Some Developers Ready For Real Estate Cooldown

Written by William Kennedy
Thursday, October 30, 2008.

RISING interest rates have caused concern in Mongolia's real estate industry, where developers have found themselves virtually cut off from credit sources. Some builders claim that in its fight to combat inflation, Mongolia's Central Bank, which recently set its interest rate near 11 percent, has endangered their projects, their businesses, and even the real-estate industry at large. Others, however, view the industry's current woes and the government's action as a less dire, and even necessary, step toward regulating the market.
"Actually the government's policies have worked," said Lee Cashell, who founded and manages Mongolian Properties. "Prices are coming down, and prices were rising too fast last September."

With help from a worldwide drop in the price of construction materials—triggered by global economic turbulence—inflation in Mongolian real estate, which rose by 30 percent last September alone, has disappeared from the market, according to Cashell.

"I would also say that prices overshot what they were supposed to be in the first place," he said. "The economy has cooled off a little bit, and the real estate market has cooled off a little bit."

Developers like Cashell and Roy Dongen—the General Director of Ganymedes Consultancy and Management, who has a housing development planned outside Ulaanbaatar—say that despite cooling off, Mongolia's industry, particularly in Ulaanbaatar, will inevitably remain strong because of high demand.
"The city center is small. There's still people who want to live in the city center," Dongen said. Moreover he added, "there's still about 600,000 living in the ger areas; a lot of them would also prefer to live in houses with a sewer system and water."

With the slow winter season approaching and both buyers and sellers unable to access credit, the economic cooldown does not mean the coming months will be painless for the industry. Nor does it mean that some entrepreneurs are necessarily wrong to fret over the safety of their business. "Property developers, who put money or built things they cannot sell easily, could have a cash flow problem," Dongen said.

These difficulties set off alarms for Mongolia's real estate market, which had grown for years unabated, but Cashell and others believe it may not be a bad thing for the industry at large.

"I guess it's a shakeout in a sense," he said. "In Mongolia, at this stage of its economic development, a lot of people trying to build buildings don't have proper experience. Going forward from here, we have to become a more professional industry of property developers rather than entrepreneurs who try to put up a building and fail."

With inflation decreasing and better quality developers surviving, Cashell added, the government should reopen credit to the industry and rekindle growth. But, he admits, the decision is not entirely theirs to make. Many developers depend on individual banks in Mongolia to provide loans and if those financial institutions cannot access resources from abroad—where potential lenders currently face their own severe problems—credit may continue to be elusive.

For his part, Dongen thinks he has found a solution to these challenges by working with a German company that manufactures inexpensive, lightweight, but sturdy construction material, known as Expanded Polystyrene (EPS). EPS offers a very fast rate of construction, particularly important in Mongolia where building shuts down in the winter.

"If you can build a house in two weeks instead of three months," Dongen said, "You can get your [investment returns] quite fast."

If traditional construction materials, despite the drop in prices, remain too expensive to buy without credit, more and more developers may also look for new strategies.

Ultimately, how the real estate development market emerges from its current difficulties may depend as much on what happens outside Mongolia, as what happens internally.