A Breakdown of Mortgage Policy in Mongolia

Overview:

As Mongolia continues to experience rapid GDP and population growth, the availability of affordable mortgage financing for people seeking proper accommodation in Mongolia is in high demand. Similarly, as Mongolia’s financial system deepens, housing finance emerges as an increasingly important part of the maturation of its financial system. In emerging markets, the maturation of financial systems appears to lead to the development of housing finance, and this deeper, more extensive financial system, in turn, contributes to higher rates of growth.

However, while the need for housing finance in Mongolia is obvious, the 40,000 homes project illustrated the country’s lack of a fully developed and reliable mortgage system. Many banks in Mongolia simply do not have the financial expertise to offer attractive mortgage loan packages or even provide the liquidity and the necessary legal framework to deliver the loans. Consequently, Mongolia’s mortgage market faces a variety of structural and procedural issues that must be resolved before ordinary Mongolians can have access to financing for house purchases and in turn contribute to Mongolia’s economic growth.

A Brief History:

The institutional structure of the present Mongolian housing finance market has been under development since 1997, when the Asian Development Bank and the Government of Mongolia initiated a drive to create legal and policy frameworks and standardized documentation for mortgage loans in Mongolia. However, the first loans were not offered until May of 2003 under the ADB’s Housing Finance Sector Program. Since then, the Government of Mongolia has enacted legislation such as the Mortgage Collateral Law and the Asset-Backed Securities Law as a means of regulating Mongolia’s mortgage market and more recently, has undertaken action to simplify origination processes and lower origination costs. In 2007, the Bank of Mongolia partnered with the National Statistic Committee (NSC) to develop a methodology for computing a Housing Price Index in Mongolia, which is computed on a quarterly basis.

Current Issues:

In order to support an efficient primary mortgage market, an incredible amount of progress needs to be made to improve the current mechanisms for property appraisal and credit risk assessment. Lack of information continues to hamper efforts to expand mortgage lending in Mongolia. For example, credit history information, which is stored by the Bank of Mongolia is extremely limited and is often out of date, making it hard for banks to measure the risk of their loans accurately. The Bank of Mongolia only carries information about the current status and not about loan performance and information from non-banking financial institutions is not stored, making it impossible to observe the history of a creditors utilities or telecom payment history. The debt to income ratio (ratio between monthly mortgage repayments including insurance and taxes and gross monthly income) is used to analyze a borrower’s capacity to repay a mortgage loan, yet there is no uniform method of calculating this. For foreign citizens, housing finance in nearly impossible to find, as the majority of commercial banks have policies that explicitly restrict lending to foreign citizens.

Before mortgages can become affordable the real estate market must also adapt by developing professional surveying and valuing services that will underpin a market undergirded by fundamental property values as well as supply and demand dynamics to provide extra security for lending institutions. Furthermore,  the sanctity of property rights should be reviewed to make it easier for banks to foreclose on property attached to defaulted loans. Without the assurance of being able to foreclose on immovable property most commercial banks are unwilling to risk lower interest rates as in the event of default they presently have little certainty of obtaining a collateralized property asset. Although great breakthroughs have been made in recent years, much work is still need in order to make foreclosure a simple and dynamic process.

The Secondary Mortgage Market:

The development of the secondary mortgage market through the establishment of the Mongolia Mortgage Corporation (MIK) in 2006 is one way the Government of Mongolia is attempting to provide increased access to housing finance. By issuing bonds on foreign and domestic markets, MIK will provide long-term funds to the Housing Finance Sector (HFS). The current shareholders of the Mongolian Mortgage Corporation are Bank of Mongolia and nine commercial banks. In 2009 MIK was approved to issue 25 Billion MNT in securitized mortgage bonds, 6.3 billion of which were sold between 2009 and 2010.

The market for MIK bonds is small since the main investors are all banks and there is a distinct lack of institutional investors. There is also an absence of rating agencies and a market based yield curve, as well as no constant issuance of government bond. The premise of mortgage securities in on the existence of supportive legal and regulatory framework, sizable and standardized primary mortgage markets, and well-developed bond markets. Specialized lenders can create efficiencies; however they need an external funding source such as a government lending window or secondary market. Their viability will ultimately depend on the willingness of investors to buy mortgage-backed securities and provide short-term funding, which in turn depends on their confidence in the credit quality of the underlying assets.

The potential benefits of a highly successful secondary mortgage market are many. Primarily, the MIK has the ability to raise large funds for subsidized housing finance, such as the 100,000 Homes Project, as well as increase the liquidity and efficiency of the housing finance system. If executed correctly, a thriving secondary mortgage market can even lower interest rates by encouraging the development of a new industry of loan originators.

Conversely, a major challenge for MIK in the next two or three years will be to preserve and enhance its private-sector-led status. Given the failure of government-created agencies to promote housing, MIK may become an attractive target for GOM investment and control. Current shareholders will have to decide whether to move more aggressively to enhance MIK’s current preeminent market position by, among other things, developing and issuing investment- grade mortgage-backed securities or losing control.

Conclusion:

The experience of the 1990s suggests that the provision of housing finance can exacerbate macro volatility. The volatility of housing prices and the potential for a boom-bust is higher if the housing supply is severely constrained by land access and urban regulation problems, which is an issue considering the short supply of land in UB with access to critical infrastructure. Going forward, the Government of Mongolia must also enact mechanisms to ensure the transparency of housing finance processes as well as create a more elastic supply of housing in order to reduce the probability of adverse real estate cycles and sharp run-ups in house prices. A strong but nimble and delimited public role in sector development is critical for the deployment of the measures.

Certainly, the extension of mortgage markets also relies upon a well functioning secondary market, which will rely on the ability of MIK to prepare and sell mortgage backed securities. The regulatory framework governing mortgage providers must also improve drastically if commercial banks are to eliminate some of the risks that push up interest rates on mortgages. These requirements are presently being worked through by the Government of Mongolia in cooperation with several multilateral organizations in order that Mongolia’s mortgage market can fuel growth in the property sector and contribute a solution to Ulaanbaatar’s housing shortage.

A stable, growing economy will encourage the growth of the housing finance system through lower inflation, lower interest rates, and lower systemic risk. In this evolutionary perspective, beyond a certain level of per capita income, housing finance will emerge with household demand for it; that is, as long as the macro, legal, and housing-market regulation environments are conducive to its emergence. In such cases, a virtuous circle can emerge as growth if the financial system promotes overall economic growth, and this higher growth, in turn, will encourage both further financial-sector and housing-finance development.


If you’d like to learn more about news in Mongolia, visit Mongoliana, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check out Mongolian Properties, Mongolia’s leading property developer and real estate agency.

Village @ Nukht Construction Update

Construction at the Village @ Nukht site is underway. Rapid progress is being made on the new buildings, located 500 meters south of Nukht's gated community. The development will feature 10,000 sqm of retail, dining, entertainment, and office space and is set to be completed by the beginning of 2013. Check out the pictures of the site below:

The Mongolian Properties agents pose for a picture

Josh Haines, APIP's new COO is overseeing the construction

On the existing building, the doors and windows have been set and the exterior facade is underway

Excavation is underway for the 3rd building

The footings have been set here

The footings have been finished and the columns are being set

If you’d like to learn more about news in Mongolia, visit Mongoliana, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check out Mongolian Properties, Mongolia’s leading property developer and real estate agency.

Retail Real Estate Space in Ulaanbaatar

There currently exist three central hubs of retail real estate space in Ulaanbaatar:

1. The Sukhbaatar and Chingeltei districts which extend into the CBD (Central Business District)

This region represents one of the earliest areas of retail space to be established in Mongolia post 1990. The heart of the region is the ‘State Department Store’ (Ikh Delguur) run by Nomin Holdings, 277,755 sqm of grade A retail space spread over five floors. Although all the space is almost always occupied, occupants over recent years have changed from local Mongolian to international brand retailers. The structure has diversified its use over recent years by offering itself as a desirable venue for prestigious events and concerts.

The area also hosts the ‘Ulaanbaatar Department Store’ (Ulaanbaatar Delguur, a clear example of how large, grade A retail space has developed in Ulaanbaatar. The building, comprised of a six floor development spanning 25,000 sqm, boasts two lifts, escalators to each floor, climate control systems and high-grade lighting. However, display problems make it difficult to attract the large, international anchor brands that are desired. The majority of the 5-10 sqm plots that make up much of the space are occupied by small scale cosmetic and fragrance retailers. Remaining space slowly populated after the structure’s launch, and as of 2011, occupancy was around 75% (mainly individual retailers touting clothing imported from China).

2. The Bayanzurkh district

This district represents a wide variety of large scale, mid to lower end retail outfits by Mongolian standards.  The retail core of Ulaanbaatar for lower end consumers is situated in the ‘Black Market’ (Naran Tuul). The Neighbouring ‘Sunday Plaza’ is a five floor shopping mall with close to 100% occupancy selling a wide range of low budget household wares from small cubicles (10-30 sqm a piece). The rest of space consists of small individual store front enterprises, or micro shopping centres.

3. The Bayangol District

In the main, the district’s operations consist of domestic retailers renting small developments of B- quality or below. With a large supply of ground floor space exceeding 30,000 sqm, the past decade has seen multiple grade B operations come online in the district, including Next Plaza, Tumbash Shopping Centre, and the Sansar Centre.

Noted for hosting the first grade A space in Ulaanbaatar, the Jiguur Grand Plaza, which opened at the tail end of 2009, consists of 30,200 sqm gross floor space. Initially low occupancy rates have risen over the past few years and as of 2011, sit at approximately 90%.

The recent completion of Max Group’s ‘Max Mall’ opposite the Jiguur Grand Plaza has suffered similar problems when trying to secure retailers. Occupancy is now approaching 80%, however the upper floors remain difficult to fill.

Why the low occupancy rates?

Examination of Mongolia’s macroeconomic indicators may help explain the trend detailed above. Overall indicators point towards positive demand for retail space; the National Statistics Office of Mongolia (NSOM) Bulletin reports that final GDP consumption rose 22.6% between 2010 and 2011, and that the national average wage increased from 341,500 MNT to 425,200 MNT in 2011, clearly having potential to fuel demand. However, real wage increases may be somewhat limited due to a CPI which increased at an annual rate of 10.2% in 2011. Despite this, it is clear that retail space demand for firms accessible to the general population has the scope to expand in line with the incomes of the Mongolian population in the future.

Why are occupancy rates lower at the top end of the market?

This phenomenon can be explained on both the supply and demand side. In terms of demand, the top end of Mongolian incomes have the potential to increase drastically as the benefits of the country’s large mining projects – i.e. Oyu Tolgoi and Tavan Tolgoi - feed into the consumption habits of the wider population. Growing segments of Mongolian society are now beginning to earn multiple million MNT per month as they are employed within the mining and financial sectors. Within Ulaanbaatar, mid to high level management are receiving salaries often equivalent to between $1,500 and $3,000 per month. However this has not been achieved across wide sections of society; as the rewards are unlikely to become common in the wider economy until the tail end of 2012 when large-scale mining operations become live. Those earning the figures described above constitute an estimated 2% of the domestic population (or 10,000 consumers).

As for the supply side, international firms are currently erring on the side of caution when it comes to moving into the Mongolian market. Bottlenecks across the Chinese border and relatively weak infrastructure act as supply chain disincentives. Risk-reward ratios are often not seen as substantial enough given the country only has a population size of 2.8 million - according to World Bank estimates - with half living within Ulaanbaatar, where trading operations would take place.

These disincentives in the medium term are being eroded. Increased infrastructure emphasis and government development projects aim to increase potential for cross border trade, and an increase in urban migration should mean Ulaanbaatar captures more of the country’s population, increasing the potential market available to international brands. The JICA estimates 55.5% of Mongolians will reside in Ulaanbaatar by 2030. Demographic changes occurring as wage increases are actualized from rapid economic growth should expand the ‘Mongolian middle class’. Furthermore, as FDI fuels mining operations and growth within the country, more wealthy foreign expats will generate another crucial source of demand.

Outlook

In the short term, previously rapid price rises in high end grade A retail space are likely to slow as additional international brands muster the confidence to enter into Mongolia as a market. Occupancy rates in such properties are likely to remain low in the short term as owners hold out on dropping prices for less glamorous domestic retailers, waiting for desired foreign ‘anchor brands’ to enter the country and their retail space. This stagnation of prices however is likely to be a short term phenomenon which should be broken as market conditions change and Mongolia unlocks its growth potential. However domestic demand for retail goods is growing rapidly for enterprises that cater to a larger segment of the Mongolian population. Refusal to drop prices for Mongolian firms should limit supply available to mid/high level domestic retailers looking for lucrative rental space, releasing the potential for impressive yield growth for grade A properties intending to cater to the domestic market and the upper echelons of the grade B market.

If you’d like to learn more about news in Mongolia, visit Mongoliana, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check out Mongolian Properties, Mongolia’s leading property developer and real estate agency.

Is there a real estate bubble in Mongolia?

Over the past decade, cheap credit and rising commodity prices in resource rich emerging economies across the world have caused real estate prices to soar in the urban centers of these frontier market countries. Yet, in the aftermath of the 2008 world financial crisis, huge sell offs rocked the property markets of emerging economies across the world as FDI and bank lending temporarily skidded to a halt.

Kazakhstan was one such country that encountered an unforeseen property bubble and financial crisis after nearly a decade of high growth. Driven by an influx of oil related FDI and easily accessible mortgages, land prices in downtown Almaty, Kazakhstan’s largest city, surged a whopping 8000% between 2002 and 2008 while the cost per meter of apartments in the downtown area rose 833% in the same time period*.

However, as the American subprime crisis took effect in 2007 and 2008, the housing bubble in Kazakhstan began to burst, and it did so quickly. By the summer of 2008, housing had dropped 40% from its peak levels and construction developers found themselves with unsold and unsellable apartments in their complexes. A full-fledged banking crisis had occurred in Kazakhstan, and developers struggled to find the financing necessary to finish partially constructed projects. Oil prices had dropped to all time lows, and to top it off, massive currency devaluation ensued, pumping up the cost of construction imports such as lumber, steel, and cement by as much as 20%.

As a country, Mongolia shares many commonalities with Kazakhstan. Both are resource economies, former Soviet satellites, and have similar cultural heritage. In a similar fashion to Kazakhstan, when the price of copper crashed in late 2008 during the global financial crisis, Mongolia's government had to call in the International Monetary Fund for help. Thus, the real question becomes: is Mongolia following a similar “boom and bust” path as Kazakhstan, and if not what differentiates the property markets between the two countries?

The real estate market in Mongolia, especially in the central business district of Ulaanbaatar, has already seen significant capital appreciation, but it is nowhere near to the 30-fold increase in Kazakhstan real estate prices prior to Kazakhstan’s bubble bursting in 2008. More importantly, mortgages for would-be apartment owners became accessible in Kazakhstan in 2002 – the start of their period of high growth. In Mongolia, however, mortgages are just now becoming accessible to the general public and most commercial banks still require down payments of 30% or more up front.

The financial industry in Kazakhstan played a large role in stimulating the property bubble by enabling unqualified creditors to take out mortgages that they couldn’t afford. The global financial environment of cheap credit and competition among national banks encouraged dependence on short- and medium term borrowing through the bond market, rather than dependence on banks’ own internal deposits and savings. In this quantity-driven environment, the way to success was through more borrowing abroad and more lending at home while quality became a secondary matter. This is a phenomenon we have yet to observe in Mongolia.

Clearly, speculation and Dutch Disease contributed to Kazakhstan’s real estate bubble. It was not just one, but many factors, such as oil price fluctuations, inadequate risk management, and currency devaluation that led to the unsustainable nature of Kazakhstan’s real estate market and economy as a whole. Even though the mining industry is certainly not free of risks, it is undeniable that mining will bring a ramp up in GDP and wage growth, and consequently induce higher real estate prices. The news that the government is considering raising state employee wages 53%, doubling state employee wages from 2008 in 4 years time, does not discourage this thesis.

As Mongolia’s property market heats up even more, Mongolia must find the right balance between enabling growth by lowering lending standards and encouraging new home ownership while also managing risk across the mining and financial sectors in the long term.

If you’d like to learn more about news in Mongolia, visit Mongoliana, Mongolia’s premier news source for all things Mongolia. If you’re interested in investing in real estate in Mongolia, check out Mongolian Properties, Mongolia’s leading property developer and real estate agency.

*Source: CRBE Kazakhstan, Almaty Office and InvestKZ.com

Village @ Nukht Update

The Village @ Nukht is a brand new, mixed use development that is currently under construction about 500 meters south of Nukht's gated community, adjacent to the Bogd Khaan Mountains. The development will feature 10,000 sqm of retail, dining, entertainment, and office space and is set to be completed by the beginning of 2013. Until then, take a look at some of the site renderings that have come through:

Courtyard View

Aerial View

Courtyard View - Daytime

Courtyard View - Angle 2

Mongolia asks China and Russia to re-route gas pipe

For almost a decade, proposals for a gas pipe running between China and Russia have been discussed but the technicalities never agreed upon. In Mongolia, as key mining projects begin to come to fruition, the President has suggested that the pipe be passed through the country in a move to support the mushrooming economy.

The capital of Mongolia, Ulaanbaatar, has one of the world’s highest air pollution levels mainly due to the widespread use of coal fires. The gas pipe, according to the President, would allow the capital to switch to a greener source of power and thus increase the city’s appeal as both a residential and tourist destination This would obviously have huge positive implications for Ulaanbaatar’s real estate owners. 

So how likely is it that the proposal will be realized?

Logistically, it makes perfect sense. Mongolia is sandwiched by two economic powerhouses and as a result, re-routing through the country saves 1,000 kilometers of pipeline. However, Russia seems unwilling to comment on the subject with a spokesman claiming no knowledge of the proposal, and adding that decisions on energy transportation are made solely on economic feasibility.

This article is in reference to the following link: http://www.bloomberg.com/news/2012-07-02/mongolia-pushes-russia-china-to-re-route-planned-gas-pipeline.html

The Impacts of Mongolia’s "100,000 Homes Project"

Astronomical mortgage rates in Mongolia have made the prospect of owning a house unattainable for the majority of Mongolians in Ulaanbaatar. With commercial bank mortgage rates hovering around 16-19.2% APR as of early 2011, it is easy to see why only 9% of real estate transactions in Mongolia are currently mortgaged. In a country where the average age is 20-24, the availability of urban housing and infrastructure is critical for the Mongolian economy as well as to ensure sustainable capital growth yields for real estate investors.

On November 2011, the Mongolian Housing Finance Corporation announced it would provide first-time homebuyers with access to mortgages capped at an interest rate of 6% on a 25-year term for apartments of less than 50 square meters in size. This initiative, a part of the “100,000 Homes Project”, seeks to help low-middle income Mongolians relocate out of the countryside and Ger Districts that currently house approximately 700,000 of Ulaanbaatar’s 1.2 million citizens around the periphery of the city.

In a market dominated by cash transactions, Mongolian borrowers still tend to make large down payments, with commercial and state owned banks such as Khan Bank, Bank of Mongolia (BoM) and Trade Development Bank (TDB) requiring initial deposits of at least 30% of the total value of the property. In order to finance this project, the Mongolian government has asked the state owned Development Bank to raise MNT 200 billion, while commercial banks will also serve to facilitate some of the mortgage lending.

            With currently only 116,000 total residential units in Ulaanbaatar, the 100,000 Homes project is destined to expand the market for low-middle income families seeking residential space in the city. However, only 2% of all mortgaged transactions in the country are nonperforming. As the requirements for down payments and credit requirements are lowered, commercial and government lending establishments will have to make adjustments to hedge against the increased risk of credit default and foreclosures.

Will Tindall, Chief Communications Officer of Asia Pacific Investment Partners, states, "The 100,000 homes project coupled with the increased penetration of the availability of mortgages, will fundamentally change the options available to nearly every Mongolian. The traditional three tiers of housing – ger/soviet block/western style apartments – will begin to reside as we see the ger communities on the periphery of Ulaanbaatar shrink”. The 100,000 homes project will undoubtedly serve to augment the already increasing presence of the middle class in Ulaanbaatar, as well as push up capital growth in Mongolia’s luxury real estate properties. With FDI totaling 5.3 billion and GDP growth at 17.3% in 2011, the success of the 100,000 homes project and subsequent emergence of the Mongolian middle class will be a true testament to the magnitude and sustainability of Mongolia’s economic strength going into the future.

To learn more about investing in Mongolian real estate, visit Mongolian Properties for more information and for all of your news and updates on current events in Mongolia, visit Mongoliana, a news portal that covers everything Mongolia.