In order to support supply and demand for apartments, Mongolbank has injected a total of 3 trillion MNT (~2 billion USD) into the market. Depending on location, quality, and environment, new apartments nowadays have three categories: luxury, good standard, and average standard. It turns out that 11 percent of apartments are luxury, 46 percent are good standard, and 43 percent are average standard. The total market value for these apartments is 7 billion MNT, 31 percent of which belongs to luxury, 47 percent to good standard, and 20 percent to average standard.
The average price of a new apartment in Ulaanbaar is said to have increased by almost one percent in January, 2015, compared to the month before. Almost every study conducted in the last six months has said that the price of apartments is to decrease by small margins. In fact, there is no chance that the MNT prices of downtown apartments are going down because their value in USD has already plummeted by 20-30 percent.
REASON WHY APARTMENT PRICES ARE NOT GOING DOWN
Land and immovable asset on it are traded on the property market. The market players include landlords, clients, investors, tenants, developers, maintainers, and other supporting parties such as banks, brokers, and legal firms. However, Mongolia’s property market is currently quite immature that the difference between those market players has not emerged yet. For example, the function of developers has not been separated from other functions. A construction company gets ahold of some land, develops engineering drawings, builds a set of apartments in tight spaces, sells them on the market, and assumes the responsibility of maintenance afterwards. One company does everything on their own.
Since there is no company that specializes in sales or a professional broker to get the deals done, the money spent on acquiring land has been sealed away for many years and does not get into the market circulation. This is why the real estate sector has been lacking cash flow. The MNT prices of apartments, especially the downtown ones, will not further decrease. It is impossible to accurately estimate the value of real estate because the land relations are so vague and the evaluation is not clear. Even the starting price of auctions can be negotiated. Also, bartering is commonplace and real estates are often sold for prices many times higher or lower than the original price.
Mongolbank has injected a lot of money into the market through commercial banks for the last two years. However, a vast amount of capital is still locked inside this sector because the government could not take urgent actions to support fair competition in the construction industry, improve efficiency and productivity, revise construction standards, and ensure transparency in land relations.
The government has still not determined its policy setting out the manner and extent of its involvement in the real estate sector. It allowed many kinds of housing corporations and State Housing Corporation to be established and paved the way for few private companies to build a cartel. On the other hand, the government is providing housing mortgages with made-up interest rates, which brings disorder rather than development into the market.
The construction companies already have a practice where they borrow 20-30 million USD from Chinese or Korean investors using their apartments as collateral and eventually share the ownership if the apartments they have already built stay in the market for too long without being purchased.
The 30-percent tugrug decline last year has reduced the willingness of foreign investors and further slowed down the capital turnover in the property market. Also, commercials banks have almost stopped providing the 8 percent mortgage from the government.
As a consequence, a three-bedroom apartment in the coldest capital city with the most polluted air in the world, not to mention the population of three million and the vast territory, costs as much as a house in metropolises such as Denver and Amsterdam.
WHAT IS MISSING IN THE REAL ESTATE SECTOR?
Currently, a construction company on their own is taking part in all of the functions that are supposed to be done by different market players. Construction companies are not able to grow to become developers in Mongolia today, which hinders labor productivity in this sector. Furthermore, the absence of specialized real estate owners and investors in the market prevents from large-scale trading and significant reduction in prices. Although banks can sell the apartments that have been seized at lower prices, the required infrastructure is not in place and the timeline of completion is not clear. Therefore, it is still not possible to sell the apartments even with lower prices. It is a general trend that many apartments being constructed in Ulaanbaatar are losing value because the infrastructure development is left behind.
As construction companies are currently their own clients and their own builders, the construction work takes place without proper independent inspections. The professional government agencies that are supposed to be in charge of those inspections are now only doing one job – commissioning the building after the construction work is done. As the few emerging developers are only starting, they are not able to pay attention to the quality of the buildings that are being constructed.
Developers are the market players who have an interest to maintain the building quality for many years and keep the maintenance costs low. The time period where the quality is kept well attracts insurance. Specialized property insurance companies are capable of carrying out proper inspections during the whole construction process and have business interests to do so. In highly developed countries, life insurance companies are permitted to fund real estate. Good quality buildings positively affect the property evaluation of real estate in the same area.
Such insurance companies monitor the operations of construction companies, ensure the labor and safety aspects are on the right track, start records and registration that would be kept for many years, and set the initial payment for insurance. If the building is inspected by independent authority and has been insured, its evaluation becomes more stable. In countries where the property market is more advanced, many public non-governmental organizations such as an association of construction companies or association of developers actively work together seeking for ways to protect common business interests and improve efficiency. It is time for all stakeholders in Mongolia’s property market to sit down together to discuss and dissect the issues faced in the sector.