Tag Archives: Development

Mongolia Construction Sector: Status and Outlook



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These are difficult times for the construction and real estate sectors in Mongolia. This is demonstrated by the recent trend in which newly build apartments are not being sold. Apartment prices are so high that ordinary citizens are often unable to afford the price for an apartment. At the same time, construction companies are relying on high interest loans to fund continued development projects. On top of that, many construction projects lack coordination and city planning and end up without access to basic needs such as parking areas, playgrounds and parks, or access to schools.

The situation has been described as a bubble, driven from the economic boost the country had received from the mining sector. As a result of the bubble, it is often impossible to obtain a clear and accurate valuation of a property, including land and any structures. This results in inflated property purchases by construction companies without any reasonable ability to obtain a return on the investment. Construction companies which cannot repay loans risk the seizures of properties and buildings by banks seeking to collect. If this happens, the properties are sold at a 40% discount off market price.

 Typically in Mongolia, a construction company plays the role of a Real Estate company. Construction companies not only build buildings, but become responsible for sales and continued maintenance of the property. A better system may be for Construction companies to focus on building a building in compliance with all environmental and safety regulations, and then sell directly to a property development company, which has responsibility for such things as funding, community planning, and long term maintenance.

 It is clear some kind of reform is needed in the sector. Experts have proposed three main solutions. Firstly, the system for property zoning should be improved. There should be government designated zones for residential spaces, industrial areas, and green areas. Secondly, steps should be taken to limit high interest loans for property development, and valuations should be moved to a lower more market based rate, property taxes should be imposed. Finally, an electronic database should be established containing all information in connection with any given property. This would provide the public with convenient access to property information, which will allow for more informed purchases.

Mongolia Facing “Challenges,” but Long Term Growth Prospects “Strong”



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This month the World Bank released its 2016 East Asia and Pacific Economic Update, with the subtitle Growing Challenges (The full report is available here). According to the report, Mongolia’s economy grew by 2.3 percent in 2015. Growth is good, but significantly lower than the 7.9 percent seen in 2014. The decline appears to be connected to decreasing government spending and exports as a result of slowing Foreign Direct Investment.

The broader causes are well known and include reduced demand from Mongolia’s southern neighbor and greatest trading partner, China, and a widespread decline in global commodity prices. The decreased demand hurts Mongolia’s mining exports. According to the World Bank, declining commodity demand exposes the need to increase development of institutions and human capital, which will help the country better adapt to changes external demand for Mongolia’s exports.

The World Bank flags Mongolia’s growth in recent years, driven my mining exports as being linked to a “decline in economic complexity.” To remedy this, the report recommends “removing barriers to economic diversification.”

These barriers may include formal restrictions on or policies which are not welcoming toward foreign investment. They may also include limitations in public goods such as education, health and infrastructure. Without these public goods in place, foreign and domestic companies face challenges in finding the right people, and in conducting their daily operations. In particular, the quality and quantity of infrastructure in Mongolia is “extremely limited,” presenting a significant barrier to investment and growth.

According to the World Bank, “Mongolia’s long term growth prospects remain strong.” However, in the short term the country faces challenges due to the global decline in commodity prices.

The World Bank recommends reasonable reforms which are expected to strengthen the internal resiliency of the Mongolian economy and ensure that the “most efficient and adaptable companies can succeed” and grow.