Space race: Demand for non-residential property is on the rise

Mongolia’s retail, office and hotel segments have seen some positive developments in recent years. High-end commercial space in the capital, Ulaanbaatar, is currently valued at something of a premium. As with the residential sector, the commercial segment was badly impacted by the international economic downturn in 2009, with many projects suspended.

More recently, however, some of these developments have started up again, and completed projects are benefitting from high demand and high prices. Mainly as a result of a handful of massive recent mineral discoveries, foreign investors are increasingly common in Ulaanbaatar. With this in mind, demand is now expected to increase at the mid- and high-end of the market in the years to come.

OFFICE: The market for office space has been growing dramatically in recent years, as more Mongolians set up businesses and the private sector takes a greater role in the economy. Foreign private sector firms have also increased their presence substantially.

In Ulaanbaatar mining and mining services firms represent the single largest source of demand for grade-A space, though financial services companies are also a source of demand. Around 75% of all grade-A office space is in the Sukhbaatar district, which includes the central business district (CBD). The remaining 25% of the grade-A space is in the Jiguur Grand Plaza, west of the CBD. Take-up rates are high. Central Tower, which is adjacent to Sukhbaatar Square, went from 60% occupancy in 2010 to 100% in 2011, with an average price of $60 per sq metre.

The downtown area is divided in terms of prices. Across the Peace Avenue bridge, heading east, land prices drop to around $25 per sq metre for grade-B space. Grade-B space, which represented half – or around 165,000 sq metres – of all the office space available in the capital in early 2011, suffered from oversupply in 2008-09, which resulted in occupancy rates dropping to 60-80% in some districts. A number of new office projects are expected to launch in 2012-13. These developments will help address the current shortage of high-quality space. The mixed-use Peace Plaza, which is located on Peace Avenue, is one of the major projects due to be completed in that period, with the other being the UB Tower.

RETAIL: Real estate development in the retail segment has also seen significant expansion in recent years, mirroring the rise of the retail sector in general – the number of businesses registered in Mongolia increased 27% year-on-year between 2009 and 2010. Since 2006, some 104,000 sq metres of grade-A, -B and - B-minus retail space has been built, with 26,600 sq metres – roughly a quarter of the total – being built in 2011 alone, according to R2 Research.

A series of new retail projects are due for completion in 2012-13, mostly as part of major mixed-use projects. These include the retail components of the Peace Plaza, the Shangri-La Hotel, the KH Apartments in Zaisan and Mogul Town. Max Mall, which is part of the Ramada Hotel complex and completed in late 2011, is also now open in Ulaanbaatar.

HOTELS: As the above list suggests, the hotel segment is about to experience sustained growth over the coming years. Overall, the segment has solid fundamentals – in 2010, tourist arrivals of 456,303 showed that the sector had strongly rebounded from a dip in 2009 to exceed the pre-downturn (2008) total of 447,389, according to statistics from the Mongolian National Tourism Centre.

General visitor numbers have also been rising as the economy grows, with business travel a rapidly expanding segment. In addition to the hotels mentioned above, Best Western, Sheraton, Hyatt and Radisson are all forging ahead with new properties that are scheduled to open in the country.

There are currently around 2500 three-, four- and five-star rooms in Ulaanbaatar, with the new hotel arrivals likely to add at least another 50% of the current total. The high-end hotels are generally clustered around the capital’s CBD, as well as Olympic Street.