Ulaanbataar, the capital of Mongolia

When one thinks of housing and Mongolia, felt tents called “yurt” or “ger”, and nomadic herders roaming around miles of desolate grassland in harsh winter conditions come to mind. Not quite luxury condominiums. Unless you’re Lee Cashell, of course. The American former venturecapital fund manager with JAFCO Investments visited Mongolia on vacation seven years ago, fell in love with the country and has since morphed into one of the top three property players there today.

Cashell discovered first-hand the extraordinary returns on investment one can get due to the shortage of quality housing in Mongolia. Seven years ago, when he first moved there, he purchased three apartments in Ulaanbataar for US$10,000 (RM32,100) apiece. He fixed up the apartments, which were in old, run-down buildings built during the Soviet era, and quickly found tenants among the expatriate community, mainly diplomatic staff and those working in NGOs (non-governmental organisations) at that time. The units were rented out at US$600 a month, which worked out to a gross rental yield of a whopping 60% then.

Not long after he had rented out the apartments, Cashell was enjoying a leisurely cup of coffee in a local coffee shop one day when he was approached by a succession of expatriates, each one of them echoing the same sentiment. “They said, ‘Oh, I heard you have these apartments for rent; I don’t know how to find an apartment in Mongolia; I can’t read the newspapers,’” he recalls. After the sixth person approached him, “I had one of those ‘ding’ moments, an epiphany”, says the 41-year-old Cashell. “There were no real-estate agents in Mongolia.”

The statistics right now may look far from promising: A country with a population of 2.7 million, of which, according to the Mongolian government in February 2009, only 40%, or over a million, live in Ulaanbataar, the capital city. And, of the population in Ulaanbataar, approximately 700,000 live in “temporary housing” — some are felt tents, while others are structures erected from pieces of bricks and wood stolen from construction sites, says Cashell. Then, there are some who live up in the hills with no heating and no proper sewage system. Some may have electricity, but no running water, he adds. “Of those who live in the countryside, a significant percentage of them are nomads.”

Cashell: In an economy that projected’s to grow at 15% [this year], people’s incomes
rise very rapidly. And, all thee people aspire to move into apartments...

To Cashell, however, these are some of the strongest push factors towards strong housing demand, especially in the light of a recovering economy after the global financial crisis last year. Another factor was the signing of a landmark mining agreement last October between the Mongolian government and Canadian-based Ivanhoe Mines as well as its partner, Rio Tinto, which will develop one of the world’s largest gold and copper mines, located in the Gobi Desert. The deal means more jobs and higher income for the local population. “In an economy that’s projected to grow at 15% [this year], people’s incomes rise very rapidly,” says Cashell. “And, all these people aspire to move into apartments, and the government would also really like to see them transition from temporary housing into apartments.”

Large increase in expat community

What’s more, the expatriate population, which stands at 4,000 today, is projected to grow fivefold to between 20,000 and 25,000 in five years. “I have 400 families from Rio Tinto coming to Mongolia over the next four to five months, and there’s nowhere for them to live,” says Cashell. “So, they have to live in hotels. There are no serviced apartments.”

The first two development projects that Cashell was involved in were carried out jointly with a local Mongolian developer. At that time, Cashell’s role was mainly as a consultant in design and marketing. “We went in with a group of investors and bought half the units in the building at a low price, and that helped pay for the building to be completed,” says Cashell.

Since then, he’s developed five mixed-use residential-cum-commercial projects under Asia Pacific Investment Partners (APIP), a company he founded and of which he is the chairman and managing director. He also started a real-estate brokerage firm called Mongolian Properties to handle all the leasing and management of the projects in the portfolio on behalf of his investors. Today, it’s the largest real-estate-management firm in Mongolia. Cashell also owns his own construction company and a cement factory “for quality-control purposes and as a hedge against inflation”.

His latest project, called Olympic Residence, is located in the heart of Ulaanbataar in the embassy enclave and flanked on either side by two upcoming five-star hotels (the Shangri-La and Hilton). “As the city became more densely populated and green space started disappearing, the only significant green space left was the Children’s Park,” says Cashell. “We basically bought up all the land around it, with Central Park in New York and Hyde Park in London at the back of our minds.”

The 135-unit, 18-storey Olympic Residence, which contains a mix of four-bedroom apartments and duplexes, as well as five-bedroom penthouses, retail space and a food court, was showcased in Singapore over the weekend of March 27 and 28. Prices ranged from US$250,000 to US$1.4 million for the largest penthouse of over 6,000 sq ft.

It was the first time that APIP had launched a project here and it was also the maiden launch of a Mongolian project in Singapore. The marketing agent for Olympic Residence in Singapore is CB Richard Ellis (CBRE). “Mongolia, being one of the fastest-growing economies in the world, is attracting keen interest from Singaporeans,” says Johnny Yu, director of residential services at CBRE.

Keen investor interest in Singapore

Of the 20 units released, seven were reserved and several are under negotiation. Cashell is confident of selling close to 15 units. One of the investors, a Singaporean who declined to be interviewed, first invested in Cashell’s project six years ago. “He’s bought an average of two units in each of my projects — my first, second, third and fourth,” says Cashell. “And, he actually gave me the money to buy the land for Olympic Residence, so he will switch that investment into apartments.”

Thompson (right, with Hyndes): There are very few assets where
I can get a yield of 10% to 20% from rental and enjoy capital growth

Another investor in Singapore is Redhill Partners, a private investment company started a year ago by Dave Thompson and James Hyndes, both of whom have 15 years’ experience in capital markets. Thompson was most recently a senior fund manager with Gartmore Investment Management, a UK-based asset-management firm. Prior to that, he was with Morgan Stanley and Credit Suisse. Hyndes was a director for Goldman Sachs, and had also worked with JPMorgan and Macquarie Bank.

Redhill Partners has an asset-management and a private-equity arm. The company trades in equities in Singapore, Hong Kong and Australia and also invests in companies such as start-up biotech firms and in property. “It’s a diversified company,” says Thompson, “with mining assets in Indonesia and residential property in Edinburgh, London,Sydney and Singapore.”

The partners have also invested in Mongolia, snapping up three units in APIP’s last project, the 75-unit Regency Residence, which was sold out three years ago and completed last October. Its selling price, which started at US$800 psm three to four years ago, soared to US$2,000 psm recently in the resale market. And, Cashell expects prices to hit US$2,500 psm by September.

“We’re a long-term investor. I’m getting very attractive yields and being paid those yields in any currency I like,” says Thompson. “I can invest in a strong capital-appreciation story. I’ve never seen a market with a more attractive supply-and-demand dynamic like in Ulaanbataar. And, that’s because on the supply side, there are very few guys like Lee [Cashell] actually bringing residential developments to the market.”

Double-digit rental yields

Because of the mining agreement signed last year by the government, the expatriate population in Ulaanbataar is expected to increase astronomically, says Thompson, and there’s not enough accommodation for their influx into the country. “And, that’s what’s driving our investment philosophy when it comes to buying assets there, as residential property is [poised for an upturn],” he continues. “At the same time, there are very few assets where I can get a yield of 10% to 20% from rental and enjoy capital growth.”

Redhill Partners is also investing in other parts of Cashell’s empire. “We’ve done extensive due diligence on the property side of the business, as well as on Lee and APIP, and we’re very confident that he’s the real deal,” adds Thompson.Naturally, Redhill has also invested in a couple of units at Olympic Residence, though Thompson declined to disclose the figure.

Investors who buy into Olympic Residence will receive an immovable property ownership certificate, which is the Mongolian equivalent of a property title or deed. The property will be purchased based on an 85-year lease, which is renewable, says Cashell. “When construction is completed, we transfer the land lease to the owners’ association, which is very similar to the condo rules in the US.”

Given that it’s an emerging market, investors in the Mongolian property market will not be able to get mortgage financing, but payment terms are staggered. For instance, buyers will have to pay a 10% nonrefundable deposit, followed by another 20% of the purchase price a few weeks later. Upon completion of the skeleton, another 30% is due, followed by 25% upon completion of plumbing and infrastructure. The remaining 15% is payable upon completion of the building in 2½ to three years.

Rental rates in Ulaanbataar are said to be some of the highest in Asia, yielding 11% to 16% annually to date. For those who have little appetite for risk and do not want to lease their apartment out, they can opt for the 7% rental guarantee for the first two years, says CBRE’s Yu. However, most buyers are likely to let out their units to enjoy the higher market rentals.

Interest from wealthy Mongolians

So far, most of the buyers at APIP’s projects are expatriates, including those who have married local women and settled down in Mongolia. However, there’s a growing number of wealthy Mongolians, whose profile includes “the coal magnates, the oligarchs, the members of parliament and the prime minister”, says Cashell. Given that many developers went bankrupt as a result of the financial crisis, Mongolians are willing to buy the building only when it’s almost completed, he explains.