Commercial real estate rents in Ulaanbaatar will more than triple within five years as increases in per-capita incomes lure international companies, said Harris Kupperman, who runs a fund that invests in Mongolian properties.
Rental prices for the capital’s main commercial strip, Peace Avenue, will top $100 per square meter per month by 2018, up from as much as $30 currently, said Kupperman, the chief executive officer of Canadian company Mongolia Growth Group, the only non-mining internationally listed company that does business in Mongolia.
Real estate prices in the capital surged as the economy reached double-digit growth driven by a boom in coal and copper mining. That prompted firms such as U.S. food companies KFC Ltd., Cinnabon International Inc. and Round Table Pizza Inc. to open shops this year, joining luxury outlets including LVMH Moet Hennessy Louis Vuitton SA and Giorgio Armani SpA.
“It starts with food and beverage, but eventually you are going to have more retail, too,” Kupperman, 32, whose company owns retail space in the Peace Avenue business corridor, said in an interview in Ulaanbaatar July 3. “You get 10-year leases signed by high-quality tenants and they add value to the property. They pay their rent on time, so it increases the value, and they tend to pay above market for top locations.”
Kupperman’s Toronto-listed firm has invested $40 million in storefront properties, office buildings and redevelopment sites since it set up shop in February 2011, and makes $200,000 a month in revenue from these properties, he said.
Retail space on Peace Avenue costs $2,500 to $3,000 per square meter, Kupperman said, adding that prices could reach levels seen in Almaty, the biggest city in Kazakhstan, where prices range from $10,000 to $30,000 per square meter.
Mongolia Growth plans to spend as much as $500 million over the next decade on developing high-end buildings on the commercial strip, he said.
Kupperman said he remains “bearish” on downtown office space. Grade-A rents in the area have surged to $70 a square meter from around $45 a square meter three years ago, Alex Skinner, the head of Real Source Inc., an Ulaanbaatar-based property consultancy, said.
The central business district contains several high-rise glass towers that house most of the big international firms doing business in the country. Rio Tinto Plc, the world’s second-biggest mining company, which is building the $6.6 billion Oyu Tolgoi copper and gold mine, has on office there.
“There is a whole lot of supply; it’s going to hurt prices in terms of rents,” Kupperman said, adding that prices in the district could fall to $30 to $40 per square meter within two years.
Instead, Kupperman said he was sticking to areas where retailers are opening shops because of the growing purchasing power of Mongolian consumers. Citizens, who owned flats inherited from the Soviet-era, have become millionaires simply by holding onto their ground-floor apartments, coveted as valuable assets because they can be converted into shops.
Apartment prices prices across Ulaanbaatar have increased 23 percent per annum since 2005, Real Source’s Skinner said. In prime locations such as downtown, a Soviet-era apartment that in 2005 would have cost around $337 per square meter, now is at least $2000 a square meter, said Skinner.
A new central bank policy that allows homeowners to refinance their mortgage loans down to 8 percent from 15 percent to 20 percent and extend the loan period to 20 years from an average of five years was helping boost consumer power, Kupperman said.
“This will reduce payments by 70 to 80 percent,” he said. “It is going to put a lot more money in the economy. With more money, they are going to go shopping, which will be good for retail and good for commercial real estate.”