Demand

The key demand side drivers in Ulaanbaatar’s residential market are the rapid economic growth that has occurred and the rises in wealth and wages it has engendered. Back in 2000, GDP per capita was less than $475 USD per annum at prevailing exchange rates. The average Mongolian was earning far less than this amount at the time. However, over the past 13 years, the mining and service sector boom combined with a low rate of population growth have pushed GDP per capita up above $4,000 USD. The same statistic is set to reach nearly $5,000 USD in the coming years. That is a nearly ten-fold increase in little over a decade.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Historical IMF Forecast

Curr

ent U

SD

Figure 25. Source: IMF

MONGOLIAN GDP PER CAPITA

114

RESIDENTIAL SECTOR

This growth has dramatically increased the purchasing power of locals. Mongolia now hosts a small but growing nouveau rich, entrepreneurial and political class, members of which are starting to demand luxury accommodation that meets international standards.

Wages have kept pace with overall GDP growth. Unlike many other developing countries in Asia, Mongolia does not have an enormous reserve pool of underutilized agrarian labor keeping wage rises in check. As a result, Mongolia now hosts a burgeoning middle class of skilled laborers and semi-professionals with an insatiable demand for comfort and modern amenities. As more and more Mongolians migrate to the city and move up the income ladder, the demand for quality accommodation will only accelerate.

At the same time, as the local economy modernizes, scores of foreign technical experts and investors have swarmed into the market, creating a considerable community of expats that have exerted upward pressure on prices, particularly in the rental market

Finally, as outlined in the macroeconomics session, last years initiation of a nationwide subsidized mortgage policy, with 20 year repayment and rates locked in at 8 % per annum (plus or mins 1%) fundamentally altered the financial landscape and provided a shot in the arm to both local residential demand and purchasing power. The size of the mortgage market has nearly doubled since the policy was initiated in July and, with less than 6% of the existing housing supply currently leveraged by mortgage loans, the market can clearly stand to absorb a much larger amount of capital in the future. The aggressive expansion of mortgage lending will stimulate demand and spending on residential property for decades to come.

0

5,000

10,000

15,000

20,000

5000

2008

2009

2010

2011

2012

2013

Market Value of Ulaanbaatar Housing Stock Outstanding Mortgages

Mill

ions

USD

Figure 26. Source: APIP, NSO

MORGAGE PENETRATION IN ULAANBAATAR’S RESIDENTIAL MARKET

115

RESIDENTIAL SECTOR

Supply

In contrast to soaring demand, the existing supply of residential space is quite limited and the development cycle for new space quite long. There are currently a little over 10 million square meters of apartments, houses and other modern residential space in Ulaanbaatar. At present there are only about 1.3 million square meters of quality, modern residential space scheduled to come online over the next few years.

Key supply side constraints include:

• Supply chain issues which hamper transportation of costly construction materials from China and other markets where they are produced, to the isolated central Mongolian steppe.

• Lack of undeveloped land in high demand areas, such as the central business district.

• Spatial and infrastructural development constraints, as projects cannot be built outside of Ulaanbaatar’s rather small and constrained heating grid.

• Further spatial constraints caused by the fact that the peripheral land on the outskirts of the city has been engulfed in the ger districts and divided into small-holdings. Normally, this land would be utilized for the development of suburbs and satellite centers. However, the negotiation costs associated with buying up tracts of land from dozens of different residents are very high and even when they can be overcome, the air quality and limited infrastructure of these areas make them unattractive. The one exception to this rule is Khan-Uul District to the south of the city (See the Khan-Uul piece in Section 3).

• Capital constraints on local developers who often cannot tap the international markets and are unable to secure debt financing from risk averse local banks.

• Frigid weather also impedes development work during the winter and considerably lengthens development times.

116

RESIDENTIAL SECTOR

Residential Development Pipeline Highlights

Sukhbaatar:

United Apartment - Developed by Uguuj Khishig, United Apartment will add 63 apartments to the Central Business District stock. The project is due to complete in May 2015 and prices are currently at US$2,300 per square meter, toward the high end of the spectrum.

Olympic Residence - Set for completion in 2015, the Olympic Residence is the next development by Asia Pacific Investment Partners. It is set to become the premier luxury residence in the country with prices starting at US$3,000 per square meter. It will consist of a retail podium and 97 high-end units situated opposite the Shangri-La in the Embassy District of Sukhbaatar.

United Apartments

The Olympic Residence

“the Olympic Residence is still very much under construction, and is set for completion in 2015”

“over 80% of the residentialunits in the building havecurrently been soldwith pricesreaching levels as high as$5,600 per square meter”

117

RESIDENTIAL SECTOR

Park Place - Park Place Residence is another upcoming development from Asia Pacific Investment Partners scheduled for completion in 2017. The GFA of the project will be around 50,000 square meters and the complex will incorporate a retail podium, boutique hotel and serviced apartments. Situated on the opposite corner of the Children’s Park flanking the Shangri- La, the units are expected to be similarly priced to those of the Olympic Residence.

Bayanzurk/National Park:

Hunnu 2222 - Developed by the Khurd Group, Hunnu 2222 is set to open in March 2015 near Ulaanbaatar’s National Park, southeast of Chinggis Khan Square It will consist largely of apartments buildings in which there will be around 1,416 units in total. Prices per square meter are currently around US$1,750.

Park Place

Hunnu 2222 Residence

118

RESIDENTIAL SECTOR

Time Square - Developed by Nomin Construction and scheduled for completion in April 2015, Times Square will add yet more supply the National Park area. Built in a similar style to the developments that have proved so popular in the area, the complex will consist of around 350 modern style apartments with facilities. Prices are around US$2,100 per square meter.

River Garden Town - Nomin Construction is also building River Garden Town, scheduled to complete alongside Times Square in April 2015. The development is similar in many respect to the aforementioned project and will add an almost identical 360 units to the National park area. However, prices are slightly higher than its counterpart at around US$2,200 per square meter.

Time Square

River Garden town

119

RESIDENTIAL SECTOR

Zaisan Golden Villa - Developed by Voltam, Zaisan Golden Villa is set to complete in April 2015. It will add a further 250 units to the Zaisan Valley which has seen a number of projects complete in recent years. Prices are currently around US$2,100 per square meter.

PerformanceWith burgeoning market demand and significant supply side constraints, citywide residential prices have skyrocketed in recent years and look set to continue appreciating far into the future.Sales prices experienced a dip during the global financial crisis as suddenly capital constrained developers and owners closed deals on the cheap to raise financing. However, prices have recovered strongly in recent years and are likely to continue rising.

Although prices have trended upward in the past year in MNT terms, the weakening of the local currency against the US dollar over the same period has caused depressed prices in US dollar terms. As a somewhat unsophisticated indicator of how much the downturn has affected the local economy; the percentage change in US dollar terms of house prices from 2008 to 2009 was around a 17% fall, compared with a 13% fall from 2013 to 2014.

Zaisan Golden Villa

5000t

1,000,000

1,500,000

2,000,000

2,5001012

2003 20052004 2006 2007 2008 2009 2010 2011 2012 2013 2014

2,500,0001,600

2,000,000

a

1,500,000

8001,000,000

500,000

-

Figure 27.

AVERAGE PRICE (MNT)

120

RESIDENTIAL SECTOR

APIP predicts that the pace of growth in sales prices will pickup over the next year after its recent moderation, as Mongolia sorts through its short run economic challenges. Growth should swing back to a faster pace in 2015 or upon restoration of levels of FDI in the economy, which should see average sales prices trend upward. If the economy underperforms, a downturn could occur but prices could still recover well above their current level in the coming years. The aggressiveness of pricing trends depends on the overall health of the economy, effectiveness of government policy and the wider mineral market prices. The increasing penetration of mortgages in the market could also have an enormous effect in the coming years, as more and more leverage is introduced on top of strong macroeconomic fundamentals.

Historically, movements in residential rental prices tend to track and predict prices quite closely in Ulaanbaatar. Rents have flattened out and even declined in some areas over the past year or so. The drop in FDI inflows has coincided with a decline in the city’s lucrative expat rental market. The current weakness of rental prices may predict an imminent decline in sales prices, as it did back in 2009.

500,000

1,000,000

1,500,000

2,000,000

2,5001012

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1,800

1,600

1,400

1,200

1,000

800

600

400

200

Figure 28. Source: Barilga Mongolia Database

AVERAGE PRICE (USD)

-2 0

-1 0

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Figure 29. Source: Barilga Mongolia Database

PRICE GROWTH (USD, %)

121

RESIDENTIAL SECTOR

On the other hand, the noticeable decline in rental prices for luxury and high-end properties may predict a modest downturn of sales prices in the near future, as these sectors are not supported by any credit.

Citywide rental prices should begin to recover as the economy corrects itself heading into 2015, however. As long as the mining economy stays on track and expat demand stays strong, average rental prices could rise aggressively from their current levels of around $12 USD per square meter per month.

500,000

1,000,000

160

2,000,000

2,5001012

2006 2007 2008 2009 2010 2011 2012 2013 2014

1,800

1,60020,000

18,000

16,000

14,000

12,000

10,000

8,000

4,000

6,000

2,000

0

Figure 30. Source: UBSTAT Database

RENTAL RATE PER SQM (MNT)

500,000

1,000,000

1,500,000

2,000,000

2,5001012

2006 2007 2008 2009 2010 2011 2012 2013 2014

1,800

1,60014.00

12.00

10.00

8.00

6.00

4.00

2.00


RENTAL RATE PER SQM (USD)

8.417.85

9.958.90 9.14 9.67 9.16 9.59

2007 2008 2009 2010 2011 2012 2013 2014


ANNUALIZED AVERAGE RENTAL YIELD (%)

122

RESIDENTIAL SECTOR

Rental yields have come down from their peak in the 2000s, where average yields were around 10%. Currently, residential properties provide an average annual gross rental yield of around 9.6%, provided they have tenants. Average yields have remained relatively robust over the past few years with much variation depending on characteristics of the property. It is not uncommon for prime residential projects to earn rental yields in excess of 15%.

Mortgage Policy in Mongolia

Overall Framework

After successfully offering US$1.5 billion five to ten year maturity sovereign bonds in 2012 (known as Chingis Bonds), the Mongolian administration allocated approximately 44% of the raised debt capital (USD 675 million) for a newly developed subsidized mortgage policy. Launched by the Bank of Mongolia in June 2013, USD 675 million worth of credit was provided to participating commercial banks at a 4% interest rate for the purpose of mortgages.

The new framework provides (up to) twenty-year fixed mortgage loans at 7% to 9% annual interest rates. A borrower is required to fund an initial down payment of 10% to 20%, and have a stable source of income along with an excellent credit standing. Such a mortgage is only available for apartments under 80 square meters in size and is eligible for both new mortgage loans and refinancing existing mortgage loans. The policy has been very successful in terms of reducing interest burdens for middle class families and assisting new home buyers financially.

The existing mortgage rates were as high as 27% in early 2013, and under 6% of the total market was mortgaged but, after the stimulus and initial absorption of credit, the weighted average interest rate of the mortgage market in Mongolia reduced by more than half to approximately 10%.

0

50,000

100,000

150,000

200,000

250,000

300,000350000

2013.06 2013.07 2013.08 2013.09 2013.10 2013.11

Figure 33. Source: The Central Bank of Mongolia

Newly Financed Mortgages vs. Refinanced Mortgages (in Million MNT)

123

RESIDENTIAL SECTOR

The new mortgage program was intended to support urban middle class and ‘ger’ district dwellers in moving into on-grid, modern residential spaces at affordable prices. A priority for the Mongolian government is increasing long-term saving, and a subsidized mortgage program is seen as a core part of reducing expenditures for middle class households. After implementing the subsidized mortgage scheme, approximately half of Mongolia’s overall loan portfolio carried new interest rates.

Mongolia’s capital pool for subsidized mortgages from the Chingis Bond was all but depleted by November 2013. Since then, the Mongolian National Mortgage Corporation, various ministries and commercial banks have been trying to raise capital for mortgage issuance purposes in order to maintain mortgage rates in the 7% to 9% range. This is seen as a key part of the government’s recently launched price stabilization scheme which aims to bring down inflation.

5

25

20

15

10

0


WEIGHTED AVERAGE INTEREST RATE OF MORTGAGE MARKET (%)

500,000

1,000,000

1,500,000

2,000,000

2,5001012

2013.06 2013.07 2013.08 2013.09 2013.10 2013.11

1,8001,6001,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

Total Pool from Chinggis Bond (Source:Oxford Business Group)Accumulated (Outstanding) Subsidized Mortgage Balance (Source: Central Bank of Mongolia)


CENTRAL BANK AND GOVERNMENT SUBSIDIZED MORTGAGE POOL STATUS

124

RESIDENTIAL SECTOR

Implications for Residential Markets

After the policy implementation in June 2013, Mongolia experienced explosive mortgage market growth, with total outstanding mortgage loan balances almost tripling from 2012 to 2014. Mongolia’s macroeconomic slowdown was somewhat shielded by the effects of the new mortgage policy, and as such average residential sales prices has been constantly growing since 2009 in local currency terms. The growth in residential property prices has also increased rental rates, with average rental yields maintain their 9%-10% levels for last four years.

In the past year in particular, since the mortgage policy was implemented, prices have risen in local currency terms. From the graph below it is easy to see when the credit was initially made available in June 2013, as after a stagnant start, a surge in prices buoyed by demand for mortgages is maintained into 2014. The drying up of liquidity in the program in 2014 has subsequently caused price growth to slow. The graph below shows average apartment prices compared to January 2013 i.e. a figure of 1.196 in December 2013 means prices are on average 20% higher then than in January 2013.

500,000

1,000,000

1,500,000

2,000,000

2,5001012

2008-Dec 2009-Dec 2010-Dec 2011-Dec2 012-Dec2 013-Dec2 014-Apr

1,600

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

20

40

60

80

100

120

140

Loan Debt Balance (mlm MNT) Annual Growth in MNT (%)

Outs

tand

ing

Mor

tgag

e Bl

ance

(in

Milli

on M

NT)

Annu

al G

row

th R

ate

(%)


OUTSTANDING MORTGAGE BALANCE (MM MNT) AND GROWTH RATE (%)

UB housing indexUB old housing indexUB new housing index

Yearly Change -5.1%Monthly Change -0.5%Weekly Change -6.3%

Figure 37. Source: Mongol bank

ULAANBAATAR RESIDENTIAL REAL ESTATE PRICE INDEX

125

RESIDENTIAL SECTOR

DIAMOND FINANCENon Bank Financial Institution

Founded in 2011, Diamond Finance is one of the fastest growing Non-Banking Financial Institution (NBFI) in Mongolia, which provides loans and currency exchange services to support SMEs and individuals’ financial needs.

NBFIs in Mongolia are regulated by the Financial Regulatory Commission and offer loan products to SMEs and individuals at competitive rates, and serve as an alternative to other financial institutions such as Banks.

BUSINESS LOAN

CONSUMER LOAN

SHORT TERM LOAN

If you’d like to know more about the loan products or understand investing opportunities, please feel free to contact us:

Address: 1/F, Temple View Residence, 12 Jamyan Gun Street1st Khoroo Sukhbaatar district, Ulaanbaatar 14240, MONGOLIATel: (+976) 7011 0071Website: www.diamondfinancemongolia.comE-mail: [email protected]

Serving your financial needs

126

OFFICE SECTOR

SECTION 2.3

127

OFFICE SECTOR

OFFICE SECTOR

128

OFFICE SECTOR

Viva City

Village @Nukht

YARMAG AREA

Bogd KhanMountain

ULAANBAATAR OFFICE MAP

Max Mall

Mining Center

Rokmon

Peace TowerState Department

Store

Tushig

Gandirs

Grand Plaza

Max Tower

Naran Plaza

SoyombotUgruu

129

OFFICE SECTORFigure 38

State DepartmentStore

Gandirs

Max Tower Government Palace

Central Tower

Blue MonGB Plaza

Bodi Tower

Blue Sky Tower

BattradeC LLC

Monnis Tower

GurvanGal Shangri

La

New Horizon Lux

Center

DHL CDFC

Orshil Center

AltaiTower

IFC

Naran Plaza

SoyombotUgruu

Metro Mall


130

OFFICE SECTOR

Executive Summary

Buoyed by the mining based FDI boom that started with the completion of the Oyu Tolgoi Investment Agreement in 2009 and lasted until the run up to the 2012 parliamentary election, demand for office sky-rocketed. From 2010 onwards developers began to rapidly commission new projects in order to meet the needs of international and growing local firms. An enormous development pipeline extending all the way into 2017 materialized as firms looked to cash in on the flood of international companies setting up shop in Ulaanbaatar.

FDI experienced a sudden and unexpected slump following the passage of a controversial new investment law and an acceleration of populist rhetoric in the run-up to the 2012 election cycle. The subsequent drop in resource commodity prices put a further damper on exploration companies and junior miners. Over the last year, the uncertainty in Mongolia’s investment climate and weak global natural resources market have pushed demand for Grade A and B office below their 2011 levels. Occupancy rates have crept down from nearly 100% to around 50% in prime Grade A projects. Despite this this drop in demand a huge glut of supply is set to come online in 2015-2017. The demand supply mismatch will likely place downward pressure on the market, keeping rent and sales prices stagnant for the foreseeable future.

Market Overview

Office was one of the best performing sectors in Ulaanbaatar just a few short years ago. In the wake of the Oyu Tolgoi investment agreement, dozens of junior miners and investment firms flocked to the country, looking for a piece of the action. Riding the crest of the decade long global commodities super cycle, firms awash with cheap cash from foreign investors competed for the limited supply of premium office space in the downtown area, bidding up rental and sales prices in the process. The situation has changed dramatically since 2012. Office is perhaps the sector where Mongolia’s current short run economic troubles have most clearly manifested themselves.

Demand

Downtown

Although demand for office space has grown significantly over the last few years, only certain areas of the city have been impacted. The dominant preference of both domestic and international companies is to acquire space within the central business district (CBD), which is primarily situated in Sukhbaatar, but also spills over to the eastern part of Chingeltei.

The central business district represents the epicenter of Mongolia’s economic activity, encompassing the country’s parliament, stock exchange, and the majority of key landmarks. For domestic companies, the headquartering of operations within this exclusive geographical area is a symbol of status and power.

“An enormous development pipeline extending all the way into 2017 materialized as firms looked to cash in on the flood of international companies setting up shop in Ulaanbaatar”

“FDI experienced a sudden and unexpected slump following the passage of a controversial new investment law and an acceleration of populist rhetoric in the run-up to the 2012 election cycle”

“Office was one of the best performing sectors in Ulaanbaatar just a few short years ago”

“The central business district representsthe epicenter of Mongolia’s economic activity, encompassing the country’s parliament, stock exchange, and the majority of key landmarks”

“For domesticcompanies, the headquartering of operations within this exclusive geographical area is a symbol of status and power”

131

OFFICE SECTOR

These considerations provide a permanent and significant boost to demand for both Grade A and Grade B office space within Sukhbaatar District. This support is unlikely to change with the vicissitudes of the market. Of the top twenty companies operating within Mongolia, 13 are headquartered within the CBD.

International firms entering Mongolia are also keen to establish headquarters in the CBD. The area is not only centrally located, reasonably safe, and close to shops and restaurants designed to cater to western tastes, but also contains almost all of the office supply that is up to international business standards.

For smaller headquarters, the central business district provides an attractive solution. However, for companies looking to establish an office with more than a few dozen employees, it is often an impractical solution in terms of both price and availability.

The purchase or rental of entire office buildings is not usually possible in the CBD. However this option appears to be increasingly desirable for many firms looking to establish a large base of operations in Ulaanbaatar. Demand appears to be enhanced if offices are located close to large residential areas that can provide accommodation for employees.

Satellite Centers

Poor infrastructure, high pollution levels and lack of residential space in the city center are pushing middle class and wealthy citizens to relocate. This trend has spurred development in the Stadium and Zaisan areas in Khan-Uul District, to the south of the city center, and more recently out along the Yarmag road leading to the airport. Until recently, most residents in these satellite areas have commuted into the city center for work. However, heavy traffic and long commute times appear to be spurring the development of satellite work spaces to accompany satellite residential space. Official government policy supports such development. Several national agencies have already moved their headquarters out to the Yarmag area and dozens more are expected to follow in the years to come.

Small sprinklings of private office space have appeared in the past year in the Village @ Nukht and Zaisan Square, and offer residents a nearby alternative to the premium work-space located in the city center. APIP anticipates that as the city swells and pollution worsens, more and more people will long to escape to the relative calm of satellite centers. Alternative office space will become commonplace as this trend continues.

Macroeconomic Pressures

In recent years, Ulaanbaatar’s office market can be understood as a function of FDI inflows with lag applied for construction and development. As discussed in the Macroeconomics section, between 2009-2011 Mongolia experience a massive inflow of foreign direct investment.

“International firms entering Mongolia are also keen to establish headquarters in the CBD”

“Small sprinklings of private office space have appeared in the past yearin the Village @ Nukht and Zaisan Square, and offer residents a nearby alternative to the premium work-space located in the city center”

“APIP anticipates that as the city swells and pollution worsens, more and more people will long to escape to the relative calm of satellite centers. Alternative office space will become commonplace as this trend continues”

132

OFFICE SECTOR

After signing an investment agreement with the Mongolian government, Rio Tinto and the other foreign stakeholders in the Oyu Tolgoi (OT) project brought in more than $6 billion USD to develop the copper and gold deposit. At the time of signing, Mongolia’s annual GDP was valued at just over $5 billion USD. The OT project therefore provided a massive direct stimulus to the local economy. In addition, OT generated international headlines and created a crowding-in effect as hundreds of international firms scrambled to get a toehold in this exciting new market.

The sudden surge in FDI caused a flurry of activity within Ulaanbaatar’s business community, with many local firms expanding rapidly in order to soak up the excess demand. At the same time, many international firms began to flock to the capital, as more and more international investment contracts created substantial business opportunities.

The spike in activity created a surge in demand for quality office space. The Mongolian market was not prepared to meet this demand. New buildings were commissioned and savvy developers converted retail and residential space but the city’s constrained infrastructure and the limited capacity of local construction firms meant that supply could not be brought online fast enough. Prices were bid up rapidly and new space was snatched up as soon as it came on the market. Blue Sky Tower and Central Tower, two major Grade A office project which had been commissioned even before the boom period, were finally completed in 2011 and immediately fully leased to international firms and burgeoning local businesses.

Even after these two major projects came online, demand was still not sated. Mongolia registered a record breaking 17% pace of GDP growth in 2011. Sales and rental prices for office continued to rise at an astronomical rate going in to 2012. Many of the projects commissioned in 2009 and 2010 experienced delays due to limited local project management capacity. At the same time, new plans for office buildings were continuously proposed and a swollen development pipeline materialized, extending out to 2017.

However, the second half of 2012 saw the bottom fall out of the FDI boom. The Aluminum Corporation of China Limited (Chalco), a Chinese state owned company, made a bid to acquire control of SouthGobi Resources, a major local coal producer.

China already controlled the transport and purchase ends of the local coal and local politicians feared that if Chinese companies obtained significant production stakes in they would control the entire supply chain of a very critical national industry. In the build-up to the 2012 parliamentary elections, most politicians were eager to show their nationalist credential and gain votes. Mongolia’s parliament passed a poorly conceived and unnecessarily restrictive new investment law designed to block the Chalco deal. A few months later, in December of the same year, the President proposed a new protectionist mining law that generated further uncertainty in the investment climate. In early 2013, a dispute broke out between the government and Rio Tinto regarding the terms of the investment agreement for the OT project.

“Rio Tinto and the other foreign stakeholders in the Oyu Tolgoi (OT) project brought in more than $6 billion USD to develop the copper and gold deposit”

“The spike in activity created a surge in demand for quality office space. TheMongolian market was not prepared to meet this demand”

“Prices were bid up rapidly and new space was snatched up assoon as it came on the market. Blue Sky Tower and Central Tower, two major Grade A office project which had been commissioned even before the boom period, were finally completed in 2011”

133

OFFICE SECTOR

Investors were spooked by all the nationalist sentiment and began looking for the exits. The souring of investor sentiment coincided with the downward phase of the global commodities super cycle. The collapse of gold, iron, copper and coal prices drove capital out of the exploration market. Many of Mongolia’s junior mining companies were forced to close up shop or scale operations down. Expat staff began to leave and office leases were not renewed.

Heading into 2015, the demand for office space has fallen considerably. As of Q4 2014, most occupancy rates of Grade A office buildings were around 50% according to APIP’s best estimates. Rental prices have been stubborn to come down from their 2011/2012 highs and as such many firms are relocating to less expensive space. Interestingly, a consequence of this is decent performance in downtown Grade B markets, as many firms relocate, unwilling to pay high Grade A rents. The drying up of deal flow has resulted in some international firms abandoning Mongolia altogether. Despite this, projects conceived in the boom years are to be opened imminently, and as a result Grade A office supply in the CBD is set to double in the coming years.

The Ulaanbaatar office market now faces an unenviable combination of anemic demand and an imminent tsunami of additional supply.

Supply

Total supply of Grade A, B and C office space in Ulaanbaatar is currently around 450,000 square meters, and this is expected to increase by over 200,000 square meters by 2017. This year saw the supply of Grade A space in the CBD nearly double with the opening of the International Commerce Center (ICC), GS Tower and Soyombot Urgoo Tower. This supply will further increase in 2015 with the completion of Chuang Group’s International Financial Center (IFC) and Shangri-La. Total Grade A space in the CBD will increase by well over 100,000 square meters before 2017.

With all the new supply coming online, office is no longer seen as a particularly lucrative sector by local construction and development firms, a dramatic change from just a few years back. In a recent survey of the top 17 local construction and development firms carried out by the APIP research team, only one of the firms interviewed listed the office sector when asked, “Which real estate sector is likely to be particularly lucrative in coming years?”

“Heading into 2015, the demand for office space has fallen considerably. Asof Q4 2014, most occupancy rates of Grade A office buildings were around 50% according to APIP’s best estimates”

“The drying up of deal flow has resultedin some international firms abandoning Mongolia altogether”

“The Ulaanbaatar office market now faces an unenviable combination of anemic demand and an imminent tsunami of additional supply”

134

OFFICE SECTOR

Central Tower - a joint venture between MCS and Shangri-La, Central Tower overlooks Sukhbaatar Square and is probably the highest quality offering for corporations in the capital. Its 30,000 square meters of office space is home to many international firms, sitting above 3 floors of prime retail that houses the likes of Louis Vuitton and Hugo Boss. As late as the second half of 2012, occupancy rates were at 100%, each occupant paying around $60 per square meter per month for the privilege. However, occupancy rates have dropped down to around 60% in recent months by APIP’s best estimates.

Blue Sky Tower - Sitting opposite Central Tower on the south side of Sukhbaatar Square, this iconic mixed-use development features a distinctive, biomorphic, sail-like blue glass design and provides Its striking design and ideal location has made it popular with international firms. Rental prices reached as high as $90 per square meter per month in 2012 and occupancy was near 100%. Current occupancy rates have fallen slightly but the tower still outperforms most of its downtown competitors.

“As late as the second half of 2012, occupancy rates were at 100%, each occupant paying around $60 per square meter per month for the privilege”

“Current occupancy rates have fallenslightly but the tower still outperforms most of its downtown competitors”

Central Tower

Blue Sky Tower

135

OFFICE SECTOR

International Commerce Center (ICC) - Opening its doors in 2014, Tsast Construction’s ICC is the newest addition to the Grade A office stock in Ulaanbaatar. Situated just south of the Blue Sky Tower, the twenty-floor structure includes fourteen floors of office space, increasing Sukhbaatar District’s existing stock by 10,500 square meters. Prices are similar to that of Blue Sky and Central Tower and occupancy rates so far have not been promising.

In addition to the office floors, other facilities will also be offered in the complex. A coffee house occupies the ground floor, whilst levels 5, 19 and 20 are to be occupied by a selection of high-end restaurants. Alongside what may prove to be some of the most desirable consumer facilities in the country, office workers will be provided with parking across two floors of heated garage space.

Monnis Tower - Developed by Monnis Group and completed in 2009, Monnis Tower contains around 15,000 square meters of office space across 13 floors. It is home to a number of the largest mining operations and supply companies currently in Mongolia. Monnis Tower is another office block that has seen occupancy rates fall from 100% in late 2012. Rental prices are currently slightly cheaper than Central Tower at around $50 per square meter per month.

“International Commerce Center (ICC) - Opening its doors in 2014, Tsast Construction’s ICC is the newest addition to the Grade A office stock in Ulaanbaatar”

“Developed by Monnis Group and completed in 2009, Monnis Tower contains around 15,000 square meters of office space across 13 floors. It is home to a number of the largest mining operations and supply companies currently in Mongolia”

ICC

Monnis Tower

136

OFFICE SECTOR

GS Tower - GS Tower - The developer, “German Standard” uses German engineering techniques on its new development located on Chinggis Avenue. However, the 7,000 square meter space is serviced by just 10 car permanent parking spaces, bringing the project premise into question.

Peace Tower - Opposite the Ulaanbaatar Department Store, Peace Tower stands 12 floors high and features several thousand square meters of grade B office space.

GS Tower

Peace Tower

137

OFFICE SECTOR

Max Tower - Completed in 2008, Max Tower is a 13 floor building encompassing 7,800 square meters of office space situated near the headquarters of Mongol Bank, the nation’s central bank. As Grade B space, Max Tower commands lower rental prices than its high end peers, currently around $35 per square meter per month.

Bodi Tower - A more established Grade B development, the tower offers 6,000 square meters of office space spread across 12 floors. Rental prices are similar to those commanded at Max Tower, around $35 per square meter per month, and occupants tend to be local Mongolian firms.

Max Tower

Bodi Tower

138

OFFICE SECTOR

Blue Mon - Situated to the north of Sukhbaatar Square, Blue Mon offers around 7,000 square meters of office space to a mixture of local and international firms. Occupancy has not been strong since its completion in 2011, topping out at around 90% in 2012.

Seoul Business Center - Situated in Bayanzurkh District, the Seoul Business Center is one example of successful high-end office space outside the CBD. The B+ rated center, spread across eight floors, is neither distant from the central business district, nor cheaper. Throughout its history, however, the structure has achieved high occupancy rates due to its proximity to the Royal Castle Residential Complex, which is large enough to house the majority of the center’s employees. Previously housing Oyu Tolgoi’s operations, the complex experienced a fall in occupancy in 2009 as many of OT’s front office staff were shipped over to Monnis Tower. However, the remaining space has filled up quickly and currently 95% of its units are in use.

“The B+ rated center, spread across eight floors, is neither distant from the central business district, nor cheaper. Throughout its history, however, the structure has achieved high occupancy rates due to its proximity to the Royal Castle Residential Complex”

Blue Mon

Seoul Business Center

139

OFFICE SECTOR

Altai Tower - Sitting opposite Monnis Tower in the CBD, Altai Tower contains around 2,500 square meters of space across 6 floors. Rental prices are typically much cheaper than the surrounding Grade A space at around $30 per square meter per month. Occupancy rates have remained strong since completion in 2011.

Express Tower - Completed in 2011 by Altai Construction, the tower contains around 8,000 square meters of Grade B space in the CBD. At $32 per square meter per month, occupancy rates have stayed near 100%.

Altai Tower

Express Tower

140

OFFICE SECTOR

Gegeenten - Jiguur Grand’s Gegeenten, located on the bayou of the Tuul River and DundGol, added over 11,000ms of office space to the Khan Uul District when it opened in 2014. The office element of the complex is named Fides Tower and provides some of the only grade A office space in the immediate region. Occupancy rates have been reasonable since the project launched, with the website currently showing around 60% occupied.

TDB tower - Opening in 2014, TDB Tower added 20,000ms of grade A office space to the CBD. The fourteen-storey building is situated on Peace Avenue and is half occupied by Trade and Development Bank of Mongolia.

Gegeenten complex

TDB Tower

141

OFFICE SECTOR

Twin Tower - Altai Construction launched Twin Tower in 2014. The development, located on Seoul Street, contains 10,000ms of grade A office space, three floors of retail and some F&B units on the top floor.

Satellite Center Office Developments:

Zaisan Square - In addition to retail and restaurant space, Zaisan Square, opened in 2013, features 4 floors of office space to serve the demand for alternative space in the Zaisan Valley.

Twin Tower

Zaisan Square

142

OFFICE SECTOR

APIP Office Park - APIP is developing a sizeable office park with a full suite of amenities to be completed in 2016. The parkwill be located along the Yarmag road near the Nukht Valley and will featureoffice space, a retail element, entertainment venues, daycare facilities andfood and beverage outlets. It will be the first large-scale alternative to spacelocated outside the city center and is anticipated to be very popular.

Quality Control

Although the city center boasts a fair amount of office space, it should be noted that city wide infrastructural constraints mean quality varies widely. For example, utilities are notoriously unreliable across Ulaanbaatar, with power cuts and hot water shortages commonplace even among the most expensive “luxury” facilities.

There is also a severe undersupply of parking facilities in the city center. With only a few developments offering carefully planned parking space, the majority of developments are limited to far too few spaces to service the whole block. The high density of cars in the capital makes this a pressing issue and will be a factor that drives demand for the alternative space discussed previously.

Development Pipeline Highlights

International Finance Center (IFC) - Another significant addition to Sukhbaatar’s stock of Grade A office space is Chuang Group’s IFC. 25 storeys tall, the structure, which is targeted for completion by end 2015, is set to overtake the Blue Sky Tower for the title of Mongolia’s tallest building and has the potential to expand the city’s stock of Grade A office space by as much as 30,000 square meters.

A mixed-use development, the first three floors of the IFC building aim will house a small high-end shopping mall and a conference center.

Rental space is anticipated to be offered at a discount to the rates charged by the current three Grade A structures in Ulaanbaatar (the Chuang Corporation currently intends the price to be just $50 per square meter).

“APIP is developing a sizeable office park with a full suite of amenities to be completed in 2016”

“Although the city center boasts a fair amount of office space, it should benoted that city wide infrastructural constraints mean quality varies widely”

Site of the planned APIP Office Park

143

OFFICE SECTOR

The IFC is also planned to be one of the first new pieces of Grade A office space in Ulaanbaatar to offer its units for purchase, for a rate around $5,000 per square meter.

Although priced at a premium compared to the expected rental prices, it is expected that many larger firms with long-term commitments in Mongolia may prefer the option of purchasing.

With most architects in Ulaanbaatar estimating that a building of the IFC’s size should take in excess of three years to complete (the Blue Sky took five), it seems unlikely that the development will be completed as planned by the end of 2015.

Shangri-La - Located just north of the Children’s Park in the heart of the central business district, the Shangri-La Hotel is scheduled to be completed in 2015 and will incorporate 25,000 square meters of Grade A office space. The project got off to a slow start but recent months have seen a flurry of impressive activity. The facades are now going on the tower and the underground portion of the complex is well underway. However, unfortunately in September 2014, Shangri-La experienced a fire on its 7th floor. It is unclear how long the project will be delayed by the blaze but the developers insist that they are still on course to open in 2015.

IFC

Shangri-La

“Shangri-La – Located just north of theChildren’s Park in the heart of the central business district, the Shangri-La Hotel is scheduled to be completed in 2015 and will incorporate 25,000 square meters of Grade A office space”

144

OFFICE SECTOR

MAK Tower - When completed MAK Tower will bring yet more Grade A office space online in an already swollen market. The office proportion is expected to be around 30,000 square meters.

New Landmark Project Gross Floor Area

Shangri-La 25,000 sqm

MAK Tower 30,000 sqm

International Finance Center 31,000 sqm

Performance

Downward pressure is being exerted on office rental prices across both Grade A and B spaces. The drying up of investment deal flow, the steep decline in FDI and the poor performance of mineral prices has pushed many high profile international firms, such as PwC, to drastically scale back their Mongolian operations. Junior mining companies are feeling the squeeze and are increasingly looking for an exit. Mongolian firms, who a few short years ago occupied Grade A space as a symbol of status and strength, are now looking to relocate to more affordable Grade B facilities.

APIP predicts that rental prices will remain stagnant or decline modestly over the next several years. Grade A space will likely be in oversupply in coming years, even if currently depressed levels of FDI and economic activity recover. No matter what happens in the wake of the newly passed investment law and the apparent softening of the OT dispute, it is unlikely that there will be enough demand to exert much positive upward pressure on rental prices in the foreseeable future.

“The drying up ofinvestment deal flow, the steep decline in FDI and the poor performance of mineral prices has pushed many highprofile international firms, such as PwC, to drastically scale back their Mongolian operations”

Grade A Grade B and C

32%

68%

Figure 39.

UPCOMING OFFICE SUPPLY DISTRIBUTED BY QUALITY

145

OFFICE SECTOR

The glut of new supply scheduled to come online in 2014 and 2015 few years will exert downward pressure on sales price levels as well. Prices are likely to remain stagnant or even decline in the medium term. When compared to the residential and retail markets, office looks set to heavily underperform. Sales prices are going to be very dependent on the health of the business environment and the strength of economic growth. A resurgence of FDI could see sales prices recover considerably in coming years. On the other hand, a drop in growth would portend a price collapse in this market.

The predicted decline of rental prices combined with the stagnation or modest growth of sales process means that office rental yields will decline in the medium term.

2009 2010 2011 2012 2013 2014

100,000

80,000

60,000

40,000

20,000

-

70

60

50

40

30

20

10

-

Average Rental Price of Four Landmark Properties (MNT)Average Rental Price of Four Landmark Properties (USD)

Figure 41. Source: APIP Annual Survey

AVERAGE MONTHLY RENTAL PRICE FOR ULAANBAATAR’S FOUR LANDMARK PROPERTIES (PER SQM)

BLUE MON CENTER, BLUE SKY TOWER, CENTRAL TOWER AND INTERNATIONAL COMMERCE CENTER

500,000

1,000,000

160

2,000,000

2,5001012

2006 2006 Grade A2 2006 Grade B2 2006 Grade C2 2013 2014

90,000

80,000

70,000

60,000

50,000

40,000

20,000

30,000

10,000

-

Figure 40. Source: APIP Annual Survey

RENTAL PRICE AVERAGE (MNT/SQM)

146

RETAIL SECTOR

SECTION 2.4

147

RETAIL SECTOR

RETAIL SECTOR

148

RETAIL SECTOR

Viva City

Village @Nukht

YARMAG AREA

Bogd KhanMountain

Gandan Monastery

Khoroolol

UB PalaceMax Mall

Grand Plaza

Naran Mall



ULAANBAATAR RETAIL MAP

149

RETAIL SECTOR

Government Palace

Metro Mall



Central Tower

IFC

Naran Plaza

Shangri-La

ICC

Olympic Residence

Figure 42

150

RETAIL SECTOR

Executive Summary

Retail may be the hidden hero of Mongolia’s real estate market. Developers have been so busy building high end office and luxury residential complexes over the past few years that they seem to have forgotten the burgeoning middle class consumer economy that lies at the heart of the Mongolian growth story.

A rise in real incomes, credit facilities and, consequently, purchasing power has led to strong and rapidly expanding sales figures for both local retailers and the handful of international brands that have already opened stores in Ulaanbaatar. Luxury and “mid-range” products are both flourishing and generating sales per unit area metrics that are already competitive at an international level. In fact, research indicates that mid-range brands are outperforming their luxury counterparts, flouting trends in other parts of Asia and underlining the fact that, contrary to popular perception, Mongolia’s growth is rapidly trickling down.

Recent sales manager and developer surveys consistently confirm a high level of business confidence in the retail sector. Rental yields for retail space are in excess of 20% in prime locations and APIP expects that sales and rental prices will continue to rise steadily as rapid growth and easing credit push demand up faster than supply. The amount of prime retail space in the city center will increase only modestly over the next few years as larger mixed-use developments come online. 2014 saw the launch of a number of satellite retail destinations in the Khan Uul region of the city. These retail and entertainment destination will prove enormously popular with the Mongolian consumer and represent the best potential for investors looking to capture high capital growth.

Overview

The undersupply of existing quality retail space coupled with rising wages and the emergence of new wealth makes a compelling argument for growth in the retail sector. The square footage of grade A retail outlets in the downtown area is still very thin, especially when compared to the more developed office and residential sectors. The next two years will see a number of enormous office developments come online as well as a plethora of luxury residential projects, yet the development pipeline for retail, in the downtown area at least, remains relatively stagnant, limited to a few dozen floors in new mixed use developments.

General macroeconomic trends have changed the consumer landscape in Mongolia. The economic sonic boom has made many millionaires overnight. Affluent locals have begun seeking new ways to show off their wealth. Luxury brands like Louis Vuitton and Burberry have opened shiny new outlet branches in the capital city in order to cater to the growing local appetite for conspicuous consumption.

“Retail may be the hidden hero of Mongolia’s real estate market”

“A rise in real incomes, credit facilities and, consequently, purchasing power has led to strong and rapidly expanding sales figures for both local retailers and the handful of international brands that have already opened stores in Ulaanbaatar”

“Luxury and “mid-range” products are both flourishing and generating sales per unit area metrics that are already competitive at an international level”

“APIP expects that sales and rentalprices will continue to rise steadily as rapid growth and easing credit push demand up faster than supply”

“General macroeconomic trends have changed the consumer landscape in Mongolia. The economic sonic boom has made many millionaires overnight”

151

RETAIL SECTOR

The country’s new millionaires are not the only individuals that have benefitted from the recent boom, however. Working and professional class wages have risen rapidly as well. This increase in purchasing power has rippled through the consumer goods market with spending, particularly in the luxury sector, at record highs. As more international brands enter the market, demand for high quality space increases and as such, retail occupancy rates downtown are extremely high.

Demand

Mongolians have much more disposable income to spend than they did just a few years ago. And spend it they have. According to the Mongolian National Statistics Office (NSO), annual per capita expenditure on clothing alone increased over 500% between 2003 and 2011. Mongolians are consuming a larger number of higher quality goods than ever before.

The expansion of purchasing power has been accompanied by rapid alterations in the preferences of Mongolian consumers. Twenty years after market liberalization, Mongolians have successfully adopted many modern consumption patterns; luxury items that convey taste, wealth, and status are becoming increasingly desirable to the country’s consumers. For the growing class of Mongolian salaried workers, earning a million Tugriks per month or more, the latest designer bags manufactured by high end western brands are carried with pride in every corner of the city; for those who remain on slightly more modest incomes, counterfeit brand names goods purchased at the Narantuul Black Market make for acceptable substitutes. Narantuul black market

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

600

500

400

300

200

400

0

Average Senior Managers Professionals Service workers


RAPIDLY RISING WAGES FOR ALL INCOME CATEGORIES

“The country’s new millionaires are not the only individuals that havebenefitted from the recent boom, however. Working and professional class wages have risen rapidly as well”

“According to the Mongolian National Statistics Office (NSO), annual per capita expenditure on clothing alone increased over 500% between 2003 and 2011”

152

RETAIL SECTOR

The retail sector has expanded dramatically in response, rising from less than 14% of GDP in 2008 to more than 19% in 2011 even as GDP itself increased by nearly 36% during the same period. The number of establishments operating nationally within the retail industry increased by over 33% over two years, from 27,113 in 2008 to 36,297 in 2010, whilst the gross domestic product generated by these establishments more than doubled between 2008 and 2011, from 472,226 to 1,051,804, and in 2013 final consumption expenditure accounted for 62.3% of GDP. In addition, the total sales of wholesale and retail trade in the country has maintained a double-digit growth trend since 2010, even in the wake of a weakening external economic environment in 2012 and 2013. Rental and sales prices for real estate in the retail sector have yet to catch up to the explosive growth of sales. The per meter rental price in Ulaanbaatar’s prime retail locations is still significantly lower than that of comparable locations in other emerging Asia markets.

“The retail sector has expanded dramatically in response, rising fromless than 14% of GDP in 2008 to more than 19% in 2011 even as GDP itself increased by nearly 36% during the same period”

“The per meter rental price in Ulaanbaatar’s prime retaillocations is still significantly lower than that of comparable locations in other emerging Asia markets”

18

16

14

12

10

8

6

4

2

0

100

90

80

70

60

50

40

30

20

10

02009 2010 2011 2012 2013

Total Sales of Wholesale and Retail Trade (MNTtn)Growth Rate

Figure 44.

TOTAL RETAIL SALES

20

18

16

14

12

10

8

6

4

2

0

74

72

70

68

66

64

62

60

58

562009 2010 2011 2012 2013

Nominal GDP of Mongolia (MNTtn)

Final Consumption Expenditure as a % of GDP in Mongolia


NOMINAL GDP OF MONGOLIA

153

RETAIL SECTOR

The Role of Credit

In addition to higher incomes, improved access to credit lines has facilitated a further rise in disposable income. As discussed in the Macroeconomics section, Mongolia’s banking sector has expanded rapidly over the last few years and there are now a multitude of NBFIs and savings and credit cooperatives in addition to the banks. This easier access to credit has boosted the average Mongolian’s spending power dramatically.

Recent government initiatives have further broadened access to credit; most notably, in June 2013 when the government capped mortgage rates at 8% per annum. Prior to the new policy rates had typically been around 18%. The volume of outstanding mortgages have more than doubled in the few short months since this since this policy was implemented and the market is set for continue strong growth. With new cheaper mortgages penetrating the housing market at such a rapid rate, effective disposable incomes will rise substantially, accelerating the establishment of a new consumer middle class.

Mongolia’s central bank has also implemented a successful price control program that has managed to bring inflation below 10% for the first time in three years. Some semblance of price stability will positively affect consumer spending and should similarly affect demand for high quality retail space. However, since the most recent downturn inflation has crept up to around 13%, the largely import based economy struggling to deal with the depreciation of the Tugrik experienced over the last year.

Retail Venues and Spending Patterns

The micro-entrepreneurial Mongolian represents the lowest end of the market. Still commonplace around UB, either within the city’s infamous open air Narantuul Black Market or in custom built small-scale stalls inside shopping plazas, such traders usually sell a selection of wares with a specific focus (electronics, cosmetics, clothing, etc.) for cheap and negotiable prices.

125$113

$74$65

100

75

50

25

0

Ulaanbaatar Downtown Jakarta Hanoi Downtown

USD

per

squ

are

met

er -

Prim

e Re

tail

Figure 46. Source: Colliers, APIP

ULAANBAATAR RETAIL SPACE IS UNDERVALUED

“Mongolia’s banking sector has expanded rapidly over the lastfew years and there are now a multitude of NBFIs and savings and credit cooperatives in addition to the banks”

“In June 2013 when the government capped mortgage rates at 8% per annum”

“The volume of outstanding mortgages have more than doubled in the few short months”

“Mongolia’s central bank has also implemented a successful price controlprogram that has managed to bring inflation below 10% for the first time in three years”

154

RETAIL SECTOR

Often these stalls are suitcase operations, with the operator often traveling once a month directly to Seoul, Beijing or another major commercial center and bringing back product in literal suitcases for resale at a considerable mark-up. Many small shops and wholesale outlets run by Mongolian owners are just a small step up the commercial ladder. Often located in pieces of ex-soviet apartment stock or low-grade commercial centers, these enterprises sell a wider range of goods, usually shipped in via container, in a similarly chaotic fashion to their stall and booth based peers.

Enterprises of interest to the real estate investor effectively begin with the professionalized set of local stores and chains that are becoming increasingly commonplace within the Mongolian commercial environment. Best characterized by local outlets like Gobi Cashmere, Nomin Holdings, and BSB electronics, these chains are a cut above the country’s small and often inefficient family run enterprises. Either producing locally (in the case of Gobi Cashmere) or importing and establishing themselves as market leaders within industries to which international brands are currently exposed (BSB electronics), these firms looks set to continue growing rapidly and expanding their output over the coming years. The wealthier firms within this category have over the past few years begun to move their operations out of the small high-street operations from which they begun trading, and into the larger custom built shopping facilities situated around Ulaanbaatar in order to maximize their exposure to the consumer.

The top tier of commercial enterprises currently operating within the Mongolian market remains the large international brands that have decided to establish direct or joint venture operations within Ulaanbaatar to gain exposure to the country’s robust, growth driven demand. Luxury brands such as Hugo Boss, Mont Blanc, Yves Saint Laurens, and Armani already have operations established in the most exclusive retail outfits within the center of the city, whilst high end franchises such as Timberland, L’Oreal. Samsonite, Seiko and Calvin Klein are beginning to occupy the increasingly large American Mall style facilities cropping up across the city. More than 40 international brands have opened up exclusive franchises or wholly owned outlets in Ulaanbaatar to date, the majority in the past three years. Occasionally, these types of firms operate through a wholly owned local vehicle but partnerships or join ventures are much more common.

“Many small shops and wholesaleoutlets run by Mongolian owners are just a small step up the commercial ladder”

“Enterprises of interest to the real estate investor effectively begin withthe professionalized set of local stores and chains that are becoming increasingly commonplace within the Mongolian commercial environment”

“Luxury brands such as Hugo Boss, Mont Blanc, Yves Saint Laurens, and Armani already have operations established in the most exclusive retail outfits within the center of the city whilst high end franchises such as Timberland, L’Oreal”

155

RETAIL SECTOR

Year New International Retail Brands Arrivingin Mongolia

New Retail SpaceOccupied m2

1996 Yves Rocher 150

1997 Sony 300

1998 Mercedez Benz, Land Rover, Ford, LG 500

2002 Seiko, Kenzo 100

2004 Omega, Rado, Tissot, Calvin Klein, Swatch, L’oreal 250

2005 Volkswagen 300

2006 ESPRIT, BMW, Swarowski 450

2007 Samsonite 100

2008 Adidas, Chevrolet 400

2009 Louis Vuitton, Ermenegildo Zegna, Chrysler, Jeep, Thann, Avon 900

2010

Burberry, Hugo Boss, United Colors of Benetton, Tommy Hilfiger, TAG Heuer,

Emporio Armani, Mont Blanc, Pianegonda, Victorinox

1260

2011Ulysse Nardin, Guess, Columbia

Sportswear, L’occitane, Christian Bauer, Apple

430

2012 Bang & Olufsen, Timberland, Nike, Toto, Samsung, Hublot 480

2013

Chopard, Frey Wille, Pal Zilieri, Damiani, UGG, Mango, Coffee Bean & Tea Leaf,

Petit Bateau,Tally Weijl, Caffe Bene, Round Table Pizza, Cinnabon, KFC, Vertu, Toyota,

Clarins, Canali

1360

2014 Karen Millen, Versace, Stuart Weitzman, Toms n Toms Coffee, Kawai 400

The top tier of commercial enterprises currently operating within the Mongolian market remains the large international brands that have decided to establish direct or joint venture operations within Ulaanbaatar to gain exposure to the country’s robust, growth driven demand. Luxury brands such as Hugo Boss, Mont Blanc, Vertu and Armani already have operations established in the most exclusive retail outfits within the center of the city, whilst high end franchises such as Timberland, L’Oreal, Samsonite, Seiko and Calvin Klein are beginning to occupy the increasingly large American

Figure 47. Source: APIP estimates

156

RETAIL SECTOR

Mall style facilities cropping up across the city. More than 80 international brands have opened up exclusive franchises or wholly owned outlets in Ulaanbaatar to date, the majority in the past three years. Occasionally, these types of firms operate through a wholly owned local vehicle but partnerships or join ventures are much more common.

Naran Group has been particularly successful acting as a local partner or local operator for international brands. Naran has served as the exclusive partner or operator for dozens of world famous brands (including Esprit, Adidas, Omega, Swatch, Tag Heuer, Swarovski, Samsonite, Guess, Calvin Klein and Timberland) in recent years. MCS has also been very successful in this space, bringing in luxury brands like Burberry and Hugo Boss through its Glamour joint venture company.

Many of these partnerships have drastically exceeded their owners’ expectations, as the appetite for luxury and mid range western brands within Ulaanbaatar has proved to be more substantial than companies projects thought possible.

“Naran has served as the exclusivepartner or operator for dozens of world famous brands (including Esprit, Adidas, Omega, Swatch, Tag Heuer, Swarovski, Samsonite, Guess, Calvin Klein and Timberland) in recent years”

“Louis Vuitton’s international management company have widely praised the as outlet as one of its highest growth operations in Asia”

Case Study – Louis Vuitton:

One particularly successful luxury venture within the Mongolian market has proved to be the Louis Vuitton located on the ground floor of the MCS Central Tower. It features a circular VIP client room, the centerpiece being a jewel encrusted riding saddle complete with a pouch for transporting caviar across the Steppe.

The stores success however speaks for itself. With over 2,000 Mongolian clients on their books, the shop has been effective in capturing a substantial share of the status conscience, affluent Mongolian class. Louis Vuitton’s international management company have widely praised the as outlet as one of its highest growth operations in Asia. The company’s financial statements released for 2010 confirm that with 73% sales growth, the Ulaanbaatar operation was the firms second most successful in Asia, being beaten only by Ho-Chi-Minh City (Saigon).

Emporio Armani and Hugo Boss at Central Tower

157

RETAIL SECTOR

Manager Perceptions

In order to better gauge business confidence in the retail sector, the APIP research team recently conducted a survey of sales managers at a number of leading international brand stores. The survey instruments gathered data on sales managers’ perceptions regarding current and future brand performance.

Concerning current performance, 77% of sales mangers responded that their current performance is either excellent or good. None of 35 sales mangers indicated that they are suffering from low performance issues.

For current sales comparisons compared to the previous quarter, 82% of sales mangers responded that current business is the same or better when compared to last quarter. Only 18% of sales mangers reported loss in sales revenues. Overall, the current retail sector seems to be performing better than previous quarters.

“APIP research team recently conducted a survey of sales managers at a number of leading international brand stores”

“Concerning current performance, 77% of sales mangers responded that their current performance is either excellent or good”

“For current sales comparisons compared to the previous quarter, 82% ofsales mangers responded that current business is the same or better when compared to last quarter”

Excellent Good Acceptable Low Performance

23%13%

64%

Figure 48. Source: APIP Survey

WHAT WOULD YOU SAY ABOUT YOUR CURRENT PERFORMANCE?

Better Same Worse

43%

18%

39%


HOW IS YOUR BRAND DOING COMPARED TO PREVIOUS QUARTER?

158

RETAIL SECTOR

In terms of future expansion 66% indicated that they are thinking of expanding their current retail space and 57% considered increasing the number of sales outlets. Concerning future brand performance, 88% of high-end sales mangers responded that they expected performance to improve.

“In terms of future expansion 66% indicated that they are thinking of expanding their current retail space and 57% considered increasing the number of sales outlets”

Excellent Good Acceptable Worse

70%

12%18%


WHAT’S YOUR FUTURE OUTLOOK ON SALES?

Yes No

66%

34%


ARE YOU THINKING OF EXPANDING CURRENT RETAIL SPACE?

Yes No

57%

43%


ARE YOU THINKING OF INCREASING NUMBER OF SALES OUTLETS?

159

RETAIL SECTOR

For business expansion, over half of sales managers commented that they are thinking of establishing additional sales outlets in Bayangol district. Bayangol district seemed to be the most popular retail zone for expansion. Almost 20% of sales managers, who were seeking for expansion opportunities, responded that they are thinking of having additional outlets in Khan-Uul district, which is home to newly developed Village @ Nukht and Hunnu Mall.

As the financial reports of retailers’ Mongolian operations circulate around Asia and the world, it is expected that more firms will decide that it is in their interests to establish branches in Ulaanbaatar. With its relatively low costs and incomparable macro outlook, Mongolia looks set for an explosion of retail spending. Analysts and business leaders agree. A.T. Kearney placed Mongolia at number seven on its 2013 Global Retail Development Index.

Challenges and Idiosyncrasies

Despite the enormous potential, the Mongolian retail market faces a few specific challenges unique to its country context. Firstly, Mongolia is still the most sparsely populated country in the world. The IMF projects that by 2018, the Mongolian population will reach a paltry 3.09 million. For retailers, this means that opportunities for high volume sales and large numbers of outlets will remain limited.

Secondly, women make up more than 51.4% of the population. They are gainfully employed at higher rates and are often earning more disposable income than their male counterparts. One luxury clothing sales manager told us that his brand’s core customer base in other countries is usually 60% male. In Mongolia, however, women make purchases in considerably larger numbers than men.

Thirdly, Mongolia is a country of extreme cycles. Temperatures range from -40 Celsius in winter to boiling lava hot in the summer. Fortunes rise and fall on the back of coal and copper prices and consumer spending follows suit. Over the course of our survey, sales managers repeatedly told us that their sales could vary unpredictably month-to-month.

Bayangol Chingeltei Khan-uulSukhbaatar

6%6%

32%

56%


WHICH DISTRICT ARE YOU THINKING OF EXPANDING?

“Almost 20% of sales managers, who were seeking for expansionopportunities, responded that they are thinking of having additional outlets in Khan-Uul district, which is home to newly developed Village @ Nukht”

“it is expected that more firms will decide that it is in their interests to establish branches in Ulaanbaatar”

“A.T. Kearney placedMongolia at number seven on its 2013 Global Retail Development Index”

“Despite the enormous potential, the Mongolian retail market faces a few specific challenges unique to its country context”

“One luxury clothing sales managertold us that his brand’s core customer base in other countries is usually 60% male. In Mongolia, however, women make purchases in considerably larger numbers than men”

160

RETAIL SECTOR

The final consideration revolves around the relatively nascent nature of the retail market. Mongolian retail is still in its infancy. Ten years ago, the market was dominated by open air markets and small-scale family stores. The shift toward centralized western style shopping habits is strongly underway but the market has yet to fully adapt to modern sales techniques and inventory management practices. Take, for example, seasonal discounts, a staple sales technique for liquidating excess inventory from last year’s line. A number of the brand managers we spoke to noted that they received strong negative feedback from clients after running a seasonal sales promotion. Clients who had purchased a costly item 3 months earlier at full price were irate that the same item was now being offered for a 40% discount. Several customers reportedly demanded that the cash difference be paid back. Retailers entering the market need to be aware of these differences and develop culturally appropriate marketing techniques.

Supply

Downtown

The city’s commercial hub for high-end shopping is undoubtedly the downtown and central business district (CBD), which encompasses most of Sukhbaatar District and Chingeltei District. Extending from just east of Sukhbaatar Square all the way west to the State Department Store and Gandan Monastry, this large and congested area has seen the fastest retail sector development in the country over recent years. The storefronts along this area’s two major thoroughfares - Peace Avenue and Seoul Street - are particularly prosperous. With occupancy rates above 95% and higher in the majority of leading stores, the area will soon be facing undersupply issues, especially in grade A locations where professional Mongolian chains and international brands congregate.

The most famous retail outfit in the central business district is the State Department Store. Run by the Nomin Holdings, this slightly aged Grade A retail space consistently fills all 27,775 square meters of its space. Coveted as one of the most iconic structures in Mongolia, the enterprise has recently seen many tenants in the space shift from domestic to international brands.


“The city’s commercial hub for high-end shopping is undoubtedly thedowntown and central business district (CBD)”

“Peace Avenue and Seoul Street – areparticularly prosperous. With occupancy rates above 95% and higher in the majority of leading stores”

“The most famous retail outfit in the central business district is the State Department Store”

161

RETAIL SECTOR

As foreign brands establish themselves within this space has priced many Mongolian companies out of the market. Surrounding the operation are a large quantity of small enterprises along Peace Avenue, offering everything from souvenirs to fast food, designed to penetrate the large quantities of consumers that spill out of the slightly overpriced State Department Store empty handed.

Just a few blocks to the south and west lies Naran Group’s recently renovated premier shopping center, Naran Mall. The four story plaza features a sleek modern glass facade along with all of the group’s trademark partner brands - including Guess, Calvin Klein, Swarovski, etc. as well as a small convenience store, a coffee shop (Coffee Bean & Tea Leaf) and several restaurants.

On the opposite side of the CBD is the city’s modern equivalent to the State Department Store, the MCS Central Tower. The structure’s modern interior design is host to many of the city’s most renowned international and luxury brands, being the location of choice for Hugo Boss, Mont Blanc, and Louis Vuitton. Positioned overlooking Sukhbaatar Square, the structure is ideally positioned to capture tourists viewing Ulaanbaatar’s most famous landmark, whilst the office space on the upper floors provides many of Mongolia’s professional class with daily exposure to its stores.

Prime Retail Space

As of September 2014 there were only six retail developments in the urban area of Ulaanbaatar which fit APIP’s definition of prime retail space, supplying the city with approximately 128,865 square meters in total. There was only one prime retail project before 2009 with the majority of new supply entering the market from 2009 to 2011.

Naran Mall

“The structure’s modern interiordesign is host to many of the city’s most renowned international and luxury brands, being the location of choice for Hugo Boss, Mont Blanc, and Louis Vuitton”

“As of September 2014 there were only six retail developments in theurban area of Ulaanbaatar which fit APIP’s definition of prime retail space”

162

RETAIL SECTOR

Within this prime supply, average occupancy fell from 90% in 2009 to 79.3% in 2010 as the market gradually absorbed the newly developed space. Increased consumer spending, new market entrants and generally good market fundamentals caused occupancy to creep up to 85.4% in 2011, even with two new projects coming online in the same year. There have been no new “prime” projects that have come online since 2012, which caused occupancy rates to reach 96.3% in mid-late 2014. This is set against a deteriorating external economic environment in which FDI and commodity prices have slumped. The strong performance of the retail market can be attributed to the continued rise in real wages and the growing appetite in consumer spending explored earlier.

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

100

90

80

70

60

50

40

30

20

10

02009 2010 2011 20132012 2014

Prime Retail Stock (GFA, sqm)

Prime Retail Occupancy (%)

Figure 54.

PRIME RETAIL SPACE

Khanburgedei Department Store

Max Mall


Central Tower


Naran Mall

163

RETAIL SECTOR

“The area around Sukhbaatar Square will see a small number of high endretail developments open in the coming years; the Olympic Residence will be the most luxurious residence in Mongolia”

“The Shangri-La hotel will also include an additional15,000 square meters of grade A retail space when it too comes online in 2015”

“2017 will also see the completion of Park Place, a mixed-use development by APIP, which will incorporate 26,000 square meters of prime retail space at its base”

Project NameOpening

YearGFA (sqm) District Developer


1970 27,765 Chingeltei Nomin Group

MCS Central Tower 2009 6,700 Sukhbaatar MCS


2010 30,000 Sukhbaatar Tushig Holdings LLC

Max Mall 2011 25,000 Bayangol Max Group

Khanburgedei Department Store

2011 14,400 BayangolKhanburgedei

Co. Ltd.

Naran Mall 2012 25,000 SukhbaatarNaran General

Trading LLC

The area around Sukhbaatar Square will see a small number of high end retail developments open in the coming years; the Olympic Residence will be the most luxurious residence in Mongolia and will incorporate around 5,000 square meters of grade A retail space on its first three floors. Situated adjacent to the Shangri-La Hotel currently under construction, the retail space should see high footfall from the country’s wealthiest citizens as well as cash rich tourists. The Shangri-La hotel will also include an additional 15,000 square meters of grade A retail space when it too comes online in 2015. Two new developments, MAK Tower developed by MAK Group and IFC developed by Chuang’s Consortium will add 14,194 and 5,000 square meters respectively of new supply when completed in 2017. 2017 will also see the completion of Park Place, a mixed-use development by APIP, which will incorporate 26,000 square meters of prime retail space at its base.

To the west of the State Department Store is the somewhat less well known Ulaanbaatar Department Store. The five-floor structure boasts modern facilities including two lifts, escalators to each floor, a climate control system, and high- grade lighting. The 25,000 square meters of space got off to a slow start and is still not fully occupied.


164

RETAIL SECTOR

Many of the original clients were small stallholders or suitcase operators. However, recently larger brands like Tommy Hilfiger have moved in and the outlet’s fortune may soon reverse itself.

Further out to the north and west, outside of of the CBD, in Bayangol District, lies the area often referred to as “Khoroolol” by locals. The area boasts the original Urgoo Cinema movie theater, which recently opened a second branch in the CBD.

Khoroolol is famous for its numerous small, grade B shops and retail centers lining the main Ard Ayush Avenue. These shops have long existed in the hands of entrepreneurial family businesses, offering a selection of cheap, often imitation goods to the Mongolian middle class. Recently, some larger international brand names have moved into the Khoroolol area, including the United Colors of Benetton, Mango and Nike.

Recent years have seen great success for the small ground floor units in the CBD and Khoroolol area. This has spurred on the development of a variety of micro malls in the downtown. Smaller complexes like Tumbash Shopping Center, Next Plaza, and Sansar Plaza were brought online in recent years. These typically two story structures have quickly been filled, all exhibiting close to a 100% occupancy rate, being rented predominantly to individual traders and small Mongolian enterprises.

Capitalizing on this trend and taking it to the next logical step, a number of local developers have opened larger, more modern shopping centers featuring a hybrid of office and or residential space.

These mid-range centers are a step up from the old Russian and newer grade B shopping centers but still do not reach the quality of Naran Plaza or Central Tower. Grand Plaza, located upon Peace Avenue just across from the Ramada Hotel is an excellent case study of such development. Although it has had its fair share of problems attracting internationally renowned tenants, occupancy rates are now as high as 90%, with many of large domestic firms placing themselves as key anchor brands. Grand Plaza also features several floors of office space that has performed fairly well.

Grand Plaza

“Smaller complexes like Tumbash Shopping Center, Next Plaza, and Sansar Plaza were brought online in recent years”

“These typically two story structures have quickly been filled,all exhibiting close to a 100% occupancy rate”

Page 100 – “Many of Mongolia’s wealthiest citizens are lookingfor alternative accommodation outside of the city center”

165

RETAIL SECTOR

Max Group’s Max Mall, on the opposite side of the road to the Grand Plaza, in the same building as the Ramada Hotel, is another example of such a development. Metro Mall, to the north of Sukhbaatar Square would fall into the same mid-range shopping center category.

Satellite Centers

Zaisan

With an extremely high urbanization rate, and subsequent strains on city infrastructure, many of Mongolia’s wealthiest citizens are looking for alternative accommodation outside of the city center. In recent years the population of the Zaisan Valley has exploded, as Ulaanbaatar’s newly affluent have fled the congestion and coal smoke pollution of the downtown area. Huge residences have sprung up over the hillsides creating what is now one of the most desirable residential locations in the country.

Over the last few years, Zaisan had not seen much in the way of retail development, however, this recently changed with the recent launch of the Zaisan Hill/Zaisan Square development. Located just opposite the Zaisan monument, Zaisan square features 3 floors of retail space and a number of restaurants. The doors opened in October of 2013 and the since its launch the project has been well received by the community.

“In recent years the population of the Zaisan Valley has exploded”

Maxmall

Zaisan Square

166

RETAIL SECTOR

Recent and Upcoming Satellite Retail Developments

Name Address CompletionDate Explanation Price

ZAISAN

ZaisanSquare

OppositeZaisan

MountainMonument,Khan-Uul,

Ulaanbaatar

Q4 2013

Total Floors: 9Floor B1- 3:

RetailFloor 4-7:

OfficeFloor 8:

Restaurant

Rent:USD55 per

m2

YARMAG

Hunnu Mall

NaadamchdiinStreet,

Khan-Uul 4,Ulaanbaatar

Q2 2014

Total Floors: 4Floor B2: Car

ParkingFloor B1-2:F&B, Retail,

Entertainment

Rent:60,000-

88,000 MNTper m2

Viva City

NaadamchdiinStreet,

Khan-Uul 4,Ulaanbaatar

Completedin 2013

Retail, Residential,

F&B

Sale:3,500,000

MNT per m2Rent: 40,000MNT per m2

Village @Nukht

Yarmag,Nukht, 5khoroo,

Khan-Uul,Ulaanbaatar

Q4 2013

Total Floors: 4Floor B1: Car

ParkingFloor 1-2:

Retail,F&B,

EntertainmentFloor 3:

Residential

Sale:4,000,000

MNT per m2

Yarmag Road

Occasionally labeled, the “New Zaisan” by developers, the area around the Yarmag Road leading out to the airport is poised for rapid retail and residential development in coming years. Just off the road lies one of the fastest growing centers of wealth in Ulaanbaatar, the luxurious residential Nukht Valley. Positioned to become an ultra- exclusive development catering to Mongolia’s top business magnates, the small- gated community is home to some of the most desirable real estate in the country. As the residential stock of the area is expanded beyond the initial hundred or so houses left over from the former politburo retreat, Nukht looks set to embark upon a period of rapid expansion.

“Occasionally labeled, the “New Zaisan” by developers, the area around the Yarmag Road leading out to the airport is poised for rapid retail and residential development in coming years”

“Nukht looks set to embark upon a period of rapid expansion”

Figure 55.

167

RETAIL SECTOR

In addition to the affluent residences of the Nukht Valley, the other areas surrounding the Yarmag road are also witnessing the rapid development of new middle class residential complexes. MCS’s Viva City was completed in 2013 and features affordable middle class housing with retail mixed in on the first floor units. The project sold out long before completion as its lower sales price spurred insatiable demand from new families unable to afford the high prices of downtown residences. Many similar residential units are planned for 2015. The national and city governments both list the development of new administrative offices around the Yarmag road in their official development plans. Infrastructure, including an expanded road, new heating plant extensions and expansion of water and sewage system is being built at an accelerated place to accommodate all the new developments.

The entire Yarmag Area is set to explode in coming years and retail developments are at the forefront of the trend. Several major retail projects completed in 2014.

The VILLAGE @ Nukht

The Village is a mixed-use complex aimed at the upper end of the market, particularly the wealthy gated community at Nukht Valley. The inspiration for the project was Bicester Village in the United Kingdom. Completed in 2014, the complex is built around a central fountain and square with unique colorful European style facades. The Village draws people out from the city center with a full suite of shopping, entertainment and restaurant facilities. The complex features 27 large retail spaces, including a hypermarket, 9 food and beverage outlets, a large beer hall, 12 offices and 8 residential units.

Hunnu Mall

Located right next to Viva City, Hunnu Mall spans 20,000 square meters and three floors, the third of which features a cinema and games. Since opening in 2014, it has become one of the strongest magnets for shopping and entertainment in the area, drawing people out from the city center and relieving local residents from having to make the long journey to the central districts of the city. In addition to the cinema, other entertainment provided includes a year- round skating rink, a family entertainment center, and a playground. Hunnu even has a daycare center for parents needing time alone to get some serious shopping done, without distractions. Restaurants and cafes will also be available for those looking for a fun get together or quick snack - not to mention the ice cream stands and food court.

A number of other malls are under development in the Khan-Uul region. The Max Expo Center, being developed by Chono Group is set to complete in 2016 and will install 14,400 square meters of new supply in the area.

APIP also have plans to develop a 40,000 square meter retail mall in the Yarmag area which is projected to open in 2017.

“The national and city governments both listthe development of new administrative offices around the Yarmag road in their official development plans”

“The Village is a mixed-use complex aimed at the upper end of the market, particularly the wealthy gated community at Nukht Valley”

“Completed in 2014, the complex is built around a central fountain and square with unique colorful European style facades”

“A number of other malls are under development in the Khan-Uul region. TheMax Expo Center, being developed by Chono Group is set to complete in 2016 and will install 14,400 square meters of new supply in the area”

“APIP also have plans to develop a 40,000 square meter retail mall in the Yarmag area which is projected to open in 2017”

168

RETAIL SECTOR

Retail Development Pipeline Highlights

City Center:

Olympic Residence - Set for completion in 2015, the Olympic Residence is the next development by Asia Pacific Investment Partners. It is set to become the premier luxury residence in the country and will incorporate high-end retail space on the first three floors of the development totaling around 5,000 square meters.

Shangri-La - Developed by MCS and the Kerry Group, the Shangri-La is set to complete in 2015 and will change the landscape for retail space in downtown Ulaanbaatar. As well as hotel and office space, the total retail space is estimated to be around 15,000 square meters, considerably bigger than other CBD retail offerings.

Park Place - Park Place Residence is the upcoming development from Asia Pacific Investment Partners scheduled for completion in 2017. The GFA of the project will be around 50,000 square meters and the complex will incorporate a retail podium, boutique hotel and serviced apartments. The retail portion is expected to be around 25,000 square meters in total.

MAK Tower - MAK Group’s MAK Tower, scheduled for completion in 2017, is estimated to bring over 14,000 square meters of grade A retail space to the city center. The development will be made up of mainly office space.

International Finance Center - Chuang’s Consortium is developing IFC and is expecting to complete the project in 2017. Although mainly an office building, they will include around 5,000 square meters of retail space in the bottom floors.

Suburban:

Mall @ Nukht - The Mall @ Nukht is to be developed by Asia Pacific Investment Partners and is scheduled t complete in 2017. The development, positioned along the Yarmag road on the way to the airport, will add 80,000 square meters of retail space to the region and is expected to capture the attention of some major international retailers

Mall @ Nukht

169

RETAIL SECTOR

Zaisan Hill - Oyuny Undra Group is developing Zaisan Hill in the Khan-Uul region. The project will add 4,000 square meters of prime retail space to the Zaisan area when it completes in 2015.

Monex Expo Center - Chono Group, the developers of Blue Sky Tower, is construction Monex Expo center and plans to complete the development in 2016. The complex will include over 14,000 square meters of retail space.

Performance

With limited supply, extremely high occupancy rates and a relatively constrained development pipeline, retail space in the city looks set to appreciate over the coming years. Rapid economic growth, broadly rising wages and better access to credit facilities, will allow consumer spending to continue expanding for years to come. Retail outlets’ per square meter earnings are extremely high. As more and more international brands look to enter the market and take advantage of the consumer boom, Ulaanbaatar’s already stretched supply of quality retail space will become extremely valuable and rental prices will undoubtedly rise.

Prime retail projects in Ulaanbaatar are currently held and leased by the developers meaning no real transaction data has been recorded in the sector. To make it harder to discern market rates, three of the top shopping malls; MCS Central Tower, Khanburgedei Department Store and Naran Plaza, double as a distributor of the brands they sell and thus are not a reliable reference point for open-market rental rates, there being an incentive to lower/increase rates for the benefit of their associated operating companies. However, more typical landlord tenant relationships can be observed at State Department Store, Max Mall and Ulaanbaatar Department Store and so some limited rental analysis can be conducted.

Typical leases last for 3-5 years and rental rates are typically fixed for the duration. This means that over the last years recorded rental rates have been relatively stable, since most agreements were made when the stores opened in 2010. In Q3 2014, average rental rates for prime downtown retail stood at US$32-US$56.3 per square meter per month. With the new space coming online since 2009, the net rent for prime projects is estimated to have increased by around 14.5% per annum (CAGR) over the past two years, as international brands have steadily entered the market. In 2015, a number of the existing leases are set to expire and a sharp increase in rental prices is subsequently expected as landlords find themselves in a better position to negotiate terms.

In suburban areas, average rents range from US$32.7-US$43.6 per square meter per month as at Q3 2014. The market being very new, these rents are expected to grow over the coming years as more and more people move into the suburbs creating more demand for regional malls.

“Retail outlets’ per square meterearnings are extremely high. As more and more international brands look to enter the market and take advantage of the consumer boom”

“Prime retail projects in Ulaanbaatar are currently held and leased by the developers meaning no real transaction data has been recorded in the sector”

“In suburban areas, average rents range from US$32.7-US$43.6 per squaremeter per month as at Q3 2014”

“The market being very new, these rents areexpected to grow over the coming years as more and more people move into the suburbs creating more demand for regional malls”

170

HOSPITALITY SECTOR

SECTION 2.5

171

HOSPITALITY SECTOR

HOSPITALITY SECTOR

172

HOSPITALITY SECTOR

Executive Summary

With its spectacular scenery, unique culture and booming economy, Mongolia has the potential to develop a thriving tourist sector. The number of foreign visitors per annum has grown steadily since 2000 with new airlines and flight routes established as well as a new international airport planned for the coming years.

This increased interest saw tourism industry revenues rise to over MNT350bn in 2013. An average of 444,364 inbound tourists per year visited Mongolia from 2009 to 2013 with China, Russia and South Korea supplying most of the traffic.As a result of the recent influx of tourists and business travellers, the past few years has seen Ulaanbaatar’s 5-star hotel market grow from non-existent to hosting the likes of Best Western and soon the Shangri-La. According to the Mongolia Hotel Association there were five 5-star hotels n Ulaanbaatar as at Q4 2014, supplying about 700 rooms in total. With limited supply and little in the development pipeline, the hotel sector looks to have great potentialgoing forward.

Overview

With its spectacular scenery, unique culture and booming economy, Mongolia has the potential to develop a thriving tourism sector. The numberof foreign visitors per annum has grown steadily since 2000 with newairlines and flight routes established as well as a new international airportplanned for the coming years. As infrastructure improves across thecountry, so the prospect of tourism in Mongolia’s dramatic regions outsideof Ulaanbaatar becomes more real.

Newly constructed asphalt roads can take the adventurous from the lush Siberian forests of Darkhan to the sweeping sand dunes of the Gobi Desert in vastly reduced times. The recent depreciation of the local currency has also contributed to increased interest from tourists, eager to take advantage of the cheaper price environment.

This increased interest saw tourism industry revenues rise to over MNT350bn in 2013. An average of 444,364 inbound tourists per year visited Mongolia from 2009 to 2013 with China, Russia and South Korea supplying most of the traffic.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Figure 56. Source: Central Bank of Mongolia and General Authority for Border Protection

TRAVEL & TOURISM ECONOMIC OUTPUT (MNT MILLION)

“The number of foreign visitors per annum has grown steadily since 2000”

“An average of 444,364 inbound tourists per year visited Mongolia from 2009 to 2013 with China, Russia and South Korea supplying most of the traffic”

“Newly constructed asphalt roads can take the adventurous from the lush Siberian forests of Darkhan to the sweeping sand dunes of the Gobi Desert in vastly reduced times.”

173

HOSPITALITY SECTOR

As the economy continues to thrive, so more and more business travellers enter the country in search of investment and business opportunities. Despite the increased number of visitors for business purposes, the majority (79%) of travellers identify themselves as tourists.

The harsh climate conditions in Ulaanbaatar pose major challenges to the hotel and overall hospitality sector. Although citywide average hotel occupancy rates reaches 75% during the summer months, numbers can be well below 30% during winter. Such gigantic seasonal swings are difficult for hotel operators to negotiate, and as a consequence many average daily room rates change according to the season. Peak season runs from June to September wile the off-season runs from December to March.

Leisure Business

79%

21%

Figure 58. Source: World Travel & Tourism Council

TRAVEL & TOURISM SPENDING BY CLASSIFICATION

0 -40

-30

-20

-10

0

10

20

30

40

50

60

100,000

200,000

300,000

400,000

500,000

600,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Number of Foreign Visitors Percentage Change

Visi

tor G

row

th R

ate

(%)

Annu

al F

orei

gn V

isito

rs to

Mon

golia

Figure 57.

FOREIGN VISITORS TO MONGOLIA AND ANNUAL CHANGE

“As the economy continues to thrive, so more and more business travellers enter the country in search of investment and business opportunities”

“The harsh climate conditions in Ulaanbaatar pose major challenges to the hotel and overall hospitality sector”

174

HOSPITALITY SECTOR

Hotel Name Number of Rooms

Standard Room Price

(Peak)

Standard Room Price (Non-peak)

Executive Suite Price

(Peak)

Executive Suite Price (Non-peak)

Bayangol Hotel 215 USD 158 USD 138 USD 612 USD 522

White House Hotel 60 USD 130 USD 110 N/A

Continental Hotel 40 USD 135 USD 115 N/A

Narantuul Hotel 240 USD 109 USD 95 USD 209

Ulaanbaatar Hotel 106 USD 82 USD 70 USD 990 USD 900

The Corporate Hotel 55 USD 127 USD 110 USD 576 USD 540

The Corporate Hotel and

Resort in Nukht50 USD 150 USD 120 USD 750 USD 750

Sunjin Grand Hotel 113 USD 115 USD 110 USD 230 USD 200

Kempinski Khan Palace 102 USD 149 USD 110 USD 650 USD 600

Ramada Hotel 128 USD 131 USD 110 USD 216 USD 210

Blue Sky Hotel 200 USD 180 USD 160 USD 463 USD 460

Best Western Premier 198 USD 260 USD 220 USD 523 USD 470

* Quotes are based on Bookings.com and Hotels.com Rates

26Ja

nuar

y

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Oct

ober

Nov

embe

r

Dece

mbe

r

26

48 51 53

6772

75

64

44

2724

Figure 59. Source: National Statistics Office and APIP Data

AVERAGE HOTEL OCCUPANCY RATE

175

HOSPITALITY SECTOR

5-Star Hotel Market

As a result of the recent influx of tourists and business travellers, the past few years has seen Ulaanbaatar’s 5-star hotel market grow from non-existent to hosting the likes of Best Western and soon the Shangri-La. According to the Mongolia Hotel Association there were five 5-star hotels n Ulaanbaatar as at Q4 2014, supplying about 700 rooms in total.

There were only two such hotels before 2012; the Ulaanbaatar Hotel, opened in 1961, and the Kempinski Khan Palace Hotel, which opened in 2009 and was renovated in 2012 to achieve 5-star status. The Kempinski was the first hotel in Mongolia to be managed by an international group. In 2012, off the back of the initial mining boom, the Blue Sky Hotel opened its doors, with Best Western entering the market in 2013. Another international group, Ramada, opened a 4-star quality hotel in 2011.

The Corporate Hotel & Convention Centre

Kempinski Hotel Khan Palace

Ulaanbaatar Hotel

Blue Sky Hotel

Best Western Premier Tuushin Hotel

“Tourists and business travellers, the past few years has seen Ulaanbaatar’s 5-star hotel market grow from non- existent to hosting the likes of Best Western and soon the Shangri-La”

“The Kempinski was the first hotel in Mongolia to be managed by an international group”

Best Western Premier Tuushin Hotel

176

HOSPITALITY SECTOR

Performance:

A combination of the rebound in tourist activities after the global depression and the mining boom caused 5-star occupancy rates to grow from 43% in 2009 to 70% in 2011. Given the seasonality in the market due to extreme weather conditions, a 70% occupancy rate is considered high.

2009 2010 2011 2012 2013 20140

100

200

300

400

500

600

700

800

{{Blue Sky Hotel

- Best Western- Corporate Hotel & Convention Center

Number of Room

STOCK OF 5-STAR HOTEL ROOMS IN UB

Figure 60..

0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

70

80

2009 2010 2011 2012 2013 2014F

ADR (USD)

RevPAR (USD)

Occ (%)

Figure 61.

HOTEL ROOM RATES / OCCUPANCY RATES

Kempinski Hotel Khan Palace

177

HOSPITALITY SECTOR

Peak Average Daily Rate (ADR) and Revenue per Average Room (RevPAR) were both recorded in 2011 achieving US$188 and US$131.6 respectively. It being a small market, new entrants generally cause some movement in pricing, as competitors lower their rates in a bit to retain market share. This can be seen in the graph above from 2012, when a substantial amount of new supply came online. The recent slowdown has also squeezed room and occupancy rates as less FDI has translated into fewer business travellers staying in the city.

However, despite this hotel rates have remained relatively stable, with ADR actually going up in local currency terms in 2014. This could suggest that the effect of cheaper tourism is causing an influx of visitors, crowding out the negative effect of fewer business visits. However, business travellers still make up 60% of 5-star hotel’s customers. The lack of a serviced apartment market means that some businessmen will rent out rooms for longer periods, typically 1-3 months. The demand for 5-star accommodation remains strong despite difficulties in Mongolia’s economic landscape and the market seems to have coped well in absorbing the new supply.

Future Supply

There are current five 5-star hotels in the development pipeline across the city. Of these five, three; Hilton, Sheraton, Hyatt Regency, are on hold or have cancelled their opening plans. Of the remaining two, the Shangri-La was scheduled to open at the end of 2014 but suffered a major setback when the main tower caught fire. The extent of the damage is difficult for anyone not close to the project to ascertain but the developers expect construction to be completed sometime in 2015.

The second is Park Place, a mixed-use development by Asia Pacific Investment Partners scheduled to complete in 2017. Occupying the last major undeveloped land parcel in the CBD close to the main square, the development should rival the Shangri-La for quality and will inject much needed supply into the nascent 5-star hotel market. Branding has not yet been determined although the position and developer track record should help secure a renowned international operator.

Hotel Name Opening Date Number of Rooms Owner/Developer

Shangri-La 2015 290 Shangri-La Asia Ltd & MCS Holdings

Park Place 2017 125 APIP

Hilton On Hold 250 N/A

Sheraton On Hold 300 Bodi Hotel LLC

Hyatt regency Cancelled 259 MAK Group

“However, despite this hotel rates have remained relatively stable, with ADR actually going up in local currency terms in 2014”

“Business travellers still make up 60% of 5-star hotel’s customers”

“The demand for 5-star accommodation remains strong despite difficulties in Mongolia’s economic landscape”

“The Shangri-La was scheduled to open at the end of 2014 but suffered a major setback when the main tower caught fire”

“The second is Park Place, a mixed-use development by Asia Pacific Investment Partners scheduled to complete in 2017”

SECTION 3

DISTRICT LEVEL ANALYSIS

SECTION 3.1

SUKHBAATAR DISTRICT

SUKHBAATAR DISTRICT MAP

Naran Mall

State Circus

Oasis Residence

Peace avenue

Peace avenue

Peace avenue

Ikh to

iruuTasgan road

Tasgan road

Zuragt road

Ard Ayush avenue

Ikh to

iruu

Sambuu street

Narnii road Narnii road Narnii road

Figure 62

MCS Plaza

Grand KhaanIrish Pub

AltaiTower

Monnis Tower

KFC

Battrade C LLC

Blue Sky Tower

ICC

Shangri-LaOlympic

Residence One ResidenceMonhouse

StarApartments United

Apartments

Central Tower

Government Palace

Metro Mall

Blue Mon

Chingis Khaan Square

Temple View

Park View

Regency Residence

Peace avenue

Peace avenue

Zaluuchuud avenue

Ikh toiruu

Zaluuchuud avenue

Sukh

baat

ar s

treet

Baga

toiru

uBa

ga to

iruu

Baga toiruu

Baga toiruu

Ikh

surg

uuli s

treet

Beijing street

Beijing street

Chin

ggis

ave

nue

Chin

ggis

ave

nue

Chin

ggis

ave

nue

Narnii road

National Amusement Park

Selbe river

Narnii road

Olympic street

Olympic street

Peace avenue

184

SUKHBAATAR DISTRICT

Executive Summary

The center of the center, Sukhbaatar District plays host to Ulaanbaatar’s most renowned entertainment destinations, work spaces and eateries. The nation’s key government offices and business institutions are all located in the confines of this small 218 hectare space. Many of the city’s most affluent, undaunted by the smoke and traffic or unwilling to move away from the action, have chosen to reside in the newly developed luxury complexes that have sprung up in recent years.

With some of the strongest demand in the city and an extremely constrained supply of undeveloped land, the price appreciation in Sukhbaatar has been among the best in Mongolia in recent years. This trend looks set to continue for the foreseeable future.

District Overview

If one district may be considered representative of the burgeoning affluence and modernity of Ulaanbaatar, it is without a doubt Sukhbaatar District. Despite being just 218 hectares in size, the district acts as the epicenter of both political and economic activity within the city.

At the district’s heart lies the prominent Chinggis Khan Square, the iconic space has been the focus of many crucial events in Mongolian history. Overlooking Chinggis Khan Square to the north sits the government palace, which houses various state organs, including Mongolia’s parliament, the Ikh Khural. Renovated in 2005, the extended neoclassical facade of the government palace now hosts a variety of imposing bronze tributes to the khans and generals of the country’s imperial past.

On the western side of the square lies what is soon to be one of Mongolia’s most important institutions, the Mongolian Stock Exchange (MSE). Despite being separated by a road that technically marks the border of the district, the MSE is part of the Sukhbaatar District hub. The pink facade and unimposing appearance of the renovated children’s theatre that houses the exchange belie the nascent power of the institution housed within. Despite being open for just two hours a day, the exchange is expected to play a crucial part in the Mongolian economic story in the coming years, as a new securities law, which took effect in January 2014, will hopefully cause a flurry of IPO activity that will give the currently illiquid operation new life.

In addition to the MSE, much of the city’s most desirable office and retail space is located in Sukhbaatar District. All three of the country’s Grade A office spaces are currently situated in Sukhbaatar: Central Tower, Blue Sky Tower, and Monnis Tower.

“some of the strongest demand in the city and an extremely constrained supply of undeveloped land, the price appreciation in Sukhbaatar has been among the best in Mongolia in recent years”

“At the district’s heart lies the prominent Chinggis Khan Square, the iconic space has been the focus of many crucial events in Mongolian history”

185

SUKHBAATAR DISTRICT

Entertainment

Sukhbaatar District has an abundance of bars, restaurants and nightclubs catering to a wide range of tastes with the majority found along Seoul Street. Ulaanbaatar’s preeminent beer hall, the Grand Khaan Irish pub is situated just opposite the Russian Embassy on Seoul Street, and is renowned for its big crowds, live music, and western food. Proximity to this institution is something of an informal benefit for any property in Ulaanbaatar; most expats will find themselves gracing the establishment with alarming regularity.

The Blue Sky Tower hosts the city’s most elegant high-end cocktail lounge on the 23rd floor that features sweeping 360 degree views of the city and regular live music.

In the shadow of the tower lies the classic Veranda restaurant. One of the highest quality eateries in the city, the restaurant features excellent Mediterranean food combined with inspiring views of the Choijin Lama Temple, making it a regular haunt for expats, visiting investors, and the increasingly westernized class of wealthy Mongolians. Just a few steps away is Millie’s Cafe. Established in 1998 by cafe founder/owner Millie Stoda, Millie’s Cafe has become an institution among both expats and locals. Lunchtime is always crowded, with ambassadors, ministers, miners and businessmen mingling over excellent coffee and American style comfort food. A relatively new edition to the district is the extremely popular Roseweood Cafe and Bakery, located next to the Czech Embassy and featuring fresh soups and sandwiches, all prepared in house.

Mongolia’s first KFC also opened in 2013, across from Monnis Tower.

The newest addition to the city’s restaurant scene is the Regency Residence’s “MexiKhan” Mexican restaurant. Featuring authentic Mexican cuisine and friendly modern atmosphere, MexiKhan is rapidly becoming a new local favorite.

The Mongolian Stock Exchange

“Sukhbaatar District has an abundance of bars, restaurants and nightclubs catering to a wide range of tastes with the majority found along Seoul Street”

“Blue Sky Tower hosts the city’s most elegant high-end cocktail lounge on the 23rd floor that features sweeping 360 degree views of the city”

“Mongolia’s first KFC also opened in 2013, across from Monnis Tower”

186

SUKHBAATAR DISTRICT

The most famous nightclub in Sukhbaatar District is iLoft, situated just to the north and east of the square, down an alleyway near XacBank headquarters that is inconspicuous in the daytime but packed with cars and blaring music in the evening.

Sukhbaatar’s Children’s Park is situated upon the southeastern portion of the National Park, the largest park in the city. Having reopened in the summer of 2011 after roughly six years of development by the BodiGroup, the amusement park is one of the most popular family destinations in the city, hosting a wide range of attractions including theme park rides, a bowling alley, billiard tables, and a bar.

Off Seoul Street, and directly south of the State Department Store is the famous Mongolia State Circus. The newly repainted dome is an iconic sight of Ulaanbaatar, looking over one of the most central, and henceforth fastest growing districts of the city. Established in 1940, the Mongolian State Circus is best known for its internationally acclaimed contortion acts. Other performers, including acrobats, gymnasts, jugglers, tightrope walkers, clowns, and magicians all perform in the act considered to be one of Mongolia’s best spectacles.

A few blocks further down Seoul Street will bring you to the infamous Marco Polo restaurant and strip-club, a night-time destination of choice for expats and locals alike.

The National University

Just north of the Government Palace lies the largest university in the country. The National University of Mongolia is also the nation’s oldest, founded in 1942 as a training ground for the communist party’s executive class. Now offering legitimate and competitive programs, one third of the Mongolian population with university degrees graduated from the institution. The university hosts estimated 11,000 undergraduates, 2000 graduate students, 800 faculty members, and 400 academic support staff at any one time.

Mongolian National University

“Sukhbaatar’s Children’s Park is situated upon the southeastern portion of the Nairamdal Park, the largest park in the city”

“Off Seoul Street, and directly south of the State Department Store is the famous Mongolia State Circus”

187

SUKHBAATAR DISTRICT

Sukhbaatar District’s campus houses the Schools of Information Technology, Physics and Electronics, and Business and Commerce; and as such hosts a vibrant student population for the majority of the year. Throughout term time, the area is a flurry of activity as students move between lectures, classes, and the cheap bars that have sprung up in order to facilitate their recreation. These periods place a considerable demographic strain on the housing stock of the northern area, as hundreds of students from outside of Ulaanbaatar move into the district’s cheap housing and student accommodation, unable to remain living at home like their city based peers. The University of the Humanities, the Mongolian State Pedagogical University and the Mongolian National Institute of Physical Education bring in thousands of students to this area as well.

Retail Space

It is unsurprising, given Sukhbaatar’s affluence, that its economy is supported by a thriving retail sector, being the first port of call for international operations looking to get a foothold within the Mongolian economy.

The most exclusive retail space within the district is undoubtedly the first two floors of the MCS Central Tower. Similar in interior design to Hong Kong’s International Finance Center, the complex hosts many of the world’s most exclusive companies including: Mont Blanc, Hugo Boss, Louis Vuitton, Swarovski, Burberry and Giorgio Armani.

The newly refurbished Naran Plaza, situated upon the north side of Peace Bridge now represents one of the most exciting retail opportunities in the city. Spread across five floors, it is home to many international franchises such as Timberlands, Swatch, WMF Kitchenware, and Calvin Klein Jeans, L’Oreal, Samsonite, Espirit, Seiko, Puma, and Yves Saint Laurent.

Residential Market

According to APIP estimates, there are currently around 175,700 square meters of residential apartment stock within Sukhbaatar district. A mixture of old apartment stock and new luxury projects, Ulaanbaatar’s most central district is also its most structurally diverse.

New supply is extremely limited compared to the district’s burgeoning levels of demand from expatriates and professional Mongolians. With both groups keen to be located as close as possible to offices in the central business district. As economic growth continues, incomes rise, and more expatriates arrive looking for safe and accessible housing, demand is expected to increase well into the medium term.

Construction companies, aware of the opportunities in the market, have attempted to respond to this demand by increasing their supply as much as Sukhbaatar’s land constraints will allow. This, however, is unlikely to be anywhere near enough to meet demand in the Sukhbaatar residential market over the medium term.

“students from outside of Ulaanbaatar move into the district’s cheap housing and student accommodation, unable to remain living at home like their city based peers”

“It is home to many international franchises such as Timberlands, Swatch, WMF Kitchenware, and Calvin Klein Jean, L’Oreal, Samsonite, Espirit, Seiko, Puma, and Yves Saint Laurent”

“According to APIP estimates, there are currently around 175,700 square meters of residential apartment stock within Sukhbaatar district”

“Construction companies, aware of the opportunities in the market, have attempted to respond to this demand by increasing their supply as much as Sukhbaatar’s land constraints will allow”

188

SUKHBAATAR DISTRICT

The district’s population has swollen by nearly 40% over the past decade according to the NSO Immigration moderated somewhat over the past year but will likely resume in the near future.

New land for development has become increasingly scarce, with nearly all- usable land within the city center having either been built upon, or currently under development. This inadequacy is well demonstrated by the fact that many of the city’s older, soviet buildings are now being pulled down to make way for newer complexes.

Luxury Residential Market

One key area of the market that has been pushing up prices within the Sukhbaatar District has been the development of Ulaanbaatar’s luxury residential market. The Embassy District, containing many of Ulaanbaatar’s most exclusive international standard properties has seen averages prices increase around 300% between 2005 and 2013, outperforming the rest of the district by about 60%.

Most luxury developments are in the so-called Embassy District, a sub-area of Sukhbaatar District, centered on the intersection between UNESCO Road and Chinggis Khaan Avenue. The abundance of embassies situated in the vicinity should be something of an indicator of the dynamics of the neighborhood. The area currently contains some of the most desirable real estate in the city, details of which can be found below.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

thou

sand

peo

ple

0

20

40

60

80

100

140

120

160

SUKHBAATAR DISTRICT POPULATION

Figure 63. Source: www.ubstat.mn

“many of the city’s older, soviet buildings are now being pulled down to make way for newer complexes”

189

SUKHBAATAR DISTRICT

Current Luxury Supply

The One Residence - The One Residence is situated to the east of the Embassy District, a prime location for luxury real estate in Sukhbaatar.

The complex’s ninety apartments, which range in size from 79 meters squared to 113 meters squared, are fitted with many of the same amenities found in the city’s most exclusive apartments.

Designed as luxury apartments would be in Korea, the rooms are garish by the standards of comparable properties.

The Regency Residence - Located down upon the southern border of the Sukhbaatar District within the Embassy Area, the Regency Residence is just five minutes walk away from Sukhbaatar Square. Spread across thirteen floors, the building contains 97 luxury apartments and penthouses, and is widely praised for their superior build quality and picturesque interior design (carried out by Harold Thompson, an internationally acclaimed firm with over of 40 years of residential expertise).

The One Residence

“Regency Residence is just five minutes walk away from Sukhbaatar Square. Spread across thirteen floors, the building contains 97 luxury apartments and penthouses”

The Regency Residence

190

SUKHBAATAR DISTRICT

Star apartments - Arguably the most exclusive accommodation close to the central business district, Star Apartments, opened in 2001, has become a firm favorite of the most affluent expatriates who have come to live and work in Ulaanbaatar. With landscaped gardens, one of the nicest gyms in the city, and 24- hour security within a high walled community, the apartments are well fit out to provide both comfort and safety to their residents.

The first truly condominium style luxury outfit in Mongolia, the price path followed by the Regency Residence demonstrates the demand for high-end real estate near the center of the city. With an initial presale value of just $650 per square meter in 2007, the conservative estimates given the untested nature of the project in Ulaanbaatar were quickly pushed up. Demand was primarily sourced from the first wave of expatriates coming into the country as the Mongolian legislative environment opened up to the idea of foreign investment, and negotiations began regarding the terms of many of the country’s major mining ventures.

By the end of 2009, the price per square meter of the property was nearly double the already considerable average seen around the rest of the Sukhbaatar district. The scale of this differential has increased even further over the past few years.

Upon the insistence of the Star Estate,, all of the apartments remain under their ownership, and are let out to tenants. Demand for the properties far exceeds the minuscule supply; prices are very high and are subject to successfully navigating the property’s two-year waiting list.

Star Apartments

“Arguably the most exclusive accommodation close to the central business district, Star Apartments, opened in 2001”

“By the end of 2009, the price per square meter of the property was nearly double the already considerable average seen around the rest of the Sukhbaatar district”

191

SUKHBAATAR DISTRICT

Mon House - Located near the One Residence to the east of the district, Monhouse was in late 2013. Containing 77 high quality residential units, the development added much needed housing supply to the Embassy District and will service wealthy locals and expats alike.

Golomt tower - Directly south of the Gandan monastery is a five building complex constructed by the Bodi corporation, known as Golomt Towers. Completed in 2006, each of the structures is 15 stories in height, and for a long time represented some of the most desirable residential space in the city. Below this aging residential space is a commercial structure, which remains operated by the Bodi Group, and is notable for housing a number of highend retail operations. These outfits enjoy continued success amongst Mongolian patrons.

Upcoming Supply

The reason behind such statistics is based upon more than just the structure’s planned luxurious interior. Views over the Bogd Khan mountain, the centrality of the structures location to the central business district, and the inherent status that comes with the ownership of such exclusive real estate has made the opportunity difficult to refuse for many Mongolians looking for obvious examples to display their success and prosperity.

Monhouse

Golomt Tower

“Located near the One Residence to the east of the district, Monhouse was in late 2013”

192

SUKHBAATAR DISTRICT

Many older Mongolians, with no intention of moving their large gated homes in Zaisan, still find themselves unable to ignore the property, making small investments in order to store their wealth, whilst allowing their young children to use their apartment as a second home when they desire to be close to the excitement of the city center.

The demand schedule facing such exclusive properties looks set to expand in line with the rest of Sukhbaatar District, if not at a faster pace. Five years ago, it was foreign investors, and expatriates looking for accommodation who formed the driving force behind Ulaanbaatar’s luxury real estate market. Today, as the spoils of FDI and resource extraction have created a new, and prosperous native social grouping, it is Mongolians who are increasingly willing to place their money into luxurious real estate assets. For many of these domestic investors, properties in Sukhbaatar provide the perfect combination of social capital, low risk, and potential financial reward.

Despite this, Sukhbaatar district’s supply potential looks to remain extremely constrained over the coming years. The spatial limitations of building in desirable locations close to the city center look set to inhibit the development of luxury space by all but the largest companies endowed with the capital to compete financially for the ever dwindling supply of usable space.

Perfomance

Strong demand has caused the average apartment price in Sukhbaatar to rapidly appreciate from under $500 per square meter in 2005, to just over $1,650 per square meter in 2014, according to APIP data. The market has witnessed a constant trend upward in prices (with the exception of 2010 due to the global financial crisis) as demand for residential real estate in Sukhbaatar continues to outstrip supply.

The increasingly salient supply limitations within Sukhbaatar combined with consistently rising levels of demand lead APIP to forecast sustained capital growth in years to come.

The magnitude of this appreciation will be determined by macroeconomic factors such as foreign direct investment, and the resulting quantity of wealthy expatriates looking to move to the country for business purposes over the coming years.

Large increases in the levels of FDI flowing into the country, underpinned by favorable conditions in the wider Mongolian economy, would push prices in the district toward the upper bound of $1,900 per square meter by the end of 2015 and $2,450 by 2018.

However, if conditions are depressed, APIP forecasts that property values would drop modestly in 2015, to around $1,400 per square meter, and then regain their upward trend, recovering to $1,600 per square meter by 2018.

“The increasingly salient supply limitations within Sukhbaatar combined with consistently rising levels of demand lead APIP to forecast sustained capital growth in years to come”

“The magnitude of this appreciation will be determined by macroeconomic factors such as foreign direct investment”

“prices in the district toward the upper bound of $1,900 per square meter by the end of 2015 and $2,450 by 2018”

193

SUKHBAATAR DISTRICT

The price movements in the Sukhbaatar District residential sales market have been matched by proportional increases in the rental rates charged by landlords.

Prices have increased from an average of $6 per square meter per month in 2005, up to $16.50 in 2013. Both locals and foreign citizens alike support demand for living space in close proximity to work and entertainment destinations.

Prices in Sukhbaatar have persistently underperformed the citywide housing index over the last year, only catching up in July 2014, where prices were around 29% above January 2013 levels. This is indicative of the makeup of accommodation in the district, the vast majority of apartments not qualifying for the government’s subsidized mortgage program.

When the data is split the results reinforce the exposition above, with the apartments under 80ms appearing to track the citywide index more readily than it’s over 80ms counterpart. The erratic over 80ms line is testament to the widely varying quality of housing in Sukhbaatar, where as little as one or two luxury penthouses sold one month can result in sample selection bias occurring, where a particular type of transaction is overrepresented and has the result of skewing the dataset.

“Prices in Sukhbaatar have persistently underperformed the citywide housing index over the last year, only catching up in July 2014”

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

4

Jan-

14De

c-14

Mar

-14

Feb-

14

May

-14

Jun-

14Ju

l-14

Apr-1

4

-0.1

-0.05

0.05

0

0.1

0.15

0.2

0.25

0.3

0.35

UlaanbaatarSukhbaatar

Figure 64. Source: Tenhleg Zuuch

ULAANBAATAR VS SUKHBAATAR DISTRICT REAL ESTATE PRICE INDEX

-0,1

-0,05

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

Sukhbaatar>80Sukhbaatar<80

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-14

Jan-

14

Dec-

14

Mar

-14

Feb-

14

May

-14

Jun-

14

Apr-1

4


SUKHBAATAR DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

SECTION 3.2

CHINGELTEI DISTRICT

CHINGELTEI DISTRICT MAP

Tasgan road

Tasgan road

Ard Ayush avenue

Ikh to

iruu

Figure 66

Buti Tower

Tengis MovieTheatre

Tedy Center


Peace Tower

Gandirs

Bodi Tower

Art 12Saikhan urguu

MIning Center

Logos Office

Peace avenue

Sambuu streetZaluuchuud avenue

Sukhbaatar street

Ikh toiruu

Baga toiruu

Baga

toiru

u

Baga

toiru

u

Ikh toiruu

Peace avenue

Peace avenue

198

CHINGELTEI DISTRICT

Executive Summary

Chingeltei is relatively similar to Sukhbaatar but plays host to a younger and slightly less affluent middle class crowd. Small-scale retail and government offices thrive in this center but residential properties are somewhat less luxurious than those found in Sukhbaatar or the Zaisan area. Square meter sales and rental prices are on a par with the top locations in the city but the average apartment encompasses a smaller floor plan and usually resides in a much older structure.

The “40,000 Homes” and “50,000 Homes” Soviet era apartment complexes are some of the oldest in the city, but their quality far surpasses that of comparable free market era developments built by penny pinching capitalists. These complexes still host some of the most desirable residences in the city and command top prices.

The supply of land and the development pipeline for residential developments are far tighter in Chingeltei than anywhere else in the city, this has meant that the government mortgage policy has not affected prices as positively as in areas such as Bayangol and Songinokhairkhan.

District Overview

Chingeltei District is similar to Sukhbaatar in many senses, having been partitioned off from Sukhbaatar after the transition to capitalism and democracy in the early 1990s.

One block to the west of Sukhbaatar Square lies the headquarters of Mongol Bank, the nation’s central bank. The majority of the country’s other large financial enterprises are headquartered nearby. Golomt Bank, Trade and Development Bank (TDB), Capital Bank and Ulaanbaatar Bank all have their central office a few blocks away. Buried amongst the financial institutions are an assortment of foreign embassies, including those of France, Vietnam, the Democratic Republic of Korea, and Turkey.

Central Bank of Mongolia Headquarters

“host to a younger and slightly less affluent middle class crowd”

“The majority of the country’s other large financial enterprises are headquartered nearby”

“foreign embassies, including those of France, Vietnam, the Democratic Republic of Korea, and Turkey”

199

CHINGELTEI DISTRICT

Many of the city’s administrative centers are located in Chingeltei District. The nuts and bolts of the Mongolian political machine may be seen turning on a daily basis in the bureaucratic departments situated primarily out of the 3rd microdistrict. Housing the Ministry of Roads, The Supreme Court of Mongolia, the Chingeltei District Administration, the Capital City Court, and the Labor Ministry Office, the majority of the country’s civil servants find themselves carrying out their day-to-day business within this compact area towards eastern Chingeltei.

Retail Space

The district’s best-known landmark is without a doubt the State Department Store, which is one of Mongolia’s most iconic structures. Throughout the socialist period, the enterprise was renowned for selling capitalist wares to foreign diplomats and an appropriately well-connected class of Mongolian elites. The arrival of democracy and the adoption of free market principles saw the building purchased by the Nomin Group, who have opened up Ulaanbaatar’s best known department store to the general population. Selling everything from crockery to cashmere, the somewhat overpriced retail outfit now offers a wide range of goods to tourists, expats, and locals. The ground floor space is utilized by an assortment of vendors and several cafes, with seating spilling outside onto the street in the summer months whilst the weather is pleasant. The top floor plays place to a food court that recently welcomed its first international franchise, sweet and decadent Cinnabon.

Surrounding the State Department Store are an assortment of shops and outlets supplying nearly every kind of good and service imaginable. Peace Avenue, which runs in front of the State Department Store complex is the transportation spinal cord of the city upon which small businesses and enterprises have concentered with alarming speed over the last decade. Large souvenir outlets catering to the spillover of visitors from the State Department Store mingle with domestic retailers, bars, restaurants, and domestic fast food chains. While most international brands have not yet mustered the courage to enter the Mongolian market, a miscellany of domestic imitations of western coffee houses and burger joints appear along the street with surprising regularity.

Mongolia’s First Cinnabon

“The district’s best-known landmark is without a doubt the State Department Store, which is one of Mongolia’s most iconic structures”

“State Department Store is an assortment of shops and outlets supplying nearly every kind of good and service imaginable”

200

CHINGELTEI DISTRICT

Recently, Round Table Pizza became one of the first international chains to open an establishment along this strip.

Directly north of the State Department Store lies the TEDY cell phone supermall. Spread across a total of four floors, the building is operated by Mobicom, the biggest network provider in the country. In addition to its network clients, the facility hosts in excess of 450 small enterprises, the majority of which occupy small plots no more than a few square meters in capacity, selling peripheral products and accessories for mobile phones and computers.

Less than 300m behind the State Department Store lies the ‘Urt Tasagaan’ (literally translated as ‘long white’), the pedestrianized thoroughfare hosts a variety of small, flea market style enterprises selling everything from second hand books to adult toys. Large scale retail and international chains have yet to penetrate this aging traditional retail center.

Entertainment

Chingeltei’s entertainment sector is thriving. Home to one of the two large theater companies in the country, Tengis Cinema, the neighborhood’s streets are bustling every weekend with teenage Mongolians flocking to

Mongolia’s First Round Table

TEDY Center

“Large scale retail and international chains have yet to penetrate this aging traditional retail center”

201

CHINGELTEI DISTRICT

see the latest western films, generally played in English and subtitled in Mongolian. In recent years, Mongolian language films have also become increasingly popular and profitable. Budgets have grown enormously and the latest premiers draw large crowds on opening weekends.

Chingeltei has an active nightlife. Face Club was recently renovated with modern interiors. The dance floor is well known for being small and intimate, attracting a high proportion of international punters and expats due to its central location.

Residential Space

Demand

On the demand side, Chingeltei’s central location makes it highly desirable. It is, however, important to differentiate between the sources of demand that face Chingeltei and Sukhbaatar Districts. In Sukhbaatar, expatriates and the most affluent members of Mongolian society are the primary purchasers of residential real estate. Central Chingeltei, on the other hand, is a more middle class neighborhood. Sales and rental prices per square meter across the two central districts are similar but Chingeltei residences tend to have a smaller floor plan. As such, the district’s accommodation is more popular with younger professionals and families on a budget. The proportion of the resident population who are foreign citizens is nearly 20% in Sukhbaatar, compared with just 7% in Chingeltei.

Supply

Supply side conditions in Chingeltei also differ slightly from those in Sukhbaatar. The majority of existing residential stock is locked within the “40,000 Homes” and “50,000 Homes” Russian era apartment complexes. Land constraints in the district are also tight. With a heavily developed core surrounded by open but effectively un-purchasable small hold plots of ger district land, there are only 32,290 square meters of modern residential accommodation currently online.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

thou

and

peop

le

0

20

40

60

80

100

140

120

180

160

CHINGELTEI DISTRICT POPULATION


“On the demand side, Chingeltei’s central location makes it highly desirable”

“The proportion of the resident population who are foreign citizens is nearly 20% in Sukhbaatar, compared with just 7% in Chingeltei”

202

CHINGELTEI DISTRICT

The relatively low supply of modern accommodation is unlikely to correct itself anytime soon. Only seven modestly sized residential projects came on line in the district in 2013, compared with an average of 26 in the city’s other core districts.

Though supply conditions remain slightly more restrictive in Chingeltei than in Sukhbaatar, this is offset by a slight reduction in the magnitude of demand for its properties. Although the young professional Mongolian class is growing in size, its gains in wealth are far less than those of the affluent class and older generations.

Case Study: The 40,000 & 50,000 Apartments

The so called “40,000 Apartments” represent the oldest surviving stock of residential real estate in the country, occupying much of the area to the east of the State Department Store in Chingeltei. Developed over fifty years ago under Ulaanbaatar’s first city master plan, the properties have experienced astronomical price rises in recent years, being driven primarily by demand from young professional Mongolian families keen to live as close to the city center as possible.

The peeling paint on the properties’ shabby exteriors belies the sturdy quality of the structures. The aesthetic malaise of the facade is due to unresolved collective action problems facing the residents of many older buildings. The interiors of the units are strikingly different. Most have been refurbished to a high standard, with western amenities and modern furniture. The 40,000 Homes are renowned for their high ceilings and thick walls, a quality practically unseen by the today profit driven, penny pinching, free market construction firms.

The “50,000 Apartments” is a similar development consisting of the buildings constructed under the city’s second centrally planned housing program. Situated along Peace Avenue, to the west of the State Department Store, the buildings are a few hundred meters further away from the city center and also of a slightly lower build quality than their predecessors.

40k & 50k apartments

“The relatively low supply of modern accommodation is unlikely to correct itself anytime soon”

“young professional Mongolian class is growing in size, its gains in wealth are far less than those of the affluent class and older generations”

“The so called “40,000 Apartments” represent the oldest surviving stock of residential real estate in the country”

“The “50,000 Apartments” is a similar development consisting of the buildings constructed under the city’s second centrally planned housing program”

203

CHINGELTEI DISTRICT

Both of these aging structures have experienced substantial increases in value over recent years. Selling for as low as $310 per square meter back in 2005, prices have increased every year, excluding the 2009 financial crisis year, where global instability somewhat depressed the property market across Ulaanbaatar at large.

Prices are expected to continue to move upwards over the coming periods, as the supply of new structures actively trading upon the Ulaanbaatar real estate market is drastically reduced. The majority of landlords and tenants within the district are acutely aware of the price momentum that has provided them with ample capital gains over recent years.

Lots of the newly built buildings in downtown Chingeltei have either have been built on children’s playgrounds or in between existing buildings, due to the limited space left in the area. The majority of these residential buildings were erected here because many believed the city limits wouldn’t expand, which would have had huge consequence for supplying power and other infrastructure if they were to build beyond them. Gandirs and Avzaga are the clear examples of such developments.

Baga Toiruu promenade

Gandirs

204

CHINGELTEI DISTRICT

Performance

The pricing pattern exhibited by residential real estate assets within Chingeltei District over recent years is close to a mirror image of that seen in Sukhbaatar; the price per square meter having increased from under $500 per square meter in 2005 to $1,600 in 2014.

Pricing has been erratic in Chingetei over the last year, prices staying persistently below the citywide average, with comparatively large oscillations from month to month. After initially good performance at the start of 2014, average prices shooting up from 17% in January to 25% in March relative to January 2013, the market seems to have cooled somewhat, having given back all this ground by May 2014. On average, prices in Chingeltei were 10% higher in July 2014 than in January 2013, a deflationary environment in USD terms. The supply side constraints discussed above have affected the district when competing for buyers of low-mid income housing. The market seems to be dragged reluctantly along by new mortgage issuances from July 2013, with prices falling off a cliff when the government started to wind down the amount of juice in the program around Q1/Q2 2014.

Breaking down the data into above and below 80ms vindicates this view. The wildly fluctuating price line for apartments above 80ms is an indication of the lack of liquidity in this market, attributable in APIP’s opinion to the lack of new supply. Apartments under 80ms, although performing better, have massively underperformed when compared to areas such as Bayanzurkh and Bayangol, districts that have benefited greatly from the government’s mortgage policy.

“Pricing has been erratic in Chingeltei over the last year”

“The market seems to have cooled somewhat, having given back all this ground by May 2014”

-0.05

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec-

14

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

0

0.05

0.1

0.15

0.2

0.25

0.30

UlaanbaatarChingeltei


ULAANBAATAR VS CHINGELTEI DISTRICT REAL ESTATE PRICE INDEX

205

CHINGELTEI DISTRICT

“Extensions of any government mortgage policies are hardly likely to impact prices”

All of this leaves Chingeltei in a difficult situation going forward. Extensions of any government mortgage policies are hardly likely to impact prices as much as other areas and the lack of new space makes new builds rare. On the other hand, there is probably a lot of price potential to be achieved in any new builds to be found. Again, looking at the mixed performance of apartments above 80ms, there are clearly units commanding high prices in the area, the market is just lacking in liquidity.

-0.2

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Chingeltei>80Chingeltei<80


CHINGELTEI DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

206

BAYANGOL DISTRICT

SECTION 3.3

207

BAYANGOL DISTRICT

BAYANGOL DISTRICT

208

BAYANGOL DISTRICT

Khoroolol Shopping Area

UB Palace

Rail Road Station

Khukh Shiltgeen

BAYANGOL DISTRICT MAP

Peace avenue

Ard Ayush avenue

Ard Ayush avenue

Peace avenue

Narnii road

209

BAYANGOL DISTRICT

Gandan Monastery

Max Mall

Grand PlazaRokmon

Strings Night Club

Altai Town

Figure 70

Peace avenue

Peace avenue

Ikh

toiru

u

Ikh to

iruu

Tasgan road

Sambuu street

Ikh to

iruu

Narnii roadNarnii road

210

BAYANGOL DISTRICT

Executive Summary:

Bayangol is well placed close to the center of Ulaanbaatar, and well connected to the city’s heating network. Yet the district has not yet been exposed to the levels of development that have transformed Sukhbaatar and Chingeltei. However as locating new space in central Ulaanbaatar becomes increasingly difficult, a number of governmental policies look set shake up Bayangol’s land market, increasing liquidity and making widespread development once again a possibility. Bayangol is clearly a high-risk investment, with momentum supported by a number of variables that in reality could have only a marginal impact. Yet the upside potential is substantial; investors who buy cheap now could well end up owning prime assets in what may become the retail heart of Ulaanbaatar.

District Overview

Bayangol is one of Ulaanbaatar’s smallest districts, covering an area of just 2,950 hectares. To the west of the central business district yet bordering both Sukhbaatar and Chingeltei, the residents of Bayangol appear to be beginning to share in the prosperity that has already reshaped the city’s more central locales.

The heart of Bayangol remains the Gandan Monastery and the surrounding area. Completed in 1738, the Monastery was designed as a residence for the second Jectsunhamba, Mongolia’s highest reincarnated lama. After centuries of fulfilling its role as the principal center of Buddhist learning in Mongolia, the monastery was closed in 1938 as part the Stalin influenced religious purges led by MPRP Chairman Khoroogiin Choibalsan. Despite the MPRP’s religious intolerance, the institution was permitted to reopen in 1944 to function with a skeletal staff as a political gesture designed to appease a predominantly Buddhist population proud of Mongolia’s traditional culture and religion. After being having been fully reinstated with the end of Mongolian Marxism in 1990, the monastery is now one of Ulaanbaatar’s major attractions.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

Ithou

sand

peo

ple

0

50

100

150

250

200

BAYANGOL DISTRICT POPULATION


“Bayangol is clearly a high-risk investment, with momentum supported by a number of variables that in reality could have only a marginal impact”

“The heart of Bayangol remains the Gandan Monastery and the surrounding area. Completed in 1738”

211

BAYANGOL DISTRICT

Mongolian citizens frequent site for worship and instruction whilst tourists flock to the structure to witness a colossal gold plated statue of Migjid Janrasig, which is reportedly embedded with some 2,286 precious stones.

The area directly surrounding Gandan is one of the oldest Ger settlements in Ulaanbaatar, accounting for 11.8% of the district’s population. Although little has changed to the arrangement of land plots in this densely populated landscape, the nature of the structures occupying them has done so significantly. The majority of families now reside in semi permanent buildings, erected and adapted by their individual owners over many years. Despite their often un-professional finish, most residencies find themselves well connected to the city’s infrastructure, with sites situated directly over the link between the CHP-2 and CHP-4 power plants and Ulaanbaatar’s downtown. In addition to being on top of this unusually high-pressure zone of the city’s decrepit heating network, the majority of households have running water and even telephone connections, materially benefiting from their proximity to the city’s urbanized core.

Bayangol is becoming increasingly well known for its stock of retail space, with the hub of commercial activity being concentrated around the 3rd and 4th micro- districts. Clustered around the district’s main roads are a multitude of small retail outfits in ‘mom ‘n pop’ style shops. Despite being predominantly owned by Mongolian nationals, international brands appear increasingly interested in establishing themselves in this growth area; both Adidas and the United Colors of Benetton have recently established operations in the area known as “Khoroolol“ by locals.

The impact of this commercial momentum is personified by the Grand Plaza complex to the southwest of Gandan, which was opened in 2008 by one of the largest construction companies in Mongolia, the Jiguur Grand Group. The complex is a prime example of Grade B space within Ulaanbaatar. Having initially faced high vacancy rates, around 90% of the space has been occupied since 2012 according to APIP estimates. The opposite side of the road houses the Max Mongolia Group’s Max Mall, which opened for business in early 2011. Although the five floors of A/B space have always boasted reasonably high occupancy, both Max Mall and

Gandan Monastery

“The area directly surrounding Gandan is one of the oldest Ger settlements in Ulaanbaatar, accounting for 11.8% of the district’s population”

“The majority of families now reside in semi permanent buildings, erected and adapted by their individual owners over many years”

212

BAYANGOL DISTRICT

the Jiguur Grand have struggled to attract anchor tenants in the form of high profile international brands that they had initially hoped. Instead both complexes lease the larger portions of their space to high-end local outlets, whilst smaller booths are let to family operations. Two towers constructed above the Max Mall have proven slightly more successful, one is notable its long term lease to Ulaanbaatar’s Ramada Hotel, which will help pull affluent visitors away from the CBD and towards this up-and-coming area.

Real Estate Market:

The majority of this residential space is made up of older Soviet structures erected in the 1970s. In the aftermath of Chairman Brezhnev’s visit to Ulaanbaatar in 1974, significant resources were pledged by the Soviet Union to help develop the city in exchange for the MPRP’s permission to allow Soviet troops to be stationed upon the Sino-Mongolian border. This development took the form of stereotypically Soviet structures, consisting of high-rise concrete tower blocks, constructed according to utilitarian designs using precast materials.

These developments, which were still being constructed well into the 1980s share many features with the well-known 40,000 and 50,000 Homes in the Chingeltei District. Laid out around traditional courtyards, these 9 – 12 story buildings represent one of the largest stocks of housing within the city. Although many have lacked coordinated efforts to maintain communal areas and structural facades, the majority of apartments are decorated and furnished to a reasonably high standard.

In addition to this fixed stock of legacy structures, APIP estimates that Bayangol currently has over 500,000 units of residential space that have been completed since 1990.

This supply side momentum looks to continue into the medium term, APIP estimates suggest that the district’s three largest developments alone saw 3,760 units of stock hit the market in 2014. These are the tip of the iceberg; the district contains one of Ulaanbaatar’s largest and best-known Ger districts, and it is therefore unsurprising that the majority of developments are low-cost, low-quality local operations.

Khoroolol Shopping Area

“one is notable its long term lease to Ulaanbaatar’s Ramada Hotel”

“The majority of this residential space is made up of older Soviet structures erected in the 1970s”

“Laid out around traditional courtyards, these 9 – 12 story buildings represent one of the largest stocks of housing within the city”

“APIP estimates that Bayangol currently has over 500,000 units of residential space that have been completed since 1990”

“APIP estimates suggest that the district’s three largest developments alone saw 3,760 units of stock hit the market in 2014”

213

BAYANGOL DISTRICT

As government initiatives to redevelop the area begin to take effect, it is likely that additional opportunities will open up for higher end developers, who can use the shake up of previously un-negotiable plots of ger land to position potentially lucrative developments. Although this will likely see supply expand across the quality spectrum, this may well have a positive effect upon the district’s asset prices. Bayangol has long lacked the development that has transformed its eastern neighbors, due to a completely illiquid market for land. If increased land right flexibility frees up space for larger developments by companies unable to find financially viable opportunities in the central business district, it could well accelerate the retail industry that is quickly becoming Bayangol’s economic base.

The ger districts within Bayangol are some of the oldest and most affluent in the city, with most owners’ cash holdings substantial enough to allow them to put down an apartment deposit, if not buy a property outright. Based on data gathered by the World Bank from Bayangol’s 11th Khoroo, it is estimated that the net worth of each Ger family unit is in excess of $32,600. With the district’s newer low-end housing stock selling for just over $30,500, whilst older stock remains slightly cheaper at $26,000, it is clear that even marginal improvements to mortgage penetration and availability should have a substantial impact upon demand. This momentum should help support valuations across the district, feeding in to the wider price level as the opportunity cost of land is increased.

Perfomance Bayangol has been one of the best performing districts in Ulaanbaatar over the past year. Its popularity among low-income communities has seen its prices shoot up as a direct result of the recent mortgage policy. After a sluggish start to 2013, prices accelerated past that of the city average (in percentage increase terms) and remained ahead until July 2014. At this time prices were around 25% higher in Bayangol than in January 2013, down from a peak of 29% achieved in March 2014, the slowdown in government mortgage credit causing softness in pricing.

“The ger districts within Bayangol are some of the oldest and most affluent in the city”

“After a sluggish start to 2013, prices accelerated past that of the city average (in percentage increase terms) and remained ahead until July 2014”

Urgoo Cinema

214

BAYANGOL DISTRICT

Splitting the data shows a real wedge in pricing between apartments above and below 80ms. The decoupling clearly taking place in June 2013 as the first wave of government mortgage credit began to be absorbed. The price line for under 80ms shoots aggressively away from its counterpart which struggles to achieve the same price increases at any point in the recorded period.

Although prices have clearly softened somewhat since their peak levels in March 2014, Bayangol exhibited more resistance than other districts as the government credit program wound down. Apartments above 80ms however have not been so resistant exhibiting a phenomenon observable in many districts across the city. The mortgage market expansion seems to cause a rapid rise in prices in the under 80ms sector, this in turn has the lagged effect of dragging up prices in the over 80ms sector. Then, as the credit programs are wound down, it is the over 80ms sector that first feels softness in pricing as if it were artificially buoyed by credit in the under 80ms sector.

Bayangol remains a key growth district for Ulaanbaatar. Much of this growth is dependent upon the successful expansion of the district’s retail economic base; shifts in the preferences of either developers of consumers could have a significant detrimental effect. This is similar dynamic to that seen in Bayanzurkh. The supply of rental space is limited as most families have owned the districts older properties since privatisation not as an income source, but as a home. Broad demographics spilling over from the central business district will likely support this appreciation until a more stable market equilibrium is achieved.

-0.05Ja

n-13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec-

14

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

UlaanbaatarBayangol


ULAANBAATAR VS BAYANGOL DISTRICT REAL ESTATE PRICE INDEX

215

BAYANGOL DISTRICT

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Bayangol>80Bayangol<80

Jan-

13

Mar

-13

Feb-

13

May

-13

Apr-1

3

Jul-1

3

Jun-

13

Sep-

13

Aug-

13

Nov

-13

Oct

-13

Jan-

14

Dec-

13

Mar

-14

Feb-

14

May

-14

Apr-1

4

Jul-1

4

Jun-

14


BAYANGOL DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

216

BAYANZURKH DISTICT

SECTION 3.4

217

BAYANZURKH DISTICT

BAYANZURKH DISTRICT

218

BAYANZURKH DISTICT BAYANZURKH DISTRICT MAP

Encanto Town

Orshil Center

KempinskiHotel

RussianChurch

NarantuulBlack Market

Crystal Town

National Park

Peace avenue

Peace avenue

Narnii road Narnii road

Ikh

toiru

u

Ikh toiruu

219

BAYANZURKH DISTICT Figure 74

Amgalan Botanical Garden

220

BAYANZURKH DISTICT

Executive Summary:

Bayanzurkh is a vast district bordering, but largely excluded from Ulaanbaatar’s CBD. Much of the growth that has developed the city’s most central districts is slowly beginning to spill over, driving an expansion of Bayanzurkh’s economic base through a strong demographic pull. Yet this demand has not gone unnoticed. A supply glut of local developer’s residential compounds looks set to put downward pressure on asset prices in 2015. It remains to be seen whether the market absorbs the excess supply and whether capital appreciation prospects return over time. Rental rates are likely to fair better, as supply is already limited by legacy issues that result in the under-provision of owners as landlords within the district. Opportunity clearly exists for those with a high tolerance to risk and the patience to time their investments correctly.

District Overview:

Bayanzurkh remains Ulaanbaatar’s largest district, covering an area of 1,244 hectares around the east of the city. The population is large and growing rapidly; the district currently has 295,000 residents, an increase of 6.3% when compared to 2013 figures. Despite its high population, penetration by the expatriate market remains relatively low.

The heart of Bayanzurkh remains the infamous Naran Tuul, or Black Market, located in the south west of the city. Having been originally christened whilst it represented one of the first exchanges of free market goods as Communism waned in the late 1980s, this Ulaanbaatar institution remains an important budget retail center for locals. The warmer summer months see up to 60,000 visitors a day flock to the site in order to purchase everything from saddles to furniture.

Modern Bayanzurkh is personified by the Kempinski Khan Palace Hotel, which until 2009 represented the only internationally managed operation in Mongolia. Located on the eastern crossroads of Peace Avenue in the heart of Bayanzurkh, the three star hotel is known for being one of the city’s best offerings with competent management and international standard service,

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

thou

and

peop

le

0

50

100

150

200

350

300

250

BAYANZURKH DISTRICT POPULATION


“A supply glut of local developer’s residential compounds looks set to put downward pressure on asset prices in 2015”

“Rental rates are likely to fair better, as supply is already limited by legacy issues that result in the under-provision of owners as landlords within the district”

“The heart of Bayanzurkh remains the infamous Naran Tuul, or Black Market, located in the south west of the city”

221

BAYANZURKH DISTICT

featuring its own high-end Mongolian and Japanese restaurants, a spa, and limousine service. The recent acquisition of a large ex-Soviet apartment block adjacent to the structure is rumored to allow the Hotel to develop into a five star institution. Although the apartments themselves have been demolished, the construction site continues to lay dormant. Regardless, most consider the Kempinski Khan Palace to be bracing itself for a tough few years as it adjusts to increased competition, as a glut of comparable Hotels situated far closer to Ulaanbaatar’s Central Business District come online over the short/ medium term.

Just west of the Kempinski Khan Palace, and considerably closer to the city’s center is the Chingis Khaan Hotel – the largest in the country, which occupies a vast plot of land given its location. In addition to the hotel this space houses a number reputable restaurants, all connected to the adjacent Sky Mall, known for containing one of the city’s only modern supermarkets, a department store, and western coffee shop. It is however the presence of Mongolia’s best known nightclub, Metropolis, which is a factor that attracts the majority of visitors to the hotel’s extensive grounds. With a capacity of up to 1,000, the club’s stylish interior and surprisingly frequent performances by internationally renowned DJs and musicians make the venue a regular haunt for many of the city’s young and affluent citizens.

Between the Kempinski Khan Palace and the Chingis Khan Hotels is the ‘Sansar District’. This literally translates from Mongolian to mean ‘Outer Space’, having been named as a tribute to the Soviet mission responsible for sending Mongolian cosmonauts into space whilst many of the area’s buildings were under construction. This somewhat aging residential space is now inhabited by a predominantly student population, with the National University, the Science and Technology University of Mongolia, the University of Humanities, and the University of Finance and Economics all being situated within walking distance. Unsurprisingly given its demographics the zone is one of Ulaanbaatar’s nightlife centers, with its old Soviet structures typically having their top floors set up as cheap and compact accommodation, whilst their ground floors house a plethora of colorful bars and karaoke clubs, all priced for a student budget.

Pedestrian Walkway on Peace Avenue in Bayanzurkh District

“The recent acquisition of a large ex-Soviet apartment block adjacent to the structure is rumored to allow the Hotel to develop into a five star institution”

“Just west of the Kempinski Khan Palace, and considerably closer to the city’s center is the Chingis Khaan Hotel – the largest in the country, which occupies a vast plot of land given its location”

“Unsurprisingly given its demographics the zone is one of Ulaanbaatar’s nightlife centers, with its old Soviet structures typically having their top floors set up as cheap and compact accommodation, whilst their ground floors house a plethora of colorful bars and karaoke clubs, all priced for a student budget”

222

BAYANZURKH DISTICT

After the NaranTuul, visitors to the district will likely be drawn to the Mongolian National Wrestling Palace, situated to the south of the Chingis Khan hotel. In the run up to the summer’s Naadam Festival, it is well worth visiting the giant ger shaped structure, which sees 450 participants whittled down through endless knockout rounds designed to eventually determine one champion.

Cuisine of note to international investors is largely limited to the nationally famed Hazara, a northern Indian restaurant opposite the National Wrestling Palace. Guests can easily spend an evening enjoying a wide variety of tandoori meats and vegetarian delicacies, all of which are priced in line with the enterprise’s high- end status. The remainder of Bayanzurkh’s eateries are largely characteristic of the conservatively priced independent Mongolian and Korean kitchens that are found across the rest of the city.

Real Estate Market:

With property selling for approximately $1,525 per square meter as of Q3 2014, Bayanzurkh remains one of the cheapest downtown district of those analyzed in this study. Prices have, however begun to move with increased momentum; property values have risen from a low base of $395 in 2005, and have risen around 13% over the past 12 months.

As of 2014, Bayanzurkh contains an estimated 1,053,000 meters squared of residential space, most of which is clustered around the Black Market. The majority of this takes the form of older stock, built up to sixty years ago in order to fulfill the residential quotas set out by the country’s centrally planned government. Most of these tall, high-rise structures have done a poor job of hiding their age. Coated at one point in white paint, the broken balcony windows of many apartments have now simply been replaced by wire mesh in order to keep intruders out. More than the complexes simplistic utilitarian architecture alludes to their Marxist beginnings; Many of the towers that line the UNESCO Road are famed for the linear red murals painted up their sides, which were intended to be symbolic of Mongolia’s collectivized prosperity.

Soviet General Marshall Jukow’s Statue

“Cuisine of note to international investors is largely limited to the nationally famed Hazara, a northern Indian restaurant opposite the National Wrestling Palace”

“With property selling for approximately $1,525 per square meter as of Q3 2014, Bayanzurkh remains one of the cheapest downtown district of those analyzed in this study”

“Prices have, however begun to move with increased momentum; property values have risen from a low base of $395 in 2005, and have risen around 13% over the past 12 months”

“Most of these tall, high-rise structures have done a poor job of hiding their age”

223

BAYANZURKH DISTICT

These older residential units are quickly becoming unusable, as poor maintenance and a lack of care have brought many structures beyond the point of feasible repair. Yet strong property rights combined with a collective action problem seem to be condemning many structures to semi-permanent obsolescence; the structures may exist, but any estimates of housing stock needs to be adjusted down to consider the depreciation that results in the district’s older buildings having become virtually uninhabitable.

Between these older structures is a considerable quantity of newer buildings finished within the last two decades. Generally regarded as far more efficient than their aged neighbors, units tend to feature open kitchens (a modern development for the Mongolian market), smaller rooms, and thinner hallways. The structures clearly benefit from the free market’s cost minimization incentive; although some outfits have been constructed to a high quality this is by no means universal, with some complexes seriously lacking in both structural integrity and their quality of finish.

However Bayanzurkh is increasingly seeing its abundance of space used to house large residential developments encompassing hundreds of homes.

Crystal Town, which was completed in 2013, is a prime example of this. Situated opposite the Black Market, the complex is not only convenient for its residents but is situated just five minutes walk away from the city’s newly established National Park. Supposedly the largest national park in Asia encompassing 130 hectares, it is testament to the amount of unused space around the district that could become available if politicians deemed, or at least could be convinced, that it was necessary.

On the east side of Crystal Town is the Ikh Mongol Khoroolol, which comprises 840 residential units targeted towards middle-income Mongolian families. Slightly to the west of Crystal Town is one of the largest residential developments in Mongolia – the Bayan Mongol Complex. Consisting of around 1,800 residential units with sizes ranging from 46 to 122 square meters with between one and three bedrooms, the complex is ideally suited for young, price conscious families.

“Between these older structures is a considerable quantity of newer buildings finished within the last two decades”

“Bayanzurkh is increasingly seeing its abundance of space used to house large residential developments encompassing hundreds of homes”

“Supposedly the largest national park in Asia encompassing 130 hectares, it is testament to the amount of unused space around the district that could become available if politicians deemed, or at least could be convinced, that it was necessary”

Crystal town

224

BAYANZURKH DISTICT

Residents enjoy ample green space, with playgrounds for children situated around a central fountain and waterfall, in addition to a fully functioning supermarket, kindergarten, beauty salon, and office block.

Bayanzurkh’s Royal Castle development takes this concept to a more affluent section of Mongolian society. Developed by the Seoul Group, the complex’s spacious units combined with the developer’s reputation for quality has for a long time helped attract many wealthy Mongolian clients to the buildings. With each unit coming equipped with two bathrooms, large windows, access to a playground, and protection by a 24-hour security guard, the development shares many characteristics with areas such as the prosperous Stadium and Embassy Districts, as well as Zaisan. Just 1.2 km away from Sukhbaatar Square, the factor that has differentiated the development from its competitors is often considered its proximity to the popular Seoul Business Center. This allowed workers with sizable housing allowances, such as those in Oyu Tolgoi, to live practically next to their offices and avoid the majority of the city’s traffic. However,as new office space has come online in Sukhbaatar Square, many companies have begun to move further towards the center, reducing the competitive advantage of the business center and Royal Castle alike. The majority of Oyu Tolgoi employees for example migrated to the Monnis Tower in 2009.

“This allowed workers with sizable housing allowances, such as those in Oyu Tolgoi, to live practically next to their offices and avoid the majority of the city’s traffic”

Bayanmongol town

Royal Castle

225

BAYANZURKH DISTICT

New developments such as American Denj, Dunjingarav and Golden Villa have proved very popular with the local community. All are located within Bayanzurkh, however, Dujingarav is toward the south near Khan Uul.

Although aggregation is difficult in a district as large as Bayanzurkh, APIP’ believes that the momentum that has propelled prices over the past decade could stumble over the short term as a glut of sizable developments come online. These sites tend to have utilized the large, but still reasonably central plots of land that have for too long remained untapped in a city changing as fast as Ulaanbaatar.

The construction industry is thriving, however, across all asset classes in Bayanzurkh. Four substantial office units (between five and seven floors) have come online in 2013 alone, which should help to drive the migration of professionals and expatriates to the area, expanding its comparatively weak economic base. This creates an unstable pricing dynamic within the district over the short term. Strong population inflows are likely to be offset by substantial supply coming online in the coming years

Performance

Over the past year, Bayanzurkh has performed similarly to the overall city index, tracking the index fairly accurately until the last recorded month. In July 2014 Bayanzurkh prices jumped up to record a 43% increase relative to January 2013. This seems rather out of character and may be due to a certain amount of sample selection bias creeping into the data. Sample selection bias occurs when a particular type of transaction is overrepresented in the dataset. On this occasion, it could be that the model’s controls for housing quality are not adequate enough, and that higher quality houses are overrepresented in the July 2104 dataset, translating as a falsely high figure for the month in question. Of course, this may not actually be the case, but given past performance one would probably be wise to exercise caution.

“The construction industry is thriving, however, across all asset classes in Bayanzurkh”

“In July 2014 Bayanzurkh prices jumped up to record a 43% increase relative to January 2013”

-0.05

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec-

14

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

0

0.05

0.15

0.1

0.2

0.25

0.3

0.35

0.4

0.45

UlaanbaatarBayanzurkh


ULAANBAATAR VS BAYANZURKH DISTRICT REAL ESTATE PRICE INDEX

226

BAYANZURKH DISTICT

Upon segmentation, the picture becomes a little clearer with regard to July 2014. The more than 80ms chart shoots past its less than 80ms counterpart to around 43%, further suggesting that indeed, sample selection bias is affecting the data. The July 2014 point for less than 80ms is considerably lower, at around 33%, however, as we have seen from the previous chart, this does not affect the much average at all. This suggests that there were an unusually high number of transactions recorded in Bayanzurkh in July 2014 in which the apartment size was more than 80ms, indicative of sample selection bias.

That aside, interestingly Bayanzurkh does not exhibit much differentiation between the two classifications. Unlike Bayangol, less than and more than 80ms track each other pretty consistently, suggesting that the mortgage market did not have such an effect in driving a wedge in market prices. There is a small wedge present from the implementation of the policy but nothing like the ones encountered in Bayangol or Songinikhairkhan. As we have seen from July 2014 data however, it may have resulted in prospective buyers holding off on their purchases until liquidity in the program dried up, such is the glut of new transactions in apartments over 80ms in July.

Although unclear yet as to developers intentions, supply is likely to slow as many of the natural sites ready and waiting for development have already been picked through. This suggests additional projects on scale that impacts the market will require an increased number of legal obstacles to be overcome, naturally slowing down the progress of even the most enthusiastic construction companies.

Rental prices in Bayanzurkh tend to be lower than other comparable districts. This is likely the result of a large proportion of the district’s defining Soviet structures being owned outright by families who were permitted to buy their homes in the 1990s. Such space therefore tends to be utilized by the owners themselves as opposed to entering into the rental market, suggesting the majority of supply comes from the district’s newer developments, which are often bought by landlords with the intention to let.

-0.05

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

0

0.05

0.15

0.1

0.2

0.25

0.3

0.35

0.4

0.45

Bayanzurkh>80Bayanzurkh<80


BAYANZURKH DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

227

BAYANZURKH DISTICT

This clearly creates an environment of uncertainty for investors. Purchase prices look relatively unstable across the market, whilst the district’s mix of new/old properties looks set to increase rental rates within a tight confidence interval. Bayanzurkh is a diverse district with a vast number of properties, which could affect the results through sampling error.

Even if the model is correct, the district’s wide range of structures suggests that any potential investor must be prepared to commit considerable time to understanding the exact area they are hoping to invest in. Although APIP’s zoning captures broad trends, much upside is contained within micro level phenomena that can only be identified through thorough due diligence.

“Although APIP’s zoning captures broad trends, much upside is contained within micro level phenomena that can only be identified through thorough due diligence”

228

SONGINOKHAIRHAN DISTRICT

SECTION 3.5

229


SONGINOKHAIRKHANDISTRICT

230

SONGINOKHAIRHAN DISTRICT SONGINOKHAIRKHAN DISTRICT MAP

Ger District

231


Moscow TownSapporo Shopping

Center

Ger District

Figure 78

Peace avenue

Labo

r Uni

on S

treet

232


Executive Summary

Songingokhairkhan is the location of much of Ulaanbaatar’s industrial activity. Prices have appreciated over the last few years, but by comparatively less than every other district in the city. Despite this, the impact of the mortgage policy has had an effect on prices in the last year given the district’s abundance of apartments under 80ms in size. For APIP, given the area’s price performance being dependent on credit, investment in Songingohairkhan real estate is a high risk, low reward game. The market is not yet developed enough to have the fundamentals to allow investors to make informed decisions, whilst the district’s upside potential is no greater than Ulaanbaatar’s more central opportunities.

District Overview

At 120,000 hectares, Songingokhairkhan is Ulaanbaatar’s second largest district by area. Situated to the north and west of the city towards the base of the Songingokhairkhan Mountain, the area represents one of the key industrial districts in the city.

The district currently houses 65,866 families, representing in excess of 250,000 individuals. Although no obvious catalyst has been identified, the generally positive demographic trends that have seen the district’s population expand over recent years is forecast to be sustained by Ulaanbaatar’s increased urbanization rate over the medium term.

To the south of Songingokhairkhan lies the majority of Ulaanbaatar’s manufacturing and warehousing facilities, which extend as far as the city’s western roundabout. This area contains a small stock of low-density residential units, situated wherever space has allowed.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

thou

and

peop

le

0

50

100

150

200

300

250

SONGINOKHAIRKHAN DISTRICT POPULATION


“For APIP, given the area’s price performance being dependent on credit, investment in Songingohairkhan real estate is a high risk, low reward game”

233


The northern portion of the district is characterized by overflowing areas of low- income ger settlements. 63% of the district’s total land is devoted to ger owners, whilst 37.4% of the district’s population describe themselves as living in informal and temporary structures.

Songingokhairkhan is fairly faithful to the stereotype of inner city ger accommodation. Plots are organized in a non-linear fashion, and lack many of the basic amenities that are now second nature to the residents of more affluent informal structure owners in districts such as Bayangol.

Real Estate Market

Residential sales prices in Songingokhairkhan are still relatively low, with space currently selling for approximately $1,150 per square meter, making it the cheapest in Ulaanbaatar. Although this is from the exceptionally low base of $420 per square meter in 2005 this remains the lowest percentage increase of any district in the city, suggesting Mongolia’s economic prosperity has been slow to filter through to this border town. This dynamic is captured by the fact that only 633 foreigners currently reside in the district, with the expanse generally of little interest to those outside of the city’s industrial sector.

Despite the prevalence of ger style accommodation, there are a number of professionally built structures within Songingokhairkhan, representing around 127,000 units of apartment space spread across 3,800 developments according to APIP’s dataset. These are almost exclusively low-cost and low-quality structures, usually built as part of a governmental housing initiative.

Change is beginning to come however. The recently completed Moscow Town, and the forthcoming Royal Town House and KharKhorin developments will increase the quantity of modern structures across the district.

“63% of the district’s total land is devoted to ger owners, whilst 37.4% of the district’s population describe themselves as living in informal and temporary structures”

“lowest percentage increase of any district in the city, suggesting Mongolia’s economic prosperity has been slow to filter through to this border town”

“Change is beginning to come however. The recently completed Moscow Town, and the forthcoming Royal Town House and KharKhorin developments will increase the quantity of modern structures across the district”

Ger District

234


Although price catalyst’s has been the government housing programs and the expansion of Mongolia’s mortgage market which have impacted demand, APIP considers these phenomena to be less pronounced than in comparable districts such as Bayangol and Bayanzurkh.

Performance

Over the past year, the district has performed broadly in line with the citywide index. District prices duly responded to the expansion of credit in June 2013 and continued their upward trajectory as mortgages were refinanced and issued. The new liquidity in the mortgage market has been driving prices across the city and Songinokhairtkhan has been directly affected by this policy.

According to APIP’s analysis, prices in the district were approximately 26% higher in July 2014 than in January 2013. Sharp prices increases can be seen in June and July 2013 when the mortgage polict was first introduced. The sluggishness of price movements prior to this point provide an indication of the effect of new credit facilities in the Mongolian market.

Given Songinokhairkhan’s profile as a largely low income housing area, breaking the data down into apartments above and below 80ms paints a clearer picture of the dynamics of the real estate market.

“Sharp prices increases can be seen in June and July 2013 when the mortgage polict was first introduced”

-0.05

Jan-

13

Mar

-13

Feb-

13

May

-13

Apr-1

3

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov

-13

Dec-

13Ja

n-14

Mar

-14

Feb-

14

Apr-1

4

Jul-1

4Ju

n-14

May

-14

0

0.15

0.05

0.1

0.2

0.3

0.25

UlaanbaatarSonginokhairkhan


ULAANBAATAR VS SONGINOKHAIRKHAN DISTRICT REAL ESTATE PRICE INDEX

-0.3

Jan-

13

Mar

-13

Feb-

13

May

-13

Apr-1

3

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov

-13

Dec-

13Ja

n-14

Mar

-14

Feb-

14

Apr-1

4

Jul-1

4Ju

n-14

May

-14

-0.2

0

-0.1

0.1

0.2

0.3

Songinokhairkhan>80Songinokhairkhan<80


SONGINOKHAIRKHAN DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

235


“Units in July 2014 below 80ms were on average 29% more expensive in MNT terms than in January 2013, whereas above 80sm recorded a price change of closer to 25%”

The erratic movements of the above 80ms price line provide evidence for a lack of liquidity in the mid-higher market compared to units under 80ms. Units in July 2014 below 80ms were on average 29% more expensive in MNT terms than in January 2013, whereas above 80sm recorded a price change of closer to 25%. This wedge in pricing (which is observable throughout much of the year) again shows the impact of the mortgage policy in a low-income area such as Songinokhairkhan.

236

KHAN-UUL DISTRICT

SECTION 3.6

237

KHAN-UUL DISTRICT

KHAN-UUL DISTRICT

238

KHAN-UUL DISTRICT KHAN-UUL DISTRICT MAP

Yarmag road

Nukh

t roa

d

Nukh

t roa

d

Yarmag road

Village @Nukht

Viva City

Hunnu Mall

British Schoolof Ulaanbaatar

Nukht Grand Villa

YARMAG AREA

Bogd KhanMountain

239

KHAN-UUL DISTRICT Figure 82

Galaxy Tower

Gegeenten Complex

Bella Vista

Buddha Vista

Zaisan square

Irish Castle

Blue Sky Town

Apartment Kh

MarshallTown

RiverGarden

Zaisan monument

ZAISAN AREA

STADIUM AREA

Bogd KhanMountain

Chinggis avenue

Chinggis avenue

Zaisan street

240

KHAN-UUL DISTRICT

Executive Summary

Khan-Uul is Ulaanbaaatar’s southernmost district and, from an investor’s perspective, perhaps its most exciting. Recent years have witnessed an explosion of middle class development around the national stadium and an even more significant flare- up of luxury housing in the area around the Zaisan monument. The Yarmag area along the road leading out to the airport looks set to replicate the success of Zaisan. Retail and office are fairly underdeveloped in this district but Zaisan Square and the plethora of new retail projects in the Yarmag area, like Hunnu Mall and The VILLAGE @ Nukht, will soon reverse this trend and turn Khan-Uul into a significant retail center.

As a whole, Khan-Uul is forecast to perform strongly in coming years. Zaisan is overdeveloped and due for a downturn as many luxury properties around the monument are currently experiencing declining rents and high vacancy rates. However, the Stadium area and the Yarmag area are forecast to perform incredibly well in terms of both rental and sales prices going into 2015.

District Overview

Khan-Uul District (named after the most famous peak of the Bogd Khan mountain range) is perhaps the area where Ulaanbaatar’s outward expansion is most visible. Rapid and uncoordinated growth in the now-prized central business and swelling rural-urban migration into the ger districts north of the center have combined to smother the valuable downtown residential locations in traffic and coal smoke. The high volume of air pollution concentrated in the city center as well as the typical noise and safety issues of urban life have led affluent families to look elsewhere for peace and fresh air.

Encompassing almost all of the land south of Peace Bridge, Khan-Uul has the smallest ger population of any of Ulaanbaatar’s districts, with just 7,400 of the district’s 119,265 families residing in gers and temporary structures. Fewer gers mean less coal smoke and, consequently, families with the means have flocked to this flourishing but still underdeveloped region of the city. This trend has prompted the construction of enormous, new middle class residential complexes around the national stadium and the proliferation of luxury apartments even further south in the Zaisan area. More than 34 new residential complexes came online in 2013 and a similar number is planned for 2014.

A similar trend is now beginning to manifest itself in the Nukht Valley and Yarmag areas, along the road leading to Chinggis Khaan International Airport. The Stadium and Zaisan areas may be nearing their medium term saturation points but the Yarmag area is still vastly underdeveloped and full of potential. The official development plan of the newly appointed city government includes enormous infrastructure upgrades to the Yarmag area and envisions the area along the airport road as the new administrative center of the city.

“Retail and office are fairly underdeveloped in this district but Zaisan Square and the plethora of new retail projects in the Yarmag area, like Hunnu Mall and The VILLAGE @ Nukht, will soon reverse this trend and turn Khan-Uul into a significant retail center”

“The high volume of air pollution concentrated in the city center as well as the typical noise and safety issues of urban life have led affluent families to look elsewhere for peace and fresh air”

“Fewer gers mean less coal smoke and, consequently, families with the means have flocked to this flourishing but still underdeveloped region of the city”

“More than 34 new residential complexes came online in 2013 and a similar number is planned for 2014”

“The Stadium and Zaisan areas may be nearing their medium term saturation points but the Yarmag area is still vastly underdeveloped and full of potential”

241

KHAN-UUL DISTRICT

The neglected western portion of Khan-Uul District, particularly khoroo 19 along the southern border of Bayangol District, is a different development landscape all together. This area houses many of Mongolia’s aging industrial operations, most of which were constructed during the country’s socialist past. Currently, a number of large Mongolian companies, including APU, MCS, Erel and Misheel Holdings, house their primary industrial operations here. Northeast of these factories are several blocks of low quality Russian apartment stock which houses the majority of factory workers. Russian built, but to a lower standard than many of city’s more central communist stock, in general the apartments run down exteriors are representative of the internal apartment quality.

Despite the luxury of Zaisan and the promise of the Yarmag area, Khan-Uul’s relative isolation is seen as an annoyance by some. The clean air and open green spaces are pleasant enough but the distance from the city center and the gridlock traffic on main thoroughfares can turn the morning commute into a painful odyssey. Peace Bridge, the single workable link between the residential area in Zaisan and the city as a whole, was the most congested traffic route in Ulaanbaatar back in 2012.

However, recent developments, including the new “Sun Bridge” near the Bars Market and the nearly completed airport road have dramatically reduced commute times. Nevertheless, there will still be days when the four-kilometer journey from Yarmag or Zaisan to the central business district may take more than an hour.

Subsections

As outlined above, Khan-Uul plays host to a number of distinct areas that display radically different market dynamics.

“The clean air and open green spaces are pleasant enough but the distance from the city center and the gridlock traffic on main thoroughfares can turn the morning commute into a painful odyssey”

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2013

2012

Ithou

sand

peo

ple

0

20

40

60

80

140

120

100

KHAN-UUL DISTRICT POPULATION


242

KHAN-UUL DISTRICT

The Stadium Area

Retail has been slower to penetrate the stadium area, consisting mostly of small-scale shops and restaurants built into residential complexes themselves and designed to meet the urgent day-to-day needs of residents. Likewise, office developments have been virtually non-existent. However, 2011 witnessed the relocation of the headquarters of Mongolia’s National Chamber of Commerce to a major new office complex on Ghandi road that currently houses the administrative functions of several different organizations. Likewise, 2012 witnessed the completion of Home Plaza, the first large-scale mall and retail center in the area, featuring a hypermarket in the basement. The Corporate Hotel also opened a new branch and convention center in the same year, located just down the road from the Chamber of Commerce. And in 2014, Gegeenten, also known as Fides Tower added immense addition (please see the office sector for detailed analysis) to both retail and office sector and bringing already clustered downtown office and retail sector to expand to this part of the city with total of 180 household units, 11,000 m2 of office space and 6,000 m2 of retail space.

The stadium neighborhood remains highly desirable, located just a short drive or brisk walk away from the downtown where the city’s best offices restaurants and nightclubs are located. Despite all the development of recent years, ample amounts of cheap empty land remain and dozens of new projects are slated to come online over the next two years. Demand for middle class housing in the area remains strong enough to bolster prices for many years to come but all the new supply being developed should keep purchase and rental prices within reasonable bounds for the foreseeable future.

Kh Apartment

“2012 witnessed the completion of Home Plaza, the first large-scale mall and retail center in the area, featuring a hypermarket in the basement”

“Demand for middle class housing in the area remains strong enough to bolster prices for many years to come”

243

KHAN-UUL DISTRICT

Zaisan

The residential area surrounding the Zaisan monument, in the southern part of Khan-Uul District, is where Mongolia’s most affluent population has gathered to escape the more crowded central business district. The monument rests a top a small hill and features a circular mural that depicts scenes of friendship between the USSR and Mongolia, the defeat of the Japanese Kwantung Army by the Soviets at Khalkhiin Gol on the Mongolian border in 1939, the defeat of Nazi Germany, and notable peace time achievements such as the Mongolian involvement in the USSR’s space exploration program.

A popular haunt for the sons and daughters of Mongolia’s rich and powerful; it is a common activity for slightly inebriated groups to make the ascent once the city’s bars close, in order to watch the sunrise from the 360 degree vantage point.

Luxury complexes line the surrounding streets and the nation’s most prestigious schools, the International and American Schools of Ulaanbaatar, can be found here. The Zaisan Memorial, resting a top a small central mound, is close to a national treasure.

It is here that rental and sale prices have seen some of the most dramatic appreciation in recent years. Back in 2007, the area around the monument consisted primarily of open fields and empty parks. The land could be acquired cheaply and demand for housing was low. The sudden boom in luxury developments happened virtually overnight from 2008-2011 and prices skyrocketed. There is worry, however that the market here may now be saturated as developers have chased profits and built more luxury housing than the local economy can easily absorb.

Zaisan is technically situated within the Bogd Khan National Park, a fact that has caused much controversy in recent years. Technically, the only way to build in a Mongolian national park is if the project deemed to be in the state interest by the national government.

Home Plaza

“Luxury complexes line the surrounding streets and the nation’s most prestigious schools, the International and American Schools of Ulaanbaatar, can be found here”

“The sudden boom in luxury developments happened virtually overnight from 2008-2011 and prices skyrocketed”

244

KHAN-UUL DISTRICT

Although some developments, such as the Seoul Group’s Seoul Royal County, River Garden & Marshall Town are probably only few who have been able to fulfill this condition effectively; the majority have not come close.

In 2011 MCS Properties launched Bella Vista and Buddha Vista in 2014 in the Zaisan Valley. Among the highest quality lodging in the capital, the two complexes each incorporate around 7,000sm of residential space. Provided are amenities for residents including a retail podium, a full suite of services and a number of entertainment venues.

Both developments are located at the foot of the Zaisan monument, Bella Vista stationed along the Tuul River while Buddha Vista, as the name would suggest, sits further back overlooking the golden statue of Buddha. With their high quality design, materials and views of Ulaanbaatar, the developments have thus far proved extremely popular with locals and expats alike, maintaining very high occupancy rates since their launch.

Continuing the theme of luxury developments in Zaisan along the Tuul River, Nomin Group’s River Garden was also launched in 2014. The complex spreads over 7.5 hectares on the foothills of the Bogd Khan Mountains and has capacity for up to 360 families. A range of lodging is available from typical high-end apartment buildings to penthouses and townhouses.

River Garden boasts of being Mongolia’s “no 1 green village” with 75% of its footprint being covered by an assortment of greenery. There are also a number of sports facilities on site including basketball courts, tennis courts and football pitches.

Zaisan area rapid development from 2008 to 2012

245

KHAN-UUL DISTRICT

Further towards Ikh Mongol State Street lies Marshall Town, another newly launched residential development in the region. Marketed as a “Deluxe Village”, Marshall Town is around 80,000ms in size and plays host to a huge number of families.

Behind Zaisan Memorial, deeper in the valley lies Blue Sky Town, which offers great views of the surrounding mountains in a more secluded location than comparable projects in the area. The nearby Jardin Residence is also popular among Zaisan’s community. Priced slightly below the luxurious Buddha Vista and Bella Vista, both projects have great locations within the valley, situated adjacent to the American School.

Marshall town

River Garden town

246

KHAN-UUL DISTRICT

Recent changes in governmental policy have attempted to resolve the situation, although their effectiveness has been limited. Despite Mongolian landlords paying fines in order to allow the legislative barriers blocking them from their licenses to be lifted, the state has not been so kind to foreign investors. It is technically illegal for a non-Mongolian citizen to invest in any form of property in a national park, and even those investors who have been fined are not safe from the law. The authorities are legally entitled to annul their documentation at a time of their choosing. The political implications of such a policy render it an extremely unfeasible, if not impossible task. It also seems to depend on the developer’s ability to secure a property ownership certificate. It is important for investors to fully understand their rights before placing their money in Zaisan or other national park based real estate assets.

Developers have not taken much initiative to build commercial or office spaces and there are relatively few retail and grocery outlets compared with the central areas found closer to Peace Bridge. The only notable exceptions are the areas around the Irish Castle Pub and the popular Golden Dragon Chinese restaurant. For the moment, there may be opportunity to meet these needs. The area’s first major retail mall and office complex, Zaisan Hill / Zaisan Square, came online in 2013. Only time will measure the success of this complex.

“The political implications of such a policy render it an extremely unfeasible, if not impossible task”

“It is important for investors to fully understand their rights before placing their money in Zaisan or other national park based real estate assets”

Seoul Royal County

Blue Sky town

247

KHAN-UUL DISTRICT

The APIP research team remains optimistic regarding the potential of retail in this area but a lack of reliable historical data obviates the development of a robust forecasting model.

For residential development, however, the initial bonanza may be coming to an end. The steep drop-off of FDI in 2013 coincided with the flight of much of the country’s more affluent expat population, the key demographic for rentals in the Zaisan area. The favorable subsidized credit and government spending programs that have bolstered the lower and middle end of the housing market all over the city are targeted at financially disadvantaged individuals. As such, they have had a much smaller impact on the luxury end of the market that Zaisan caters to. Many of the newer complexes in this area remain half empty, awaiting tenants and owners that will not arrive any time soon.

The sharp decline of rental prices in recent months likely presages a downturn in sales prices or, at the very least, a moderation in the pace of capital growth. A similar but less severe downturn occurred in 2008 and 2009 in the wake of the financial crisis.

The 2014-cool down has the potential to be more severe as the amount of supply coming online is significantly greater.

However, continued strong economic growth and easy credit policy have the potential to ameliorate the downward pressure engendered by dipping demand and oversupply.

“The APIP research team remains optimistic regarding the potential of retail in this area but a lack of reliable historical data obviates the development of a robust forecasting model”

“The steep drop-off of FDI in 2013 coincided with the flight of much of the country’s more affluent expat population, the key demographic for rentals in the Zaisan area”

“A similar but less severe downturn occurred in 2008 and 2009 in the wake of the financial crisis”

Jardin Residence

248

KHAN-UUL DISTRICT

Yarmag

Some of the strongest price appreciation in coming years may occur in Yarmag, along the relatively empty section of Khan-Uul leading out to the international airport.

The newly appointed city government is taking advantage of all the open land and fresh air along the Yarmag road to expand and renovate its administrative offices. The immigration agency moved its headquarters to this area in 2012 and dozens of other national ministries and city offices are scheduled to follow suite over the coming years. The government has dramatically expanded local infrastructure to accommodate the anticipated developments.

The 10-kilometer airport road and the city road feeding into it have been expanded from a two-lane path to a six-lane highway. This has radically reduced transport times to and from the city center. Water and sewage lines for the area have also been extended and an addition has been built on to the nearest heating plant in order to help the new developments in the area stay warm through the harsh winters.

“Some of the strongest price appreciation in coming years may occur in Yarmag, along the relatively empty section of Khan-Uul leading out to the international airport”

Nukht Valley in the future?

The newly constructed Airport road

249

KHAN-UUL DISTRICT

Savvy developers are piggybacking on the government’s plans and building a host of new office, retail and residential communities. Development is centered around the construction of the new highway. Prices are still low while the road and the surrounding infrastructure are being finalized, but that will not stay true much longer.

The current housing options range from the handful of gers to the north of the airport road, to the small yet high quality, affordable apartments at MCS’s Viva city to the elite penthouses in APIP’s The VILLAGE @ Nukht and the ultra luxury houses in Nukht valley proper. These housing complexes are the closest Mongolia has to the suburb atmosphere seen in developed western nations. The major concern of those living here is the long commute needed to reach the city’s shopping and work amenities in the downtown area.

The new office and retail developments coming online in the next two years should help to alleviate this concern, however. Viva City, which came online in 2013, is primarily a middle class residential complex but the ground floor units feature many small retail units and restaurant. The 5,000 square meter Hunnu Mall is also one of the main attractions since opening its doors in 2014. In addition to grocery shopping and salon visits, parents are able to drop off their children at the playground or with the day care service promised. Teens can meet their friends at the ice rink or catch the latest blockbuster at the cinema. Communities have the greatest access to a prestigious school, the British School of Ulaanbaatar.

Located to the southwest of the main Yarmag road, the Nukht valley is a small, gated community that was originally the summer retreat of Mongolia’s socialist political elite. Since the transition, the area’s limited land and residential stock has been made available to whoever can afford it. In recent years, many multimillion-dollar weekend homes have been constructed in the Nukht valley, transforming it into one of the wealthiest areas outside of Zaisan. Typically thought of as the playground of Mongolia’s business magnates and wealthiest politicians, the area’s few hundred houses are lacking nearby by shopping and retail amenities.

“The current housing options range from the handful of gers to the north of the airport road, to the small yet high quality, affordable apartments at MCS’s Viva city to the elite penthouses in APIP’s The VILLAGE @ Nukht and the ultra luxury houses in Nukht valley proper”

“The major concern of those living here is the long commute needed to reach the city’s shopping and work amenities in the downtown area”

“The 5,000 square meter Hunnu Mall is also one of the main attractions since opening its doors in 2014”

Viva City

250

KHAN-UUL DISTRICT

The VILLAGE @ Nukht is a mix-used retail and office complex located at the entrance to the Nukht valley. The Village is designed to take advantage of the lack of nearby retail and entertainment facilities and provide a much-needed outlet for the wealthy families and teens housed in the valley to the north. The inspiration for the project was Bicester Village in the United Kingdom.

The unique European facades and interiors will undoubtedly draw in additional crowds from the city center and the more affluent from middle class developments along the neighboring Yarmag road.

The Village offers a full suite of shopping, entertainment and restaurant facilities including 27 large retail spaces, a hypermarket, 9 food and beverage outlets, a beer hall, 12 offices and 8 residential units.

“The VILLAGE @ Nukht is a mix-used retail and office complex located at the entrance to the Nukht valley. The Village is designed to take advantage of the lack of nearby retail and entertainment facilities and provide a much- needed outlet for the wealthy families and teens housed in the valley to the north”

“The Village offers a full suite of shopping, entertainment and restaurant facilities including 27 large retail spaces, a hypermarket, 9 food and beverage outlets, a beer hall, 12 offices and 8 residential units”

The VILLAGE @ Nukht

Hunnu Mall

251

KHAN-UUL DISTRICT

Investor Insight: The British School of Ulaanbaatar.

With the mission to establish the “leading international school in Mongolia,” the British School of Ulaanbaatar models itself after the English International School system, offering a broad and challenging educational program to students from diverse cultural backgrounds. The state-of-the-art school building was completed last May and features a modern sports complex and student dormitory, all located across from Viva City. One of the most striking and well-resourced school campuses in Mongolia, in terms of the architectural style and the range of facilities, the school will have the capacity to host several thousand student from the nearby luxury and middle class developments springing up in the area.

The British School of Ulaanbaatar

252

KHAN-UUL DISTRICT

PerformanceKhan Uul’s price performance over the past year is exactly as you might expect given its status as a high-end, segmented market. The overall price index rises correspondingly with the average until the end of 2013, where it proceeds to seemingly fall off a cliff before regaining ground. On average prices were around 13% higher in MNT terms from tbeir levels in January 2013, meaning roughly flat in dollar terms or even slightly depressed. Before the majority of the liquidity in the mortgage program ran out at the turn of the year, prices were up around 23%, above the Ulaanbaatar average. The data characterizes buyers as opportunistic, using the mortgage program to buy a unit in the prestigious neighborhoods within Khan-Uul, and stopping abruptly when liquidity dried up.

Segmenting the market vindicates this view as once can observe the “price cliff” exhibiting itself in only apartments under 80ms in size. Apartments over 80ms in size have displayed strong growth over the past year, largely unaffected by the ceasing of the mortgage policy. The huge wedge in prices furthermore confirms the region as one of many caveats. The amalgamation of areas as diverse as Nukht, Zaisan and the Stadium Area serve to distort the data somewhat, as one can see from the rather erratic results below.

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

4

Jan-

14De

c-14

Mar

-14

Feb-

14

May

-14

Jun-

14Ju

l-14

Apr-1

40

0.05

0.15

0.1

0.2

0.25

0.3

UlaanbaatarKhan-Uul


ULAANBAATAR VS KHAN-UUL DISTRICT REAL ESTATE PRICE INDEX

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

4

Jan-

14De

c-14

Mar

-14

Feb-

14

May

-14

Jun-

14Ju

l-14

Apr-1

4

-0.1

-0.05

0.05

0

0.1

0.15

0.2

0.25

0.3

0.35

Khan-Uul>80Khan-Uul<80


KHAN-UUL DISTRICT APARTMENTS OVER 80MS VS UNDER 80MS

“The overall price index rises correspondingly with the average until the end of 2013, where it proceeds to seemingly fall off a cliff before regaining ground”

“Before the majority of the liquidity in the mortgage program ran out at the turn of the year, prices were up around 23%, above the Ulaanbaatar average”

“Apartments over 80ms in size have displayed strong growth over the past year, largely unaffected by the ceasing of the mortgage policy”

253

KHAN-UUL DISTRICT

“However, most of this drop was powered by the flight of high-end ex-pat tenants from Zaisan as a result of the collapse of the 2012 collapse

As a whole, Khan-Uul looks set to do well in coming years. Average rental prices, which had been appreciating steadily since 2010, saw a moderate decline in 2013. However, most of this drop was powered by the flight of high-end ex-pat tenants from Zaisan as a result of the collapse of the 2012 collapse in FDI. The Stadium area and the rest of the district performed much better on average.

The Stadium area in particular will see strong appreciation of prices, as will middle class developments all over the district. Prices of luxury developments in Zaisan will be less of affected by these policies and these areas may see price stagnation or even declines. However, the underperformance of luxury properties in Zaisan will not be strong enough to drag down the district wide average.

APIP is a Mongolia focused, vertically integrated real estate development group that has been active in the country over the past 12 years. APIP owns a number of subsidiary companies related to property development, cement and financial services. Founded in 2001 by American venture capitalist Lee Cashell, APIP has been profitable every year since its inception and is regarded as one of the most transparent private companies in Mongolia. APIP is IFRS complaint and audited by one of the Big Four accounting firms.

Tomorrow’s Emerging Markets today

DIAMOND FINANCENon Bank Financial Institution

Mongolian Properties Construction Corporation, the sole contractor of APIP, has executed a number of developments for APIP.

Founded in 2002, Mongolian Properties is the oldest real estate agency in the country and has expanded to meet the needs of both local and international clients in nearly all aspects of Mongolian real estate.

Property

Central Asian Cement is the only cement producing facility in the capital city and was acquired by APIP to support the growing demand for cement, as well as for our property development business.

The business is underpinned by a strategically placed limestone deposit and, with the onset of major mining and infrastructure projects, demand is set to expand rapidly.

Cement

Founded in 2011, Diamond Finance is one of the fastest growing Non-Banking Financial Institution (NBFI) in Mongolia, which provides loans and currency exchange services to support SMEs and individuals’ financial needs.

NBFIs in Mongolia are regulated by the Financial Regulatory Commission and offer loan products to SMEs and individuals at competitive rates, and serve as an alternative to other financial institutions such as Banks.

Lending Institution

HEAD OFFICE:Suite 202, Regency Residence16 Olympic Street, 1st Khoroo, Sukhbaatar DistrictUlaanbaatar 1422016, MONGOLIATel: (+976) 7730 0550Fax: (+976) 7730 0880

HONG KONG OFFICE: Unit 301 Winsome House, 73 Wyndham Street, Central, HONG KONGTel: +852 2805 7792Fax: +852 2805 7801E-mail: [email protected] HONG KONG

Mon House 2005

Regency Residence 2010

Olympic Residence 2015

Mall @ Nukht

Website: www.apip.com, E-mail: [email protected]

LONDON OFFICE: 47 Charles Street, MayfairLONDON, W1J 5EL Tel: +44 207495 6611E-mail: [email protected]

LONDON

Mon House 2005

Regency Residence 2010

Olympic Residence 2015

Mall @ Nukht

Office Park @ Nukht

Park View 2007

The VIllage @ Nukht 2014

Oasis Residence 2016

Residence @ Nukht

Noble Stallions Residence

Temple View 2009

Park Place 2017

American University Complex

Airport Logistics Center

OUR DEVELOPMENTS

FUTURE DEVELOPMENTS

HONG KONG Unit 301 Winsome House, 73 Wyndham Street, Central, HONG KONGTel: +852 2805 7792Fax: +852 2805 7801E-mail: [email protected]

MONGOLIA Suite 202, Regency Residence16 Olympic Street, 1st Khoroo, Sukhbaatar DistrictUlaanbaatar 14220, MONGOLIATel: (+976) 7730 0550Fax: (+976) 7730 0880E-mail: [email protected]

LONDON 47 Charles Street, MayfairLONDON, W1J 5EL Tel: +44 207495 6611E-mail: [email protected]

THE LARGEST REAL ESTATE AGENCY

IN MONGOLIA

[email protected]

real-estate-report-2015.pdf - Mongolian Properties

Documents

Transcript of real-estate-report-2015.pdf - Mongolian Properties