The ‘burbs come to Mongolia

By bne IntelliNews February 16, 2015

Terrence Edwards in Ulaanbaatar -


There is no hint when standing in the desolate Yarmag district of Ulaanbaatar that you are near the centre of one of the world's fastest growing economies. But what today is just a mostly empty valley, for developers will be the next magnet for Mongolia's rising middle class – unless a property crash happens.

The growth of Mongolia's capital city has been fuelled by the floods of money from the export of the country's vast mineral resources to China and elsewhere. But troubles in Mongolia’s mining sector and slowing growth in its southern neighbour have put the brakes on its own economic expansion.

Ulaanbaatar, which translates as “Red Hero”, was built by the Soviet government in the 1950s in the Tuul river valley. The central business district is where companies such as the global mining conglomerate Rio Tinto are locally headquartered, within walking distance of the country's parliament and some ministries.

Companies such as Asia Pacific Investment Partners (APIP) are continuing to build in Ulaanbaatar despite the economic slowdown since 2011 (though growth should still have been around 7% last year), even in such far-flung areas as Yarmag. Although this suburban area is decades away from catching up with the more developed city centre, the difference is less stark when compared to the city centre of 13 years ago. That was when APIP CEO Lee Cashell first began renting out apartments to project workers in the early noughties. “The city was a big village,” he says. “You would still see horses down streets. It was a good time to get to know the area and explore the city created by the Soviets.”

Cashell's company has since grown from a small rentals operation utilising three Soviet-style apartments purchased at $10,000 each, into a large-scale property developer for luxury homes, with subsidiaries for property management and producing construction materials.

Head for the hills

The wide open spaces in Yarmag strongly contrast with the city centre, where developments are practically piling up on top of one another.

APIP's Village @Nukht was built in Yarmag with eight penthouse units as well as shopping and office space, with the expectation that the area would develop into a new urban centre. Other more affordable options are appearing too, along with schools and shopping centres. It's also where Ulaanbaatar's city administration has long-term plans to relocate its offices. “We've been watching Yarmag for a number of years, and the real estate agency has done transactions at Nukht Valley where the wealthy are living and currently building,” says Cashell.

Yarmag also provides escape from Ulaanbaatar's choking air pollution. The World Bank considers the Mongolian capital one of the most polluted cities in the world. During winter, when temperatures can dip below -30°Celsius at night, the Red Hero transforms into the Smoky Hero, or Utaabaatar.

Residents living in the traditional white-felt tents known as gers burn low-grade coal and sometimes even harmful substances such as plastics from their trash to stay warm. The smoke emitted from neighbourhoods where these homes are clustered are causing birth defects and lung disease, health experts say.

Although Ulaanbaatar has partnered with local groups and the World Bank to try to combat the “airpocalypse”, there’s been little progress. The government's long-term strategy is to get those living in gers into apartments and houses hooked up to the city's central heating grid – an admirable strategy but one that will take years.

Not built to last

In the rush to meet the growing demand for housing in Ulaanbaatar, many of the new apartment buildings and houses were thrown up and are notorious for their poor quality.

Many new homeowners are unhappy with what they've bought. Some complain they were cheated, as the shoddily built homes quickly need expensive repairs or renovation. Many construction workers also lack the skills in modern building techniques to provide decent standards of construction. “I think there's a big lack of trust in construction,” says Gabriel Francesch, director of business development for Ulaanbaatar-based construction and design firm Global Ideas. “People distrust anyone in construction because there's so much bad work being done, and its not very professional still.”

Francesch, who is also a managing partner, says his firm has fared well in the last few years, despite the economic slowdown, by relying on skilled foreign architects to deal with the unique challenges found in the world's coldest capital city. For instance, while some spaces can get relentlessly hot from the radiators connected to the city's central grid, other new buildings need to produce their own heat and manage sewage for themselves. “We look for expertise in detail and technical solutions,” says Francesch. “Not for the foundations, but more for insulation, heating ventilation, detailed drawings and other complicated things people in Mongolia can't do at the same level.”

Whether or not prices can be sustained at the current levels is also becoming a concern. The fear is that rampant speculation and oversupply will lead to a property market crash.

Mongolia no longer has the mining boom that was attracting foreign investors in droves up to 2011, when the economy grew an astonishing 17.5%. Although the government hasn't released last year's growth figures, most analysts don’t expect anything much above 7%. Mongolia's unresolved disagreements with foreign mining companies caused foreign investment to slump 74% last year.

Cashell says his properties locally range between $2,300 and $2,900 per square metre. But as many of the high-end homes remain empty in another growing district called Zaisan, fears are growing that prices are set to fall. Cashell, though, says he isn't worried, since prices are still well below those of other growing cities in Southeast Asia as well as Almaty, the capital of neighbouring Kazakhstan. The oil-based economy in 2008 suffered a real estate crisis as the global credit crunch took hold, sending property values down 40%. “I think Ulaanbaatar will grow faster than Kazakhstan, and luxury in Kazakhstan is still double the price what's in Ulaanbaatar,” says Cashell.

Despite these concerns, developers do not appear to have slowed the pace of building, banking on the idea that economic growth will soon pick up again. Mongolia's new prime minister has made getting the country's largest mining projects going again a priority. Meanwhile, a new international airport near to Ulaanbaatar is bringing in fresh investment, and many are hoping that work will finally begin on long-awaited power plants.

But while companies like Global Ideas are specializing in creating modern designs by foreign architects, Cashell has grown nostalgic for the now-fading Soviet character. “I think renovating old Soviet buildings will be similar to how right now in London renovations of old historic buildings is a hot topic. Architects fight over these projects,” he says. “I look forward to the day I can get my hands on one of these projects here.”

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