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.
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