Homes For Mongolia's Masses -- a Housing Shortage Amidst a Construction Boom?

Identifier: 
07ULAANBAATAR394

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000394

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EAP/EP
USAID FOR ANE CALISTA DOWNEY

E.0 12958: N/A
TAGS: EFIN, PGOV, SOCI, BTIO, MG
SUBJECT: Homes For Mongolia's Masses -- a Housing Shortage Amidst a
Construction Boom?

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

1. (SBU) SUMMARY. The Government of Mongolia (GOM) has launched a
two-year campaign to build 40,000 affordable apartment units
throughout the country (with 80 to 90% in Ulaanbaatar (UB), the
capital) to address a critical housing shortage caused by increasing
numbers of rural migrants moving to the cities, principally UB. Per
GOM officials, the project will be partially funded by a US$51
million government bond issue, with the GOM hoping to attract
supplemental financing from private investors. The project has four
formal goals: (a) place needy, ger (felt yurt in Russian) district
families in affordable apartments; (b) transform traditional ger
districts into modern urban developments; (c)cultivate a more
professional and well-trained domestic construction industry; and
(d) spur growth in the country's sluggish mortgage market. Critics
pan the plan's lack of transparency and openness for corruption,
asking if it has undergone proper due diligence. They are concerned
that the government's politically-driven, frenzied schedule and
unrealistic goals could lead to urban development "run amok" and
that buildings will be of substandard quality. International
financial institutions in particular worry that the plan does not
accurately reflected in the government's budget, suggesting that the
government invest such money elsewhere, leaving residential
construction to the private sector. END SUMMARY

Government Vows to Build 40,000 Homes in Two Years
--------------------------------------------- -----

3. (U) The ambitious two-year program is the GOM's response to a
critical housing shortage in Mongolia's urban centers, particularly
the capital Ulaanbaatar. Tens of thousands of rural families have
left the grasslands for urban areas. This migration has swelled
Ulaanbaatar's population from the 500,000 residents of 1996 to the
estimated 1.2 million in 2007, more than doubling over the last
decade. Starts of affordable housing starts have failed to keep
pace. Consequently, 60% of UB's one million inhabitants have moved
their felt tents or gers (most lacking electricity; almost all
lacking water and sewage facilities) into overcrowded
checkerboard-like "ger" districts that surround UB and other major
cities, straining an already limited infrastructure.

Housing Boom or Bust?
----------------------

4. (U) Ironically, this housing shortage comes at a time of
unbridled housing development. Government statistics show that
nationwide privately financed housing starts in 2006 nearly doubled
over 2005 figures to some 8,000 units. Real estate industry figures
show that property prices in Ulaanbaatar have jumped 18% in the last
year alone and most apartments now under construction (middle and
high end) will rent for US$1000 per month or more. Some are now
afraid that this could be a housing bubble in the making, as the
market of for US$1000 apartments may be limited to expats and the
relatively small Mongolian upper classes, who already have housing.

5. (U) Yet, speculators and developers hope that the country's
surging mining sector will attract floods of expats looking for
western-style, upscale accommodations. These hopes have attracted
investments in Ulaanbaatar's housing market from Japan, South Korea,
China, Russia, the Netherlands, Malaysia, the United States and
Singapore. European newspapers tout Ulaanbaatar as the "hot" market
for real estate investors. Ubiquitous billboards around UB advertise
swank housing developments with western sounding names like
"Marshall Town" and "Four Seasons" (the latter renamed, as "Japan
Town" grated on some). To be sure, such developments remain well
out of reach to all but the wealthiest buyers. But a burgeoning
middle class of Mongolians who work for expat mining companies or
other international organizations and who are on average paid a
salary four to six times greater than the national average of US$150
a month are also looking to "move on up" to better accommodations,
if not these high-end homes. With most housing starts targeting
upper and mid-income buyers, low-income ger district residents are
left out in the cold.

6. (SBU) Hyper-sensitive ruling party MPRP politicians, desperate to
head off a potential upheaval from the city's poor just before

ULAANBAATA 00000394 002 OF 004

mid-2008 elections, essentially hijacked what had been a 2004
Democratic Party election promise to provide thousands of low-cost
apartments with low-interest mortgages. While Democrats may resent
the MPRP's taking credit for their idea, the program nevertheless
enjoys wide support within the government. Mongolia's Prime
Minister Enkhbold, a former UB mayor, is a major backer of the plan
(Note: nagging rumors persist that both he and the current mayor of
UB are personally benefiting financially from some of the
construction projects).

Details of the "Master Plan"
----------------------------

7. (U) The "master plan" calls for the construction of 40,000
apartment units by 2009, with 80 to 90% in Ulaanbaatar and the rest
sprinkled throughout the country in aimag centers and some larger
townships or "soums." New apartment complexes will be built in
areas now occupied by ger districts and undeveloped tracts outside
the city centers. Where the government will not build apartment
blocks, it plans to install the proper infrastructure that will
entice private sector investors to build on the site. Vacant land
near Ulaanbaatar's airport, near the children's camp to the west of
the city and an area on the city's east side are slated for
development. Recently, the government also submitted to parliament
to free the Yarmag area in the Khan-Uul District from the Bogd Khan
Uul Strictly Protected Area in order to make space for housing
projects. A number of foreign companies have expressed strong
interest in building a modern residential town in the Yarmag area.

8. (SBU) G. Myagmar, Director of the Policy and Coordination
Department of the Ministry of Construction and Urban Planning, whose
office will have primary oversight of the plan, recently told
Econoff that the building program will coincide with Millennium
Development construction projects that will continue until 2020,
when the GOM hopes that 80% of its population will be properly
housed. But he conceded that with an estimated 136,000 ger
districts families in need of housing, 40,000 apartments is only a
modest start.

9. (SBU) Myagmar said the plan has five objectives: 1) building of
mini-town-like housing projects including all necessary
infrastructure, 2) constructing new buildings on existing
infrastructure, 3) transforming ger districts into apartment blocks,
4) developing small and medium business in the construction sector
that will lead to the creation of a more professional and well
trained class of construction sector workers, and, 5) creating a
genuine housing and mortgage market.

Cranking up the Domestic Mortgage Industry
-------------------------------------------

10. (SBU) GOM representatives tacitly acknowledge that the real aim
of the plan, in addition to providing much needed housing, is to
spur growth in the country's nascent mortgage industry, which they
hope will, in turn, generate more investment in housing development.
Mongolia's current mortgage industry is weighed down by lack of a
legal framework and by a population still uncomfortable with the
idea of private property ownership. Ancillary services such as
housing insurance, mortgage appraising, etc, are non-existent, and
confusing signals from the GOM on foreclosure laws and enforcement
make loaning large sums risky to all but the most credit worthy
customers. A draft law on mortgages that includes language on
foreclosures is now winding its way through parliamentary
subcommittees with no specific passage date in sight.

11. (SBU) To oversee the mortgage angle of the plan, as well as to
expand the country's mortgage industry in general, the GOM
established the Housing Finance Corporation (HFC), a byproduct of a
successful Asian Development Bank (ADB) program with the same
objective that ended earlier this year. The ADB declined GOM pleas
to extend its program believing it was time the private industry
step in and carry the ball. J. Jargalsaikhan, President of HFC,
told Econoff that the experience gained under ADB was invaluable and
that his organization wanted establish contact with mortgage and
housing experts in the U.S., such as the Department of Housing and
Urban Development, Fannie Mae Corporation and U.S. real estate
companies.

ULAANBAATA 00000394 003 OF 004

12. (SBU) HFC admitted that although the 40,000 apartment plan is
primarily aimed at low and middle income Mongolian's, no means
testing would be used for those who had money to purchase the units
outright and nothing would preventing well-off Mongolians from
taking advantage of low cost housing. He fully expected many of the
units, mostly one-bedroom apartments, to be purchased through
remittances by Mongolians working overseas in Korea, Japan or the
U.S.

Critics: Plan Not Transparent, Open to Corruption
--------------------------------------------- -----

13. (SBU) Housing experts and representatives of international
financial institutions in Mongolia have strongly criticized the
lack of means testing, in addition to other problems with the plan.
An overall lack of transparency in the development process has led
many to speculate that the freshly built apartments will actually go
to those who have the right political connections. Those who lack
"friends in high places" may stoop to exploit the poor as fronts to
obtain low interest mortgages. Unlike some countries which lure
teachers or police to buy properties in certain areas with
guaranteed low interest mortgages as long as they promise to remain
in the property for 10 years or more, Mongolia has no such
provision, and many fear the rich will simply pay poorer families to
occupy the apartments for a year or so, then either "flip" them or
rent them out at much higher prices. The IMF rep wondered whether a
thorough due diligence was done on the project and voiced concerns
about how the project is being advertised, if at all, to the very
ger district residents in is intended to benefit.

14. (SBU) Others grumble that the plan in general was not well
thought through, that GOM estimates on financing and construction
costs are wildly optimistic, would have been better left to the
private sector, and that this was yet another example of the GOM
spending foolishly and not girding itself for inevitable price
fluctuations in commodity prices that make up the backbone of the
Mongolian economy.

Project Financing: Fuzzy Math?
------------------------------

15. (SBU) Some IFI representatives complain that the project is not
clearly reflected in the government's budget and have questioned the
fiscal math behind issuing Tugruk 60 billion(about US$52 million) in
bonds to finance the project. One IFI rep opined "with savings
account interest rates so high (16% to 20%), how can the government
expect to make low yielding bonds attractive to investors? They
will have promise a return of at least 10% to stay competitive, but
how can they then turn and use that money to finance low interest
mortgages?"

16. (SBU) The local IMF rep, however, felt the GOM would have no
problem finding buyers for its bonds, even at lower rates:
"Mongolian banks and investors are looking for safe harbors to store
the overabundance of liquidity now sloshing around the country." He
pointed to the sale of the first Tugruk 10 billion tranche in
January on Mongolia's normally sleepy stock exchange. One local
bank, Khan Bank, gobbled this issue up within minutes. The IMF Rep
opined that bond sales remain brisk, noting that when it came to
bonds "crisis-prone Mongolia is doing better than Ford Motors."

17. (U) Banks appear to be resisting the idea of issuing subsidized
mortgages to low-income buyers. They want market rates instead and
feel that it is the only way to ensure the program will be
sustainable. USAID, through the Economic Policy Reform and
Competitiveness (EPRC) project, is about to bring an expert to help
design a targeted subsidy system that will allow banks to get market
rates for mortgages while the qualified low income families will
have their costs reduced, most likely by down payment support. This
would be a much more effective use of government financing than the
current GOM plan to provide subsidized low interest loans to
builders for construction and to banks for mortgage capital. USAID
has been trying to help the private sector housing finance market by
providing extensive support to the Mongolia Mortgage Corporation and
consulting with GOM lawmakers on the mortgage security law and other
laws to support asset backed securities.

ULAANBAATA 00000394 004 OF 004

18. (SBU) Still, others believe Mongolia could invest its new mining
wealth more wisely and feel that the 40,000 apartment housing
project, along with social welfare payments to newlyweds, newborn
children and monthly child allowances are simply throwbacks to grand
"Plans" of the socialist era. "Without the GOM properly investing in
infrastructure and social safety nets, grand schemes like the 40,000
apartments will crumble when commodity prices fall," one IFI rep
commented.

Build First, Think Later
------------------------

19. (SBU) The local ADB rep expressed concern that this project was
urban expansion "run amok". Quickly assembled large-scale
construction projects like this, he said, often leave no room for
proper urban planning. For example, one of the plan's largest
developments is to be located next to Ulaanbaatar's Chinggis Khan
Airport. "Has there been any thought given to the consequences of
building high-rise apartments so close to the airport's single
runway?" he mused. As far as post can tell, the GOM has not asked
let alone answered the question.

20. (SBU) A representative from the German Aid Organization GTZ, who
has been working with the GOM on an urban development and vocational
education program, feared that quality would be sacrificed as the
GOM tried to keep prices low. He complained that the government
would use poor quality building materials from China and Korea and
that absolutely no thought had been given to making the buildings
earth quake resistant even though Ulaanbaatar lies in a seismically
active zone. Also, the tall tenement blocks envisioned by the
government would undoubtedly create tunnel effect winds that would
kick up even more dust than usual leading to even greater pollution
problems.

21. (SBU) The local rep from the ADB wondered aloud if the 40,000
apartment program might lead to a housing glut (in this category of
housing), doing more harm than good for the private construction
industry and possibly exposing Mongolia's banking system, already
saddled with a high ratio of non-performing loans, to even greater
risk. Despite a government survey's indicating otherwise, he doubted
the demand was really there. Although impoverished ger-district
dwellers have told survey takers "they would love to move to new
apartments," most ger districts residents lack the stable incomes
lenders require and could not afford a mortgage at any
interest-rate.

22. (SBU) On the supply side, the local World Bank representative
felt government promises were unrealistic. "The GOM could maybe
supply 15,000 units within two years," he said, pointing out that so
far only one project had started production. He asked, "How much
could the government hope to achieve this year before the harsh
winter put a halt to construction projects (Note: the construction
season runs from May to October) until next year?". He surmised the
other 25,000 units could possibly be developed through private
sector financing with the government taking credit for their
construction thanks to their "enlightened" housing policies.

Minton