EL PROYECTO

Ulaanbaatar

Ulaanbaatar is at present Mongolia’s only first tier conurbation. Located in the north of central Mongolia on the Tuul River, it represents the cultural, economic and political heart of the country.

The past decade has seen the city transform from an unindustrialized settlement of 770,000, to the increasingly international city that can be seen today. Recent years have seen the emergence of a multitude of modern apartment blocks, offices, shopping malls and hotels as resource extraction has begun to bring significant wealth to the country.

The city is divided into six primary districts (Düüregs): Bayangol, Bayanzurkh, Chingeltei, Khaan Uul, Songingkhairkhan, and Sukhbaatar. Each district is then subdivided into a set of Khoroo’s, representing the administrative subdivisions of Ulaanbaatar, of which there are currently 132 in total. Each Khoroo is then further divided into microdistricts, or Khesegs.

Investor Insight: Scope of the Mongolian Properties Real Estate Report 2012

The focus of this guide upon Mongolia’s capital city should not be interpreted as a slight upon the economic potential of the second and third tier settlements around the country.

As mining operations have developed, many urban centres have found themselves experiencing rapid growth. Dalanzadgad, the capital of the Omnogovi Aimag, is located just 247km from Oyu Tolgoi and 108km from Tavan Tolgoi and has become the epicentre of mining activity outside of Ulaanbaatar.

As mining companies have established their offices in the region, the city’s population has increased from 17,000 in 2009 to 30,000. Average incomes have risen at the second fastest rate nationally (surpassed only by Ulaanbaatar).

Sainshand, the capital of the Dornogovi Province is already reasonably well established, lying on the key infrastructural link between Ulaanbaatar and the Chinese border. Government plans to build an industrial park in the area, along with 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. A strong demographic pull (the projects are expected to create some 200,000 to 250,000 jobs), combined with increases in average income is likely fuel real estate demand, and price appreciation over the coming years.

Despite this impressive potential, Asia Pacific Investment Partners currently believes that such markets have not yet developed to a standard acceptable for the majority of international investors. Scarce information combined with fragmented management mechanisms within the still remote regions continue to create obstacles and risks that have all but disappeared within Ulaanbaatar.

Given Ulaanbaatar’s unique position as the sole first tier city in a country with $1.3 trillion of mineral resources, there are a number of unique trends shaping its development. This section aims to detail the factors that are affecting Ulaanbaatar’s current trajectory, and the impact they are having on the make up and structure of the real estate market in the city.

The Demographics of Ulaanbaatar

Two connected forces have fuelled the drastic changes across Ulaanbaatar over recent years: the country’s economic growth, and considerable change in its demographic makeup.

Despite informational inconsistencies in measuring Mongolia’s exact demography, all metrics are in consensus that the proportion of the population living in Ulaanbaatar has grown over the last decade. The National Statistics Office of Mongolia estimates the capital’s population increased from 1,147,700 in 2008 to 1,287,100 in 2011, growing 25% in just three years, with 40,641 people relocating to the capital in 2010 alone.

Currently an estimated 47.1% of Mongolia’s population live in Ulaanbaatar according to the Japanese International Cooperation Agency, a proportion that is expected to increase considerably over the medium term. Forecasts anticipate that by 2020, over half the country’s population will be based within the capital city.

Photo by Hamid Sardar / Khasar Sandag

These high rates of urban migration are caused by a combination of financial necessity and the perception of opportunity among many currently based in Mongolia’s countryside.

Particularly harsh weather conditions over recent years have incentivised the shift away from the nomadic lifestyle for many, with large quantities of livestock across the country having perished. As livestock numbers have dwindled, the financial and nutritional requirements of nomads have become more and more difficult to fulfil, causing many to abandon their rural existence.

Investor Insight: The Nature and Impact of the Dzuud on the Mongolian Economy

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 so many of Mongolia’s population intrinsically connected to the health of their animals, the occurrence of a Dzud usually marks a significant change in the socio-economic conditions facing many 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, the past two decades have seen Mongolia’s rural communities having to deal with these conditions with unusual regularity.

The winters of 1990-2000, 2000-2001, and 2001-2002 saw the country hit by three consecutive dzuds, killing an estimated 11 million heads of livestock nationwide.

The infamous winter 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. This incident has been regarded by many as something of a catalyst for the significant urban migration witnessed in Mongolia over recent years; the increased frequency of such occurrences causing many to question the sustainability of the nomadic lifestyle.

With incomes unstable, conditions harsh, and even the most basic of infrastructure non-existent for many 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 labour market are positive, with most Mongolians being acutely aware of the country’s extraordinary economic transformation. By simply relocating to the capital, it is believed that the unemployment and volatile wages plaguing many herdsmen can be avoided.

The Outcome of Mongolia’s Urbanisation: The Ger Districts

For the majority of the migrants who flock to Ulaanbaatar, reality falls short of expectations as migrants they find themselves joining the peri-urbanised ‘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 properties. These plots are typically owned by those who live on the land, having been awarded the right to own plots by the private land ownership laws enacted in 2002.

The land ownership registration procedures were made explicit in 2005.

Investor Insight: 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.

The sheer scale of Ulaanbaatar’s ger areas means that treating them as a homogenous entity is inadvisable. It is thus useful to loosely follow the tripartite framework developed by the World Bank, breaking down the areas by their characteristics and proximity to the central ger district.

‘City centre’ ger districts are those situated within or close to Ulaanbaatar’s urban areas, and will usually border with apartment blocks and fixed urban structures. It is estimated that 78% of structures within city centre ger districts are small, detached constructions, 18%

are the traditional felt tents, whilst the remainder are represented by modern apartment blocks that have spilled over from Ulaanbaatar’s developed core.

Characterised by a strong sense of community, these regions are well established and tend to represent migrant families whose ancestors moved to Ulaanbaatar generations 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.

This system has allowed those living in central ger districts to secure a reasonable level of prosperity, estimated by the World Bank to represent $21,920 of illiquid assets (property), and $4,381 of liquid assets (savings, stocks, cars) for families on average. However, with monthly household incomes around $220, their earnings are still short of their apartment dwelling peers, who earn around $319 per month.

‘Mid-tier gers’ are typically slightly further out than the central ger district, although some are still within walking distance of the Ulaanbaatar’s central, developed areas. This is not universally applicable, as the districts being characterised primarily by their sheer scale form something akin to a continuous landmass of informal structures, which may extend for several kilometres in every direction.

Circa 72% of in these mid tier neighbourhoods are detached self-built structures, with the remainder being characterized by temporary gers. Household assets in these slightly more inaccessible regions are considerably less than those of their more centrally located peers.

The illiquid wealth (primarily in property assets) of these families is typically about $13,521, whilst monthly income is just $137 per month for ger households, and $163 per month for the owners of detached property.

Many living in these ‘mid tier’ Ger districts are reasonably comfortable with their residential situation, 36.3% and 38.6% of those asked in a 2010 World Bank sample stating 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’. Despite a certain amount of disappointment stemming from their limited exposure to the city’s infrastructure, many families in these districts are well settled and comfortable in the neighbourhoods and are keen to keep the property that provides many with their homes and operational bases that for the informal businesses often supplements their income.

‘Fringe’ Ger areas are those on the periphery of Ulaanbaatar, hosting the city’s most recent migrants. Although they usually do not come close to bordering with the developed city of Ulaanbaatar usually considered of interest to international investors, some of their characteristics should not be overlooked.

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, 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.

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

warm through winter temperatures as low as -40 degrees centigrade 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.

These worries have catalysed the recent shift towards the official development of city management plans, designed to alleviate the problems caused by mass migration. The recently updated JICA Master Plan 2020, is intended to oversee Ulaanbaatar’s development over the medium term, and has crafted the idea of a ‘compact city model,’ which now forms the core rationale behind the city’s development. Urban sprawl has made Ulaanbaatar into an extremely low-density city, making both operations and infrastructural provision problematic and inefficient. In order to solve this problem, emphasis is placed upon the necessity of high-rise accommodation within the city’s centre, built carefully around a prudently planned transport network. The Central Business District’s present population density rests at around 6,000 persons per square kilometre. JICA’s proposals would increase this figure to 23,700, whilst raising the concentration in surrounding areas (which include the central and some mid ger districts) to an estimated 13,700 persons per square kilometre.

Central to the vision of the ‘compact city’ is therefore the necessity of high-rise buildings.

Until recently, Mongolia’s real estate industry has been in equilibrium supported almost completely by free market forces, leading to the acute under provision of real estate designed to cater to the low-income market - this is not for lack of demand. The World Bank’s 2012 survey into the attitudes of residents towards developmental strategies found that of samples close to central Ulaanbaatar (the areas most likely to be affected by compact city developments), only 12.7% refused to support the development of apartments at all in Photo by Hamid Sardar / Khasar Sandag

converted to apartment residences.

The market is not yet developed enough to see these demands actualised. Consumers have been faced with severe financing constraints; at present income levels only of those situated in the detached houses of the central city ger districts are considered close to being able to finance the purchase/rent of modern apartment accommodation.

The total assets of detached property owners remain just 66% of their apartment based counterparts, whilst the value of their real estate remains considerably less . To satisfy this demand, it would be necessary for the gap between property prices and the wealth of ger households to be funded using mortgages and bank loans, instruments that are at present extremely underdeveloped in Mongolia.

The resulting low-end market dynamic is thus characterised by latent demand, unable to enter into the mainstream real estate market under present conditions. The government’s recent 100,000 Homes Project aims to accelerate credit development within Ulaanbaatar, allowing for the demand clearly present in the low tier apartment market to become effective, whilst simultaneously stimulating the growth of private sector supply.

Investor Insight: The 100,000 Homes Project

The 100,000 Homes Project is a macro-level project aimed to correct both demand and supply side failures associated with Mongolia’s low-end real estate market. The project aims to facilitate the construction of 75,000 homes across Ulaanbaatar, and a further 25,000 across the rest of the country: 5,000 in the Western Region, 5,000 in the Khangai Region, 5,000 in the Eastern Region, and a further 10,000 in the Central Region excluding Ulaanbaatar.

Supply side development is to be almost exclusively facilitated by the private sector, a break away from the norm of affordable housing projects worldwide.

The government is not building the homes themselves, nor are they subsidizing

land acquisition, construction, or the property management of the new buildings in any way. Instead, they aim to use their expertise to cap the price per square meter that can be charged on properties as part of the program, expand targeted development and investment within factories which produce construction inputs, and oversee expansion by acting to facilitate key industry partnerships.

The government’s biggest role however looks set to be involved in providing (and funding) the infrastructural frameworks serving the new developments, the lack of which has discouraged private sector participation in these types of projects over recent years. The extension of roads, water grids, heating and electricity is an expensive undertaking within the disorganised mass of property that is Ulaanbaatar; the connection of a single large apartment complex to the water grid alone costing as much as $1,350,000. Funds to finance the considerable investment required is to take place primarily through bond issuance from the Development Bank of Mongolia .

The demand side looks set to be stimulated by lending policies targeted at specific demographics, initiated by the Mongolian Mortgage Corporation. Undeveloped financial intermediaries have typically charged 16-19% APR on mortgages, coupled with down payments usually in the region of 30% to ger district residents over recent years. This means that mortgages have been fundamentally inaccessible to the majority of those families housed in Ulaanbaaatar’s informal structures. Fulfilling the role of market leaders in November 2011, the Mongolian Mortgage Corporation announced that it would offer homebuyers 25-year

mortgages for apartments smaller than 50 square meters, with a fixed interest rate of 6%.

Of the 8,000 homes already constructed, almost every apartment has been sold. This not only demonstrates the success of the 100,000 homes by palpably increasing the living standards of a sizable proportion of the population, but the effectiveness of the mortgage mechanisms being spear-headed by the Mongolian Mortgage Corporation in easing financial conditions.

These successes are set against a legislative backdrop that is quickly working to amend current inadequacies that limit the programs effectiveness. The newly elected Democratic Party looks set to lead a comprehensive review into the detail of the project to ensure its effectiveness. One rule currently damaging the plans scope is the clause stating that Mongolian Mortgage Corporation mortgages charged at the 6% interest rate are only to be available to first time homeowners. As many of Ulaanbaatar’s lower and middle class citizens live in multigenerational housing, where the entire family is usually documented as having ownership of the property, this means that there are many would be homeowners unnecessarily excluded from consideration due to a technicality.

At the time of writing, the Ikh Khural (the Parliment of Mongolia) is debating how government policy may be amended to benefit these individuals.

Although slightly short of the programs ambitious first year targets, Asia Pacific Investment Partners estimate that the output of the 100,000 homes project is set to gather momentum, as confidence increases and a range of factors restraining both supply and demand are resolved.

The success of the 100,000 Homes Project, and the instigation of development according to the ‘Compact City Model’ look to exacerbate the demand for space in central and some mid-tier ger areas, further increasing land prices.

This looks set to limit the development of the modern city of Ulaanbaatar out of the currently built up centre, limiting the supply of space predominantly to the area that already exists.

This looks set to limit the development of the modern city of Ulaanbaatar out of the currently built up centre, limiting the supply of space predominantly to the area that already exists.