Real Estate in Asia: Where are the bubbles, and where is it safe to invest? Far East Forum Special Edition from Ulaanbaatar, Mongolia

People have been talking about it for more than six months. Various and sundry predictions as to when it is going to happen have floated around analysts desks, newspaper editors ears, and even across the coffee or tea table. Yet, thus far, there has been scant definitive, damning evidence and even less written on the subject. I am of course referring to the Mainland Chinese real estate boom (soon to be bust).

Last week’s WSJ article did a tidy job of explaining where the market is heading in Beijing. There is really no telling how fast this is going to happen. Prices have been skyrocketing in Shanghai and Beijing (in particular) as well as Hong Kong over the past few years. Just this past fall the Beijing government attempted to cool the market via restricting home ownership to two properties per person.

This has a number of important implications for the world, as it could be a burst as opposed to simply a ‘deflation.’ Real estate risk is substantial in China because much of the growth has been predicated on increasing land and property values. This will no doubt have an impact on commodity prices for things like sheetrock, steel, copper (as pointed out in the WSJ article), as well as numerous other building supplies.

In addition to the commodity price downturn, Chinese banks holding mortgages could face problems similar to those experienced by US banks during the financial crisis. If the property values decline by 10-20% (as this article suggests), there could be a drastic increase in default risk.

In Hong Kong, the local government is taking up a number of measures including building public housing, re-zoning land, lowering the mortgage amounts that can be borrowed, penalizing back-to-back sales (they have a multi-tiered penalty system within 2 years, and a 15% penalty if a property is re-sold within 6 months!), and increasing the cost of buying for non-residents. (See the South China Morning Post’s article entitled. “Tough Measures to cool homes market”). All of these measures are designed to slow a market whose prices have gone up 18% in the last year (See SCMP’s “Market boom leads to gloom”).

Even across the Strait in the de-facto independent Taiwanese market, prices are still on the rise (somewhere between 10-20% depending on location). There was a lot of speculation about the sharp price increases after Taipei opened the Taiwan home market up to Mainland Chinese in June 2010. The government in Taiwan has also acted to cool the prices by introducing a luxury tax on properties that reach a threshold value. This has apparently worked to some extent because brokerages reported a 20-30% decline in sales after the announcement of this policy (See the China Post’s article entitled “Home prices rise in May despite luxury tax: real estate firms”).

All this begs the question, where should real estate investors send their money in Asia? Based on my own recent experience, I suggest Ulaanbaatar, Mongolia as a destination. Rent prices here are comparable to many American cities (depending on the place). Even more lucrative than this is a business known as ‘mediation.’ Exactly as it sounds, this involves someone fluent in both English and Mongolian that acts as a go-between for foreign tenants and local landlords. They often charge tenants and landlords $500 US each for ‘facilitating and managing the transaction.’ It strikes me that the value-added of this kind of service is extremely low, and offers huge potential for anyone willing and able to provide similar services.

Offices, luxury brand shopping, and a complete (excepting a single Kenny Rogers Roasters) dearth of western food chains in the city are three of the most lucrative opportunities I have witnessed since moving here. Next to Sukhbaatar Square the Central Tower claims a Louis Vuitton, Armani, and Hugo Boss store. People in UB claim that for at least a short period of time the LV Store was the highest grossing in all of Asia. Right across the street is another new gleaming building, the Blue Sky Tower, which according to MAD investment solutions is the tallest structure in Mongolia (Article). Yet, there is not a single Starbucks, McDonald’s, Pizza Hut, or KFC. Not that any one brand is necessary, it is striking that most developing countries have at least one of these to offer whereas Mongolia has not even one.

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