Investment In Ulaanbaatar, Mongolia

Boomtown On The Steppes

Mongolia’s is a fledgling democracy, in existence only since 1990. Prior to that, this country was a client state of the U.S.S.R. During the almost 70 years of Soviet influence, Mongolia did enjoy some benefits, including the construction of a trans-national railway, advances in literacy and education, and an improved infrastructure. On the other hand, many intellectuals and other perceived enemies to the Russian Federation were killed or sent off to gulags, people were forbidden to practice their religion, agricultural and economic pursuits were placed under central government control, and freedom of the press was abolished. When perestroika took hold, Mongolia was one of the first countries to recognize the opportunity it presented and to strike out on its own. It seceded from the Federation.

Since that time, Mongolia’s new government has tried to embrace democracy and a free-market economy, but it has been a difficult transition. Historically, this was a country of nomads. In recent years, a huge population surge has taken place, to Ulaanbaatar, which has developed into the only large city in this remote, land-locked country. Foreigners have migrated to this spot, as well, looking to cash in on the country’s huge untapped reserves of natural resources, which include significant deposits of copper, coal, gold, iron ore, and uranium.

For the past 10 years, large mining companies from China, Australia, Canada, and Korea have been laying the groundwork for massive mineral extraction. The first priority has been to improve the country’s infrastructure. The few roads that existed were little more than dirt tracks; housing and services to accommodate the influx of foreign workers and investors were inadequate.

Ulaanbaatar’s population has exploded in the past decade; the population of this city has doubled in the past three years alone. Mongolians wanting to reap the benefits of the huge influx of foreign investment continue their migration to Ulaanbaatar with the hope of finding work in construction, mining, or support services. The relatively small city center is awash with new construction—business centers, banks, and luxury high-rise condominiums—while the outlying areas are given over to large ger encampments, the round felt yurt-like tents used by the nomads who have moved here from the countryside in search of wealth.

All the foreign investment (foreign direct investment has surged in the past few years, growing from US$25 million in 1997 to US$1.02 billion in 2010) has translated into one of the fastest-growing economies in the world. In 2010, Mongolia’s GDP was 6.4%. It surged to 17.3% in 2011, and estimated GDP growth for 2012 is 17.2%. With the giant Oyu Tolgoi mine set to begin production in 2013, allowing access to the largest untapped copper and gold reserve on the planet, it is unlikely that these extreme growth levels will slow. In addition, Mongolia has huge untapped reserves of coal. With China purchasing up to 22 million tons of coal per month, it’s safe to say that Mongolia has a long-term customer to the south. Bottom line, Mongolia should see double-digit GDP for many years to come.

Though Mongolia is one of the poorest countries in Asia, and many recent immigrants coming from the steppes, deserts, and mountains to Ulaanbaatar live at the most extreme levels of poverty, there is an emerging middle class and an expanding segment of the population that qualifies as wealthy. Today, walking through downtown Ulaanbaatar, you see shiny new Humvees and Range Rovers, Mongolian men in smart suits, and women wearing designer dresses and high heels. Everyone is busy, moving through the city with a purpose, off to their jobs at investment banks and other businesses catering to the new economy.

At the heart of the boom is the country’s ballooning mining activity. Meantime, this fast-expanding industry is creating other opportunities for foreign investors. With the continuing influx of well-paid foreign executives and the growing number of wealthy Mongolians, residential and commercial real estate prices have been surging. New developments are springing up throughout the city, and returns are very attractive. Some foreigners have arrived on the scene to open businesses; new restaurants, bars, upscale hotels, and coffee shops that serve a predominately expat crowd are a good example of Ulaanbaatar’s new economy. The government exerts very little regulation at this time, meaning Mongolia is a fairly easy place to start a business. In the banking sector, high interest rates make for interesting certificate of deposit investment opportunities in the local currency. A Mongolian tögrög CD earns 16% to 17% currently. Further, the country imposes no currency restrictions, allowing for an easy flow of money in and out.

One of the most interesting investment opportunities is to buy an apartment for rental. While there is virtually no private ownership of land in Mongolia, foreigners can own condominiums. If you purchase one in Ulaanbaatar, you’ll be issued title to that property in the form of what is called an Immovable Property Certificate. With this, you have the right to sell the property, use it for collateral, or rent it out. The returns in the current economy can be impressive, as high as 15% to 17% per year from the rental income alone. In addition, values are appreciating rapidly and have, in some parts of Ulaanbaatar, doubled over the past three years. Aggressive appreciation is expected to continue for the short term at least.

Wendy Justice

Editor’s Note: Wendy and David Justice have just returned from a scouting expedition in Ulaanbaatar, Mongolia. Their complete report from the scene, including details on how to participate in this rapidly expanding economy’s booming property market, is being dispatched today to all members of Lief Simon’s Global Property Investor’s Marketwatch. If you’re one of Lief’s readers, watch your in-box. If you’re not, sign up here.

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