Clare Nuttall in Ulaan Bataar -

Among the French bakeries, Irish pubs and Korean restaurants of central Ulaan Bataar, work is in progress on numerous construction sites. Completion is slow, due to the harsh climate that shuts down construction during the winter months, meaning supply isn't keeping up with the acute demand for residential and commercial property - at least at the highest and lowest ends of the market.

Within the next 12 months, several high-profile, mixed-use developments will come onto the market, where they are expected to be snapped up immediately. The best known of these is Chono Corporation's Blue Sky Tower, a blue glass building inspired by the sail-shaped Burj Al-Arab Hotel in Dubai.

At the other end of the spectrum, demand for affordable housing is equally strong, due to the thousands of migrants who have flocked to the capital in search of work. More than 50% of the city's population now lives in shantytowns of gers - the traditional Mongolian felt tents - that cover the surrounding hills. In winter, when temperatures plunge to minus 40° Celsius, Ulaan Bataar is enveloped in a noxious smog caused by smoke from the fires in these tens of thousands of gers. "People burn garbage, used batteries, dead rats - whatever they can find to keep the gers warm," complains one Ulaan Bataar resident.

A combination of economic and demographic reasons have caused the surge in demand for housing. Since 2003, Mongolia's economy has been growing by an average of almost 9% a year. Businesses are profitable and household incomes are up by 54% in the last two years. International firms, especially in the mining industry, are moving into Mongolia.

According to Enkhbileg Enkhjargal, foreign relations officer at Chono, Mongolia's real estate market has seen an average annual increase of 30-40% in investment and this is expected to continue for another five years. Randolph Koppa, president of the Trade and Development Bank, estimates that 100,000 residential units are needed in Ulaan Bataar alone.

Alisher Ali Djumanov, managing director of Eurasia Capital Management - which invests in Mongolian real estate through its Mongolia Discovery Fund and its real estate fund - describes Ulaan Bataar as "like Almaty before it became as affluent as it is now."

However, perhaps inevitably, there are already signs a bubble is forming in the mid-market. Most Mongolian developers have focused on building mid-price residential and commercial space, resulting in a fall in prices in recent months. "In the period of 2002-2008, residential prices rose four times," says Enkhjargal. "But from the spring of 2008, residential prices started to fall down 15-30%, especially prices of old apartments."

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