OBG talks to Dagvadorj Ganbaatar, President, Max Group

Interview: Dagvadorj Ganbaatar

What have been the trends in the Mongolian real estate market over the last three years?

DAGVADORJ GANBAATAR: Just 10 years ago, most of the people in Mongolia were leaving our country for better work and living opportunities abroad. However, recent economic growth has changed this emigration pattern, with large numbers of Mongolians now returning, and we expect this reverse trend to continue. Return migration and economic growth have created significant demand for quality housing. Present and future growth will also raise demand for more labour, first in mining and then the construction industry. To satisfy current demand, the sector needs to build 40,000 apartments, as well as an additional 100,000 apartments in order to meet the government’s housing targets.

Based on these factors, we feel the residential real-estate sector is in the beginning stages of strong growth. We anticipate another five to 10 years of strong demand in all segments, from affordable social housing to upscale luxury apartments and townhouses. From 2009 to 2010, the residential market expanded by around 10%; we see this level of growth as an absolute minimum over the next two to three years.

In terms of the commercial market and the recent global crisis, my opinion is that the country’s mining sector-led growth has shielded us from significant impact from the economic recession. In a way, our mining sector was able to counteract this slowdown by attracting huge levels of foreign investment to the economy. As a result of these investments, the commercial real estate sector has seen a rise in demand for class A offices and quality retail space. Again, this is only the beginning: most of the real estate market’s expected growth is still ahead of us.

What is your assessment of the government’s ambitious plans to build 100,000 apartments?

GANBAATAR: I believe it is a very important project, as there is quite clearly huge demand in the residential market. While the government guarantees the provision of supportive infrastructure and public utilities, the construction of these apartments is mostly left to the private sector. Considering that we have almost 200,000 families living in ger districts in Ulaanbaatar and its outskirts, they need to be rehoused. As income levels rise and living conditions improve, people seek proper accommodation, a trend which is happening now. The real challenge is that even though average salaries have increased considerably over the last three years, mortgage rates still remain quite high and unaffordable for lower-income and even lower-middle-class households. While the private sector will concentrate on building the apartments, the government needs to find a solution to help buyers with access to cheaper and longer-term capital. Currently, commercial banks lend mortgages at around 12% to 14%; under the government plans, the optimal interest rate would be around 6%. These rates are unrealistic, however, so the government must intervene and set up a special mortgage fund to help people with long-term finance.

Do you expect local production of building materials to expand in the future?

GANBAATAR: At the moment around 30% of our material is imported from abroad, primarily from China. In the next two years, we are confident that local firms will be able to fully meet internal demand for basic materials, such as cement, reinforcement steel and iron. We have all the natural resources, such as limestone, iron ore and coal, so the production of key materials could be done quite cheaply and easily. If our firms can set up production facilities, we’ll become more stable and sustainable. What the sector needs is the government to play a greater role in helping us to set up manufacturing centres or clusters, either with tax incentives or access to capital. Our financial sector does not have the capacity to fund these projects at present. We require long-term capital; most loans have terms up to three years with 11% to 14% interest, and under these terms, it can become quite risky for firms to get involved.