Yangon More Expensive Than NYC Sparking Boom: Real Estate
Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his U.S.-based employer.
He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than $100 a square foot, compared with less than $75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.
The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations -- all unsuitable to the image of his $29 billion in revenue engineering and construction company, which he said he wasn’t authorized to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money,” Danley is still looking.
“We can’t move into a space where someone’s cooking up nasi goreng on the sidewalk all night,” he said, using the Indonesian name for fried rice.
Developers are rushing to solve Danley’s problem, one faced by hundreds of multinational companies setting up operations in Myanmar following its political opening and easing of international sanctions. Yangon, the commercial capital, needs at least 8.7 million square feet (800,000 square meters) of office space to support the influx, according to Yoma Strategic Holdings Ltd. (YOMA) About 1.9 million square feet will be available by the end of 2015, compared with 600,000 now, the Myanmar office of broker Colliers International UK Plc estimated.
“With rentals going up, and the shortage going to become more acute in at least the next seven years, it’s an attractive market for foreign developers,” said Cyrus Pun, executive director of Yoma, a Singapore-listed company that derives most of its revenue from developing property in Myanmar and has seen its share price more than double since the April 2012 elections and subsequent loosening of sanctions that have allowed less-fettered foreign investment.
“There’s still a big gap to be filled,” he said in a telephone interview, adding that Yoma is in confidential talks that may lead to joint projects with Japanese, Singaporean or Indonesian developers. “Whatever is being built right now will not satisfy the immediate demand.”
The opportunity has lured other Southeast Asian developers, including Singapore-listed Soilbuild Construction Group Ltd. (SOIL) and Vietnam’s HAGL Joint-Stock Co., along with Hong Kong’s Shangri-La Asia Ltd. (69) Each has announced an office, retail, residential apartment or hotel project that it plans to build or manage. At least three more office buildings are being built by local developers, Pun said.
“There is a feeling that this is the last great adventure there may be in Southeast Asia in terms of a market opening up,” said David Simister, chairman of CBRE Thailand.
Rents have increased almost fivefold in Yangon’s three towers, none of which is higher than 27 stories, from $22 a square foot a year as of the end of 2011, before Myanmar President Thein Sein began allowing more political freedom and loosening economic controls, according to CBRE data. Tenants at the three -- Sakura Tower, FMI Centre and Centrepoint Towers -- include Standard Chartered Plc (STAN), PricewaterhouseCoopers LLP, Coca-Cola Co., Nestle SA, Sumitomo Corp., Bank of Tokyo-Mitsubishi UFJ Ltd. and Malayan Banking Bhd.
The energy industry is expected to generate a chunk of the demand for real estate as companies such as Exxon Mobil Corp., Woodside Petroleum Ltd. and Total SA line up for a share of the country’s oil and gas reserves.
In 2010, energy and mining contributed $8 billion to Myanmar’s gross domestic product, according to a June report from McKinsey & Co. By 2030, the sector could contribute $21.7 billion to an economy that is expected to expand to about $200 billion, it said.
While awaiting new office space, some companies have turned to hotels. Mizuho Corporate Bank Ltd. (8411) picked the Sedona Hotel, located along Inya Lake near the U.S. Embassy and University of Yangon. It has seen rent more than double to $6,720 a month for the 1,000 square feet it occupies from $3,200 in April of last year, according to its country representative, Tetsuro Nonaka. Other tenants are Hyundai Heavy Industries Co., Yamaha Motor Co. and Kawasaki Heavy Industries Ltd. (7012), according to signs outside the hotel.
Unilever NV, the world’s second-largest consumer-goods company, is among companies that have rented villas, such as the ones Danley considered, driving their prices skyward. A four-bedroom residence that rents at $6,500 a month will probably rise another 46 percent, to $9,500, by the end of the year, said Brett Miller, the managing director of Scipio Services Co., a Yangon-based real estate advisory and facilities management company.
Prices are going up by the week, said Cherie Aung-Khin, a local restaurateur who wants to expand her Green Elephant eatery, which serves Burmese cuisine and is popular with foreign visitors. In early June, she viewed a 3,000-square-foot space for a second outlet for $3,800 a month. When she returned from a trip to Bangkok two weeks later, the landlord had raised the rent to $4,500. After negotiations, she settled for $4,200, she said.
“Next month, we’ll have a higher demand gap than we saw this month, and rents are bound to go up again,” said Miller.
U.S. sanctions on Myanmar were in place since at least May 1997, when the country banned Americans from investing or facilitating investments into Myanmar, according to the U.S. Department of the Treasury. They were progressively increased over the next 15 years. Similarly, European Union sanctions on the country were in place from October 1996 until both the U.S. and EU began lifting them last year.
Myanmar, also known as Burma, was hit with these sanctions as five decades of military rule curtailed political freedom and landed opponents of the junta in jail. A closed economy till now means companies setting up new business in the country contend with telephone networks that experience frequent call drops and a cash-only payments system in which credit cards are practically unheard of. Adding to the difficulty of paying for goods and services in Myanmar, business owners typically won’t accept worn U.S. dollar bills, the preferred currency.
The U.S. easing allowed companies to invest in the Southeast Asian nation, including acquiring land for construction and development except in ventures connected to Myanmar’s former military leadership.
Real estate was not under EU restrictions, said Bernhard N. Faustenhammer, interim head of the EU delegation to Singapore, in an e-mailed response to questions. There were barriers to investment in the sector because companies could not choose local partners such as state-owned companies in Myanmar, he said. No restrictions exist now.
“During the period of the sanctions, Western developers did not even enter Myanmar,” said Tony Picon, managing director of Colliers International Myanmar, explaining they didn’t have “working knowledge” of the country as some developers from Singapore or Hong Kong do.
“If you’re a big Western developer, it may be perceived to be too risky to get into a large project in a frontier market, and the small developments may be too messy and not worth your while to pursue,” said Picon.
International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Pun said. For large-scale projects, some foreign companies bring their own workers from outside, while also using local resources available, he said.
“Whilst labor is in abundance, lack of well-skilled construction workers and supervisors is certainly a feature in Myanmar,” he said.
Ambiguous laws related to construction and ownership of property are keeping some away. Far East Orchard Ltd., a unit of Singapore’s largest closely held developer, Far East Organization, isn’t rushing to invest.
“It’s a very cowboy town,” Lucas Chow, Far East Orchard’s group chief executive officer, said at a press conference in Singapore July 2. “The rules are not exactly clear; the laws are not exactly clear; the concept of mortgages is not clear; condominium laws are also not clear. So many things aren’t clear, so I don’t think we have an appetite for that kind of market.”
Yoma has partnered with its own affiliate, Serge Pun & Associates Myanmar Ltd., to build two downtown office towers across the road from Malaysian-born billionaire Robert Kuok’s Traders Hotel starting in the first quarter of 2014. The two towers will add 700,000 square feet of commercial real estate to Yangon’s downtown in three years, said Serge Pun, Cyrus Pun’s Myanmar-born father and chairman of the company that bears his name.
Traders, a brand of Hong Kong-listed Shangri-La, will develop a new site next to its hotel in central Yangon, adding 35,000 square feet of commercial real estate to downtown Yangon by 2016, according to CBRE.
The development by HAGL, Vietnam’s second-biggest listed property developer, near where opposition leader Aung San Suu Kyi spent 15 years under house arrest, will be completed by 2016, according to a statement on the company’s website. Its plan is for 2.4 million square feet of office space, plus a hotel and serviced apartments.
Norway’s Telenor ASA (TEL) and Ooredoo QSC of Qatar, which won licenses in June to expand telecommunications in Myanmar, where only about one in 10 people has a mobile phone, will each need at least 30,000 square feet of office space, Cyrus Pun estimated.
A Hilton Hotel is expected to open in the second of Centrepoint’s towers next year, according to Richard Mayhew, director of LP Holding Co., a Yangon-based company that owns the development. The tallest of the city’s three office properties, it was started in 1996, halted during the Asian financial crisis, resumed in 2005, and opened in 2010, he said.
Singapore’s Soilbuild will provide project management and consulting for a hotel and a serviced-apartment development in Myanmar, through which it intends to gain an understanding of the market and possibly step in later for a share of the construction business, said its executive director, Ho Toon Bah.
“Myanmar is at a very infant stage of their development,” Ho said. “There are a lot of things they need to build. However, since they have been shut off for so long, a lot of their rules and laws are not up to international standards.”
Danley, the business manager at the U.S. multinational, said he hopes to find a suitable office at a “value price” soon. Companies need to come to Yangon with realistic expectations and patience, he said.
“If you want to move into an office with a nice view, then you probably want to wait a few years before you move to Yangon,” he said.