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RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0618

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