Mongolia Real Estate Report

8/12/2019 Mongolia Real Estate Report

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When I rst came to Ulaanbaatar just four years ago, I found a very dierent

city to the one I work in today. The Mongolian growth story had not yet

begun and it showed. The buildings were decrepit, foreigners were a

novelty, and the food was predominantly mutton.

Just four years on, none of these remain true. Fast paced constructionfueled by massive inows of Foreign Direct Investment have allowed large

structures such as the The Monnis Tower, The Blue Sky, and the Central Tower

to dominate the citys skyline. The expatriate population has swollen over

recent years, with thousands of professionals having located to the steppe

in order to make the most of the countrys considerable opportunity.

These changes have taken place against the backdrop of unprecedented

economic development. Having achieved a real GDP growth rate of 17.3%

over 2011, the Mongolian economy is outperforming every one of the BRIC

economies. Mongolia is predicted by the World Bank to be the world leader

in economic growth over the next two decades.

This momentum appears to have transferred eectively into the real estate

sector, with many property assets facing double-digit value appreciation

over recent years. Although huge gains have already been realized, it

appears the market is only just beginning to gather momentum. As the

country continues its rapid growth trajectory and urbanization, immigration

and upward mobility spur demand for all types of real estate, a combination

of unique conditions is also limiting the growth of an inadequate supply.

The Mongolian real estate market however continues to face a chronic

information decit, resulting in many of these future price drivers yet to be

priced into the market. Asia Pacic Investment Partners and Mongolian

Properties seeks to bring some clarity to investors looking to enter this exciting

market by publishing this Mongolian Properties Real Estate Report 2013.This book is the rst comprehensive piece of research into Ulaanbaatars

real estate market that is backed by local data and ten years of direct

operational expertise.

Drawing upon the combined wisdom of all of Mongolian Properties, the

oldest real estate agency in the country, the Mongolian Properties Real

Estate Report 2012 aims to convey a decade of expertise to the reader in a

relatively simple document. With thoughts, reections and forecasts having

been recorded in a comprehensive series of interviews with each member

of the companys team, we are condent that the reader could not be in

better hands.

Additional data for the Mongolian Properties Real Estate Report 2013was sourced from Tenkhleg Zuuch, Mongolias leading real estate trade

magazine.

This report is divided into three sections: a country overview designed to

guide those new to the country through its politics, macroeconomic

situation, and legal and tax regimes; an analysis section that describes and

examines many of the trends and drivers that have, and should continue to

shape the real estate over the coming years and nally an examination of

the real estate market detailed into the six key districts of Ulaanbaatar with

some ideas of future price trajectories.

However you are thinking of investing in the Mongolian growth story, Asia

Pacic Investment Partners is condent that the Mongolian Properties RealEstate Report 2013 is the most comprehensive examination of market drivers

currently published. We hope you nd it a useful tool in determining your

investment strategy for Mongolia!

Introduction from the editor

Content

Editor Joe Holloway

Design & Production - Urtnasan Erdenebileg

Art Director Naranmunkh E

Editorial Assistant Yanjindulam TuvdEditorial Assistant Saruulzaya Bayarsaikhan

Marketing Manager - Buyanhishig

International Distribution Stuart Evans

Financial Analyst Locke Brown

Editorial Contributor Evan Casey

Operations Coordinator Andrew Bergman

Administration Kevin Trzcinski

Business Development Director

[email protected] Tell: (+44) 7776 195209HK Tell: (+852) 9549 2188

Websites

www.mongolia-properties.comwww.apipcorp.com

Follow us on Facebook

www.facebook.com/mongolia.propertywww.linkedin.com/company/mongolian-properties

Mongolian PropertiesDisclaimer

Every eort has been made to ensure theaccuracy of the information and datacontained in this book however, the editorsand the publishers accept no responsibilityfor any errors it may contain, or for any loss,nancial or otherwise, sustained or incurredby any person or entity using this publication.

Copyright

All rights are reserved in this publica-tion. No part of this publication can bere-produced displayed, stored, or trans-mitted in any manner without the prior

written consent of Mongolian Properties.

Photo Credits

Photographers: Hamid Sardar /KhasarSandag

To order a copy of this report,please contact:

Kevin Trzcinski, Group Sales & MarketingDirector

[email protected]


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Map of the city.......................................................................................p2

Macroeconomics.................................................................................p11

Politics....................................................................................................p25

Legal System.........................................................................................p33

Tax..........................................................................................................p43

Section Two...........................................................................................p51

Residential Market................................................................................p75

Oce.....................................................................................................p81

Retail......................................................................................................p89

Sukhbaatar............................................................................................p99

Chingeltei............................................................................................p111

Khan Uul...............................................................................................p119

Bayanzurkh..........................................................................................p129

Bayangol.............................................................................................p135

Songinokhairkhan...............................................................................p141

Table of contents

DISCLAIMER:CERTAIN STATEMENTS IN THIS DOCUMENT ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE NOT BASED ON HISTORICAL FACTS BUT

RATHER ON MANAGEMENTS EXPECTATIONS REGARDING FUTURE GROWTH, RESULTS OF OPERATIONS, PERFORMANCE, FUTURE CAPITAL AND OTHER EXPENDITURES (INCLUDING THE

AMOUNT, NATURE AND SOURCES OF FUNDING THEREOF), COMPETITIVE ADVANTAGES, BUSINESS PROSPECTS AND OPPORTUNITIES. SUCH FORWARD LOOKING STATEMENTS REFLECT

MANAGEMENTS CURRENT BELIEFS AND ASSUMPTIONS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. FORWARD LOOKING STATEMENTS INVOLVE

SIGNIFICANT KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE

FORWARD LOOKING STATEMENTS INCLUDING RISKS ASSOCIATED WITH VULNERABILITY TO GENERAL ECONOMIC MARKET AND BUSINESS CONDITIONS, COMPETITION, ENVIRONMENTAL

AND OTHER REGULATORY CHANGES, ACTIONS BY GOVERNMENTAL AUTHORITIES, CAPITAL MARKET CONDITIONS, RELIANCE ON KEY PERSONNEL, UNINSURED AND UNDERINSURED

LOSSES AND OTHER FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT ARE

BASED UPON WHAT MANAGEMENT BELIEVES TO BE REASONABLE ASSUMPTIONS THE COMPANY CANNOT ASSURE INVESTORS THAT ACTUAL RESULTS WILL BE CONSISTENT WITH THESEFORWARD LOOKING STATEMENTS. THE COMPANY HEREBY EXPRESSLY DISCLAIMS ANY LIABILITY FOR ANY INACCURATE OR OUT OF DATE INFORMATION PRESENTED IN THIS DOCUMENT

AND THE COMPANY SHALL HAVE NO OBLIGATION TO CORRECT, AMEND OR UPDATE THIS DOCUMENT IN THE FUTURE FOR WHATEVER REASON.

THIS PRESENTATION IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER OR SOLICITATION FOR AN OFFER WITH RESPECT TO THE PURCHASE OR SALE OF ANY

SECURITY. NEITHER THIS DOCUMENT NOR ANYTHING CONTAINED HEREIN SHALL FORM THE BASIS OF, OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT

WHATSOEVER.


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U L A A N B A

Grand

Plaza

GandanMonastery

BilegDepartment

Store

UrgooMovie

TheatreTenMo

The

TBDAnduud

UBPalace

Maxmall

Naran

Mall

Ulaanbaatar

Department

Store


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ATA R M A P

Sukhbaatar District Bayangol District

Chingeltei District Khan-Uul District

Bayanzurkh District

Sukhbaatar

squareCentral

Tower

ITCenter

BlueSky

Tower

Academic

Theatreof

Drama

Chinggis

Hotel

SOS MedicaUlaanbaatar

WrestlingPalace

Regency

Residence

Olympic

Residence

Park

View

Temple

View

State

epartment

Store

StateCircus

Naran

Plaza

Bayangol

Hotel

MongolianParliam

ent

Govertmentbuildin

g

Natural

Museum

State

Gallery

ChildrenPark

Bogdkhan

Nuseum

Central

Stadium

Bayanmongol

Khoroolol


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Ulaanbaatar: The changing face of one of Asias most vibrant frontier cities

The view from the top of one of Ulaanbaatars newly built skyscrapers oers a cityscapemarkedly dierent from that of only a few years ago. Numerous luxury high-rise buildings havesprung up in the centre of town, and construction of new high-end residential, commercialand mixed use developments continues apace. Several leading international hotel brandshave moved into the market and, in addition to the existing Kempinsky, Shangri-La andHilton are now also building new ve star hotels in the city centre. The stock of housingcatering to the demands of the middle and low income sectors of the city is also increasingdramatically, under pressure both from an increasingly auent middle class, and high levelsof immigration from the Ger district into formal brick and mortar structures. In addition torapid development within the city, new residential developments are also springing up inthe valleys of Zaisan, Nukht, and Ikhtenger, pushing the boundaries of the city outwards.

Following a decade of chaotic development the government is now also beginning to

take a more considered approach to the citys development, and is implementing anaggressive infrastructure program to improve trac, water and heating conditions.

Driving these changes in the cityscape is a highly eclectic and rapidly changing population.As the capital of one of the worlds fastest growing economies, Ulaanbaatar is currentlywitnessing a rapid inux of highly educated overseas Mongolians returning home, togetherwith rapid ongoing urbanisation as a result of migration from the countryside. Added to thisthe city is also becoming increasingly cosmopolitan, with large numbers of investors andbankers from global nancial centres such as Hong Kong, London, Singapore and NewYork mixing with miners from Australia and Canada. The result is a highly energetic andentrepreneurial culture that manifests itself not only in business, but also in the citys vibrant

cafs, bars and nightspots.

As a result of the countrys mining boom, combined with rapid improvement in the level ofhuman resources, Ulaanbaatar is now benetting from a spillover eect into other areas ofthe economy, leading to rapid growth across numerous industries, in particular real estate,construction, manufacturing, and tourism. Combined with these positive forces are alsoa number of constraining factors, in particular the citys xed heating grid, the scarcityof parking, and the overloaded road network, all of which conspire to create pockets ofextraordinary opportunity for real estate investors in specic locations across the city.

We hope that this real estate report will shed light on some of the key industry dynamics atplay and provide investors and family planners alike with a useful guide to the opportunitiescurrently available in the real estate market in Ulaanbaatar, as well as pointers as to whichareas to avoid. A special thanks to Joe Holloway, the research team at Mongolian Propertiesand our friends at TenchlinZuch for all of their research and hard work, without which thisreport would not have been possible. We hope you nd this report useful and look forwardto assisting you further as you explore the opportunities available in Ulaanbaatar.

Yours Sincerely,

Lee Michael Cashell

Chief Executive Ocer

Mongolian Properties LLC

Thoughts from the CEO


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Macroeconomics


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Macroeconomics

Just twenty years ago, a newly democratized Mongolian state was struggling to survive a

transformation recession as its previously subsidized agricultural enterprises were forced to

face international competition.

Today, through market liberalization, democratization and a certain amount of geographicgood fortune, the country is recognized as one of the worlds fastest growing economies.

Mongolia achieved real GDP growth of 17.3% in 2011, signicantly outperforming every

one of the BRIC economies. The World Bank estimates suggest 2012 will play out in much

the same way; based on Q1 observed data real GDP growth is forecast to be 16.7%, in

comparison to 5.8% across the BRICs, and 2.5% worldwide.

Despite demand from China appearing somewhat weakened according to Q2 2012

metrics, growth in Mongolias industrial output remains healthy. The mining sector that

underpins Mongolias growth saw output rise by 10% y-o-y in April 2012 according to the

World Bank. The potential for increases in industrial output remain substantial in the medium

term, with Oyu Tolgoi already having begun to stockpile ore from its open pit, being on

track to begin commercial production in Q1 2013.

Investment Basics: The Mining Sector

The estimated value of Mongolias resource wealth is approximately US$1.3trillion.

According to ResCap, a Mongolia-focused investment bank, there are

approximately 6,000 known deposits of over 80 dierent minerals in the country,

including gold, copper, coal, uranium, molybdenum, tin and iron. However as

just 27% of the country has been surveyed to a scale of 1:50,000. The countrys

exploration potential is vast.

Of the many operations currently in the country, two deserve a specic mention.

The rst of these, the internationally renowned Oyu Tolgoi (OT) representing the

largest undeveloped copper deposit worldwide, situated 80km from the Chinese

border. The project is managed through a joint venture between Ivanhoe Mines

and Rio Tinto, who have a 66% stake, whilst the Mongolian government controls the


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Macroeconomics

remainder. Research by Ivanhoe

Mines estimates that the deposit

contains around 37 million tons of

copper and 1,431 tons of gold and

is considered to be worth USD$350billion (around 50x the value of

Mongolias current GDP).

Commercial production at OT is set

to commence in Q1 2013 at the

Southern Oyu open pit mine, whilst

the Hugo North division (a black

rock cave mine) is on track to

extract its rst ore in 2015.

Despite deposits of copper and gold playing a crucial part in Mongolias economic

development, coal looks to be the countrys most important resource over the

coming years, possessing an estimated 163.2 billion tons of the mineral as opposed

to just 77.3 million of copper. The largest operation is the Tavan Tolgoi (TT) project,

located just 200 km from the Sino-Mongolian border. The site is believed to be the

second largest untapped reserve in the world and is made up of over 6.4 billion

tons of coking coal. Extraction began as far back as 1960, but until recently, the

mine has been functioning subject to severe ineciencies and output constraints.

To unleash the coalelds true potential, the government has decided to split the

project in two; one half it will develop alone, the other being opened up to foreigninvestment. The public sector operation is to be nanced through a three way

international equity IPO that will list shares in London, Hong Kong and Ulaanbaatar

in Q1 2013, whilst international players are currently being courted to fund the

development of the private West Tsankhi venture.

Located between Russia and China, Mongolia has the potential to supply two of

the worlds largest growth economies with the raw materials needed to sustain

development. The Chinese are dominant in the consumption of Mongolias

resources, receiving more than 90% of its exports. The currently dyadic Mongolian

current account is cause for concern, with resource revenues perceived to be atthe mercy of protectionism, infrastructural bottlenecks and imperfectly competitive

price setting regimes.

A project of rail network renewal is currently underway in order to ease some of

these concerns and it will expand the service links to both China and the Trans-

Siberian Railway, which will logistically connect OT and TT to the ports of Russias

Pacic Coast. Access to naval trade through both of Mongolias neighbors is

expected to ensure a fair price is met for the countrys extracted minerals. Avoiding

the potential threat of Chinese monopsonistic abuse is thus greatly reduced, as the

goods are allowed to face internationally competitive commodity prices.

The extraction of Mongolias previously latent resources have allowed deposits to be

Photo by Hamid Sardar / Khasar Sandag


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Macroeconomics

converted into tangible wealth, as exports reached a record high of US$4.8bn at the end

of 2011, up from just US$2.5bn four years earlier. Coal outows were valued at US$2.2 billion

in 2011, more than twice the total of the previous year (US$0.9 billion), whilst the contribution

of copper to the Mongolian current account increased by 25% over 2011 (although much

benet was derived from the commoditys price increase over the period).

Growth has been facilitated by the easing of the countrys production constraints by

capital and expertise inows from a number of multi-national mining corporations. Levels of

FDI have surged, reaching 39% of GDP in 2011. Forecasts based upon Q1 results expect this

gure will be exceeded in 2012, as foreign direct investment is predicted to be US$4.4bn

(roughly half of the countrys GDP).

Export Expectations

Despite a strong performance over recent years, recent data has upset the trend of

positive export growth. Exports contracted by 2.8% for the rst time in two years in April,

whilst coal exports, representing the Mongolian external sectors largest earner, have

displayed negligible growth in recent months. Copper prices have been falling since

January, which has translated into a 19% y-o-y drop in the goods total revenue.


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Macroeconomics

The short-term vulnerability of Mongolias export performance is connected to a number

of worldwide phenomena. Pessimism and uncertainty borne out of the current Eurozone

crisis has created volatility in world commodity markets, directly impacting Mongolian

export revenues.

Chinas Consumption of Mongolian Exports

As resulting global trade slows, continually disappointing growth gures reported in China

(which currently consumes 93% of Mongolias total exports) has led to slackening demand

growth for Mongolian commodities.

Investor Insight: Can Chinese Growth Sustain Mongolian Exports

Q2 2012 saw Chinese real GDP growth at its lowest level in three years. Aer re-

achieving double-digit rises in gross domestic product from Q4 2009 to Q2 2010 as a

result of decisive counter-cyclical scal policy in the wake of the global economic

crisis, the Asian giant has recently seen gures slip unusually low. Part of this is due

to deliberate tightening of monetary conditions, shiing domestic policy from

relatively loose to prudent in order to subdue high levels of ination and fears of

an overheating real estate market.

Slowing growth across the worlds high income economies have continued to

depress economic activity worldwide; in 2011 growth decelerated to 1.6%, about


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Macroeconomics

half the value recorded in the previous year.

Concerns over Chinas economic stability are only natural for those with vested

interests south of the Mongolian border (as indeed they are for the majority of

Asia). Despite a bleak global economic outlook, there are however positive signs

that suggest a further deterioration of the Sino-Mongolia commodity dyad may be

limited.

With Chinas ination hitting 30-month lows in July 2012 and consumer prices rising

by just 1.8% compared to a year earlier, CPI looks set to fall signicantly below

the yearly target price increase of 4 percent according to Zhang Zhiwei, Chief

Economist at Nomura in Hong Kong. This may well be the catalyst needed to

facilitate the main body of the Chinese counter cyclical eort. The PBoCs ination

aversion being the key motivation for the reasonably tight policy witnessed towards

the beginning of 2012. Policymakers are now faced with increased room formaneuver; with ination control no longer their most pressing issue, the government

will be able to shi its focus to securing growth.

With these factors taken into consideration, the international outlook on the Chinese

economy is perhaps more bearish than is justied. Key indicators from the OECD,

Chinas National Statistics Bureau and the ocial purchasing managers index have

all showed a downward trend since early 2010. However each metric has declined


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Macroeconomics

much more gradually then was observed in 2008, whilst the rate of deceleration has

slowed in recent months, suggesting the economy may be beginning to stabilize.

As scal policy is rolled out in the near future, and the monetary changes enacted

earlier this year feed through with the usual lag to the real economy, the Chinese

look set to reestablish their growth momentum in the medium term.

This should oer much comfort to Mongolian exporters. A Chinese stimulus founded

upon infrastructure spending and increased business credit has the potential to

steady the commodity demand forming Mongolias major export channel. Asia

Pacic Investment Partners remains cautiously optimistic for Mongolias export

revenues in the medium/long term, considering that the power of the Chinese

policy response should not be underestimated.

Foreign Direct Investment: Facilitating export growth

Extraction of mineral wealth, the major force behind Mongolias GDP growth, has been

funded by aggressive Foreign Direct Investment over recent years, which looks set to

continue well into the future.

With the exception of 2009, where conditions were weakened due to international nancial

instability, total FDI ows to Mongolia have increased consistently on a yearly basis.

Investment Basics: FIFTA Registered Companies

Much Foreign Direct Investment in Mongolia begins as foreign entities start a FIFTA

(Foreign Investment and Foreign Trade Agency) registered company. With the

exception of land ownership , FIFTA registered companies face identical legal

and tax regimes and enjoy exactly the same rights as Mongolian incorporated

companies.

Registration with FIFTA costs approximately $1000 (including registration fees, stamp

fees, notary costs, and administrative charges), however before the process can

commence it is necessary for the company to prove that they are in possession

of a minimum of $100,000 of available assets. FIFTA registration requires the


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Macroeconomics

submission of the following documents:

the application form; the companys

charter; a document to conrm the

company address; the minutes of the

foundation meeting; the balancesheet conrming the required minimum

amount of owners equity; a letter

from the banking institution stating the

shareholder has maintained its accounts

in good standing; documents conrming

the identity of founders; and payment

of the required fee for state registration.

Once an application is received, FIFTA

will usually issue a company its certicate

within 7-14 working days.

For these reasons, FIFTA registration is

seen as a simple and cost eective way

of allowing foreign direct investments to

compete on a level playing eld with

Mongolian companies.

Mongolias desirability as an investment location for many has stemmed from: interest in

its under-utilized mineral wealth; combined with its reputation for democratic and stable

politics , investor friendly legal system, and attractive tax environment. The OECD FDI

Regulatory Restrictiveness Index measures statutory restrictions on foreign direct investmentin 55 countries worldwide, based on data drawn from across 22 sectors. Mongolias rank

of 0.096 represents an economy considerably more open to FDI than in many comparable

macro investment cases, its score being lower than Russias 0.189, Chinas 0.408, and both

the Non-OECD and World averages.

The Oyu Tolgoi project, nalized aer six years of negotiation in 2009 has spearheaded the

development of Mongolias investment inows. The mines construction budget for 2011

alone was $2.3 billion (over 1/3 of the countrys 2010 GDP), the operations total assembly



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Macroeconomics

costs being estimated to have required $7 billion of foreign capital. The apparent success

of Oyu Tolgoi has led to a signicant rise in FDI ows into the country from resource-focused

investors worldwide.

A stabilization in Foreign Direct Investment is expected by Asia Pacic Investment

Partners over the coming years. Capital ows to the mining sector are set to decrease

somewhat, as the rst stage of Oyu Tolgoi is completed in Q3 2012 and the nancing of

operational equipment for the open pit mine begins to drop o. Despite this, investment

in the countrys foremost mining project looks set to support growth well into the medium

term. Development of the mines two capital intensive, high tech block cave mines are

set to continue until 2015 and 2017 respectively, whilst the nancing of considerableinfrastructural expansion is required if the capacity constraints currently limiting the mines

eciency are to be eased.

Mongolias resource led growth has begun to spill over across the economy, with increased

growth and Foreign Direct Investment expected to face many industries other than those

directly related to mineral extraction.


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Macroeconomics

As opportunities in these sectors are appreciated by international entities increasingly

aware of Mongolia as an investment location, it is predicted that FDI ows will remain

buoyant, with everything from luxury consumer brands, to insurance, to multi-nationals

looking to break into the high growth market.

Government Spending

Recent years have seen government spending growth outpace increases in the countrys

revenues. Although a country in Mongolias position may be expected to run decits now

to facilitate immediate infrastructural development and poverty alleviation, many are

concerned that if the government is not able to reduce its decit, scal sustainability may

be threatened.

Source: NSOM, IMF, BoM, World Bank

The rst four months of 2012 saw government spending increase 32% in nominal, and

13% in real term compared to the previous year. Revenues cannot seem to keep pace,

growing just 21% in nominal terms over the same period and 4.2% if ination is taken into

consideration.

The withdrawal of customs and excise taxes last year on petrol and diesel products has

drastically weakened Mongolias domestic tax base. According to y-o-y estimates from

data obtained in April, the former are to expect a 26% reduction, whilst the latter are

likely to fall by as much as 50%. This is a substantial loss given that the combination of

the two items accounted for around 8% of total revenues in 2011. On top of these more

recent developments, the Mongolian treasury is still feeling the eects of its 2011 decision

to abolish its Windfall Prots Tax, which was responsible for roughly a h of government

revenue last year.

These pressures have been somewhat oset by maintained growth in tax revenues derived

from personal, corporate and domestic goods markets, and VAT on capital goods imports.

These however do not look capable of lling the decit in the medium term.

To add to its problems the Mongolian government is nding policy increasingly constrained

by its long-term commitments. A share of future tax revenues have already been received

in the form of pre-payments from the developers of Oyu Tolgoi and Tavan Tolgoi, meaning


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Macroeconomics

a proportion of potentially taxable revenue in the future has already been accounted

for. Furthermore, over 1.5 million of the population have opted to trade their state issued

Erdenes Tavan Tolgoi shares for MNT 1 million per person. The state has already started

selling 10% of its 51% holding of the venture to local companies; a successful sale would

raise more than enough capital to cover the governments scal liabilities, however if theactual sum achieved is insucient, then the state would be liable to cover the amount

necessary.

Despite continued spending increases in Q1 2012, over the medium term the Mongolian

government clearly appreciates the need to adjust government expenditures. The FSL

(sometimes called the Fiscal Responsibility Law) passed in June 2010 sets out strict scal

rules, requiring all government budgets to ensure they do not allow the countrys structural

decit to exceed a limit of 2% of GDP aer the law becomes binding in January 2013. As of

April, the scal decit lies at 4.2% of GDP, whilst the structural decit is 6.1 % of GDP.

Although hitting its self-imposed target will be a challenge, certain conditions in Q3 and Q4

2012 should help the government make the crucial cuts. The Integrated Budget Law was

passed in December 2011 in order to support scal sustainability and to aid the successful

implementation of the FSL. The legislation is designed to strengthen the public sectors

investment framework by requiring more rigorous feasibility studies, whilst implementing

increasingly demanding checks on planned expenditure programs to ensure they are

necessary in accordance with national priorities.

Like many emerging markets with credible democratic institutions, Mongolia is aected

by a politically motivated scal cycle. The proximity of the June parliamentary election

undoubtedly inated the governments budget early in the year, as politicians attempted toenact populist policies in an attempt to sure up their chances of reelection. This is reected



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Macroeconomics

in particular by

the quarters

s u b s t a n t i a l

increases in

public sectorwages and

salaries (up

36%).

Asia Pacic

I n v e s t m e n t

P a r t n e r s

a n t i c i p a t e s

that Q3 and

Q4 will be a

period of scal

consolidation,

as government

expendi tu re

experiences a

negligible rate of growth, whilst revenues continue to be driven up by Mongolias double

digit growth. Public sector wage increases from the start of the year will have largely been

eroded by ination, whilst the new parliamentary cycle should provide a combination

of incentives and constraints for policymakers, which will hopefully encourage scal

prudence.

Ination

Ination is the largest challenge for the Mongolian economy at present, as increases in

the price level remain both high and volatile. Peaking at over 30% in the summer of 2008

before turning briey negative the following year, Mongolias ination as of April 2012 was

estimated to be 16% y-o-y, much higher than the Bank of Mongolias target of 10%.The

situation is slightly worse in Ulaanbaatar, being the epicenter of the Mongolian economy.

The citys headline ination rate climbed to 17.8% y-o-y from 9.4% in December.



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Macroeconomics

Current high ination is being fueled by both core ination and increases in the price of

food, most notably meat.

Prices of core goods rose by nearly 13% y-o-y in April 2012 this was responsible for roughly

half the increase in headline ination. Food prices however account for about 40% ofMongolias basket of goods, and represent the key driving force behind ination and its

volatility. Increases in meat prices have been borne out of supply shocks to the agricultural

industry, most notably harsh weather conditions. As the breeding of new livestock takes

time, the supply lag has pushed up the prices of meat nationwide.

The continuation of rapid growth in government expenditure has however contributed tothe generalized wage and price pressures. Increases in cash handouts (such as the Tavan

Tolgoi share option program, eectively giving MNT 1,500,000 to each citizen) and growth

in public sector wages in 2012 have drastically increased inationary forces. The resulting

changes in civil servants wages are seen as particularly damaging, causing many private

sector rms to immediately raise wages by a proportional amount in order to remain

competitive.

Reacting to these conditions, the Bank of Mongolias benchmark rate was raised by 50

basis points in March 2012 and 50 basis points again in April 2012, setting the interest rate

at 13.25%.

However, these bold policy prescriptions appear to have little eect with the headline

national rate of ination at 17.8%, the real policy rate is negative in real terms, creating no

incentive for the cooling o of demand side pressures, as both investment and consumption

remain high. Combined with consistently high scal spending, the Bank of Mongolia is

considered by most commentators to be largely powerless in achieving its target.

Headway is likely to be made in the coming periods however as the new parliament (the

furthest it is possible to be away from the next electoral cycle) begin to cut back their

expenditure in order to reduce the structural decit down to the 2% level stipulated by the

FSL. This will likely ease many of the demand side pressures underlying Mongolias recent

inationary experience, giving the Bank of Mongolia room to eectively maneuver policy.


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Macroeconomics

Wage Growth: The emergence of the Mongolian Middle Class

Mongolias rapid economic growth has led to considerable increases in the wage rates

across many groups of society. The average national wage according to the National

Statistics Oce of Mongolia rose by 24% between 2011 and 2012 alone, from MNT 341.5

thousand to MNT 424.2 thousand, a 13.8% increase in real terms.

Increases in the wage packages outside of the mining sector are also considerable, with

average incomes across the economy increasing by 17.3% over 2012. As Mongolias growth

continues on its double-digit path, practically every industry is expected to maintain wage

growth momentum.

This upside potential is particularly striking in the nancial services industry, which saw

average real incomes expand by 16.3% over the period, and the infrastructure sector,

whose workers saw their real incomes increase by 21.0% last year.

A wage rate increase in these key industries has been accompanied by an expansion in

the labor market size, as high demand incentivizes the rapid expansion of capacity. The

number working in the mining and quarrying sector has increased by 34,900 in 2009 to45,100 in 2011, the number in nancial services from 12,300 to 16,200 over the same period,

whilst the quantity of those with careers resting within the infrastructure has expanded from

18,700 to 75,800.

These factors point to the emergence of a wealthy class that represents an increasingly

large proportion of Mongolian society. As the economy provides opportunity, more and

more citizens are prepared to enter into increasingly white-collar industries. The growth of

wages have fueled consumer demand primarily focused upon the purchase of increasingly

expensive vehicles, real estate, and western consumer goods, with utility being derivedfrom both the actual consumption, and the inherent status of such items.


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Politics


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Politics

Mongolia peacefully transitioned to democracy in July 1990, enshrining multi-party politics

constitutionally in 1992. Quick to embrace principles synonymous with the western liberal

democratic ideal, the country is oen used as an illustration of regime consolidation and

stability in the otherwise tumultuous post Soviet space.

Despite a strong track record when compared to its geographical peers, the exact course

of Mongolias political trajectory in just two decades on is still somewhat uncertain. Recent

incidents, such as the controversial parliamentary elections of 2008 and certain short-lived

spells of resource nationalism have highlighted the countrys youth and inexperience.

Shocks of this magnitude are however reasonably commonplace when compared

against the majority of frontier markets worldwide, being a risk which investors much bear

to capitalize on lucrative growth potential.

This is not to say that signs of malaise in the Mongolian system can be brushed under

the carpet. Instead it should be noted that the country is prone to similar temptations

that plague transition regimes all over the post-soviet bloc. Thus, the question is to what

extent Mongolian politics is institutionally and culturally prepared to avoid falling o the

democratic wagon.

Institutional Structure

Mongolias institutional conguration is best described as semi presidential. Thus executive

power is split between a Prime Minister (endowed with the most power of any single actor

in the Mongolian political system) and the President (who is commander in chief of the

military and acts as Mongolias head of state).

The Prime Minister is drawn out of the majority party in Mongolias unicameral legislature

(the State Great Hural or Parliament of Mongolia), their mandate being derived from the



27/14627

Politics

legitimacy of the majority of legislators who nominated

them following each separate parliamentary election.

In contrast the president is elected directly by the

countrys population once every four years. The outcomeis determined by simple plurality, and candidates are

constitutionally allowed to serve up no more than

two terms in oce. Once in oce the President is

constitutionally obliged to renounce the membership of

any political party to which they were previously aliated.

Despite the oce drawing its mandate from the people

as opposed to parliament, legislative checks are on the

position are in place. If a two thirds majority of the Ikh

Khural (the Parlament of Mongolia) deems the President

to have abused the position, or violated their oath of non-

partisanship they face removal from oce. This check isbalanced by the Presidents right to veto against any part

(or the entirety) of any law or decision passed by the countrys legislative body.

The Ikh Khural

In terms of the countrys legislature, the Ikh Khural consists of 76 members, each elected by

their own single seat constituency, requiring a simple plurality to gain oce. The countrys

electoral convention stipulates that a legislative election is only to be considered valid if

50% of the electorate turns up to the ballot box, placing emphasis on the importance of

participation within the electoral mechanism. The body is charged with drawing up and

approving new laws in conjunction with the government, and passing the national budget

on a yearly basis with a simply member majority. Super majorities are required to overrule

the Presidential veto, and ratify constitutional change.

The political trajectory Mongolia has embarked upon, has somewhat troubled scholars

of political science who study the institutional arrangements of states at the time of

democratization. Semi-presidential regimes have been commonplace in the post-

communist world, and have more oen than not provided the framework for the failure

of the democratic process. The experiences of Russia, Kyrgyzstan and Kazakhstan

are testament to this, where the constitutional counterweights between branches of

government have been gradually eroded by powerful executives. The result has been themove from party dictatorship under the communist mechanism to personal dictatorship,

as individuals begin to dominate every aspect of political life.

The constitutional strength of the Mongolian system stems from the relative power

endowments it permits the branches of government. By giving the countrys parliament

the signicant powers outlined above, authority has eectively been fragmented; split

between an accountable executive and inuential legislature. As such, the Mongolian

institutional arrangement has removed the possibility of the president eroding their

legislative check; changing the political game from one of semipresidentialism to

superpresidentialism, as has been well documented across the post soviet space. Thus

fragmentation of the Mongolian system has prevented the consolidated of power by any

one individual, allowing the country to evade the reversal to despotism that has plagued

President of MongoliaTsakhiagiin Elbegdorj


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Politics

so many of the nations peers.

Parties Overview

The Madisonian dispersal of power across branches of government tends to lead toaccusations of political ineectiveness, decisive action being replaced by stagnation and

paralysis. Mongolia has, to a large extent avoided the ineectiveness frequently accused

of cursing the regimes of the United States and France, the countrys two principle political

parties overlapping on a number of ideological issues. Both organizations are seen to have

worked together on a variety of issues, allowing the countrys democratic eort to derive

legitimacy from a joint eort as opposed to from a revolution of the Democratic Party

against the incumbent Mongolian Peoples Revolutionary Party.

The Mongolian Peoples Party

The Mongolian Peoples Party (the MPP), formerly the Mongolian Peoples RevolutionaryParty is Mongolias oldest political organization in Mongolia. Formed in 1921 to facilitate

the Outer Mongolian Revolution, the party enjoyed a monopoly of power through the

countrys socialist period, and enjoyed a majority in the Ikh Khural up until 1996.

Despite a lasting commitment its socialist orgin (the organization became a member of

Socialist International in 2003), since transition the party has embraced liberal economic

reforms and democratic practices. Describing itself as a center le political force, based

on social democratic idealsi the group demonstrates an ideological pragmatism rarely

displayed by the ancestors of previously dominant Marxist-Leninist parties which have

developed in countries across the post Soviet Union.

The commitment towards modernization in the democratic world is demonstrated by

the groups decision at its 26th Party Congress in 2010 to remove the Revolutionary

component of its name, being supported by 99.3% of delegates. It should be noted that

from the minority of members who did not support the amendment, a splinter organization

has been created headed by the groups former leader and ex-President Nambaryn

Enkhbayar. Awarded legitimate party status on June 24th, 2011 by the Mongolian Supreme

Court, the two entities should not be confused.

The Democratic Party of Mongolia

Founded by those who pioneered the democratic revolution of 1990, the Mongolian

Democratic Party (DP) was a product of the merging between the Mongolian National

Progressive Party, and the Mongolian Social Democratic Party. These two parties were

the ruling coalition in the Ikh Khural aer democratic forces rst gained a parliamentary

majority in 1996, holding y out of the available 76 seats.

Ideologically describing themselves a conservative liberal grouping, the partys primary

goals are stated as overseeing the continuation of Mongolias transformation into an open

and democratic society and the facilitation of the countrys economic development. This

commitment was demonstrated by the groups inuential role in securing the Oyu Tolgoi

contract in 2008.


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Politics

The allegations suggested there were irregularities in the counting process, along with

the bribing of the electorate, and the concerns were soon echoed by countrys smaller

parties.

Against a background of extensive media coverage, protesters gathered the followingday in front of the Peoples Revolutionary Party headquarters (situated between the

Ulaanbaatar Hotel and Sukhbaatar Square). What was originally intended to be a

peaceful demonstration sadly escalated into violence as a minority broke into the MPRP

headquarters and looted small liquor store situated on the ground oor, torching the

premise in the process.

As the re spread across the entirety of the building, police clashed with the mass le

outside the structure. Batons, water cannons, tear gas, rubber bullets, and live ammunition

were deployed in a vicious police reaction, assuming the worst of the majority of protestors.

A series of myopic arrests followed, the bulk of those taken into custody being peaceful

protestors who played no part in the arson that the incident is famed for. Tragically vewere killed amongst the ensuing mayhem, four of whom were shot. At midnight President

Enkhbayar declared a national state of emergency which was to be in eect for 96 hours.

96 Armored Personnel Carriers were deployed to the streets, a curfew was put into eect,

and a media blackout declared.

Within a few days the situation stabilized and the harsh measures were revoked. Although

representing a short period of time however, the episode did much to damage the

countrys impressive democratic reputation, commentators and investors alike speculating

that the incident was to mark a change in direction for Mongolias political development.

This however was not the case, despite Ts. Elbegdorj stating on the 18th July that the

Democratic Party would boycott the opening season of the Ikh Khural. Aer a short

period of political posturing, all members of the Democratic Party, including Elbegdorj

himself were sworn into parliament, S. Bayar being elected prime minister of a coalition

government, supported by both the MPRP and the DP.

Not only was parliament able to form a majority, but the policy which resulted from its

operation is oen considered some of the most crucial in Mongolias history. The two

parties worked together in order to negotiate the terms of the Oyu Tolgoi Agreement in

the months that the crisis, eectively kick starting foreign direct investment in Mongolia

and the headline grabbing growth gures that the country has witnessed in recent years.

Furthermore, the crisis can hardly be seen to represent the manifestation of a fundamental

problem in the Mongolian democratic culture. Instead the general consensus on the

ground is that the issue concerned a handful of troublemakers, intoxicated on stolen

alcohol, who got out of control. The resulting brutality of police action was a function of

the uncertainty surrounding a large crowd watching a building burn in the night, and is an

isolated response in the history of Mongolia since its democratic transition.

No incidence of electoral fraud has ever been reported in Mongolia since the countrys

conception in 1990. Despite accusations being the commonplace reaction of defeated

politicians, no international monitoring agency has ever recorded, or even suspected any

irregularities.


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The 2012 Parliamentary Election

Mongolias most recent parliamentary elections, taking place on the 28th June 2012, were

internationally proclaimed as something of a litmus test of the countrys political stability

in the aermath of the 2008 debacle. Although marred by controversy not unusual in the

Mongolian politics, in many ways the event marked the return to business as usual for the

countrys democratic system.

For the rst time in its history, the country used an electronic voting system, to remove any

possibility of a repeat of the 2008 of the allegations that caused widespread civil unrest

occurring in the previous round. In addition to this slightly technical issue, a number of

constitutional changes were enacted to the electoral process designed to allow for the

better representation of minority interests, going some way to breaking the DP and MPRsduopoly of power.

The seat allocation mechanism was changed from rst past the post to proportional

representation, signicantly beneting the interests of the countrys smaller parties and

independent candidates, who managed to secure 16 out of the 76 positions on oer. A

quota system was also introduced - designed to ensure that no less than 20% of candidates

running were women. This was a progressive concession by the Mongolian regime that

is more of a democratic achievement for gender equality than has been managed by

many more developed countries around the world. The policy was clearly successful, with

the proportion of female candidates being nearly 32%.

Concerns were voiced before the polls even commenced due to the arrest of former



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president Nambaryn Enkhbayar upon the 12th April, who was imprisoned by the

Independent Authority Against Corruption over allegations of misconduct during his time

in oce. The case is widely held to be politically motivated; although the prevailing mood

in Ulaanbaatar is that Enkhbayar has questions to answer concerning the sources of his

income, the action taken neither addressed the most crucial issues, nor was carried outtaking into account the due process rights stipulated by Mongolian Law.

With the exception of this incident, the actual parliamentary process has been seen to

be a reasonable success. The Democratic Party gained 31 seats, representing the largest

parliamentary grouping, whilst the Mongolia Peoples Party polled closely behind, with 25

seats. The Justice Coalition (a combined eort from the MPRP and the MNDP) acquired

a sizable 11 seats (with support somewhat fueled by a public outcry over N. Enkhbayars

treatment), whereas the Civil Will Green Party and independent candidates obtained two

and three seats respectively.

The results were generally accepted by all major groupings; some complaints were voicedby the MPRP when the initial results were published criticizing the untested nature of the

electronic vote counting machines, however they soon deceased as it became obvious

their claims rested upon little substance.

Mongolias New Political Trajectory

On August 25th, Prime Minister Norovyn Altankhuyag chaired the rst cabinet meeting of

the countrys sixth government. Because the Democratic Party did not obtain the 39-seat

majority necessary for it to form its own cabinet, proceedings were delayed whilst coalition

negotiations played out.

With the government being formed out of a union of the Democratic Party, the Justice

Coalition, and Civil Will Party, the new political trajectory of Mongolia remains unclear.

Certain members of the Justice Coalition are well known for the resource nationalism,

although public statements made in the run up to the election may well have been an

example of little more than political posturing.

Recent stories have reported worldwide the intentions of some key actors in the government,

such as the Mining Minister Gankhuyag Davaajav, to seek to reopen negotiations of the

Oyu Tolgoi contract. This is true, although many reports misrepresent the intentions of even

the more extreme members of government. The Oyu Tolgoi contract holds that onceRio Tinto has recouped all the capital of its principle investment, it would be possible for

negotiations to reopen as to how the gains from extraction should be distributed between

the public and private sectors. It is this that is currently being advocated by the more

extreme members of Mongolias parliament, hoping to see the governments stake in prots

raised from 34% to 50%. Given the size of the projects investment however, it is expected

to be around een to twenty years before the principle investment is recouped, meaning

that these ideas have little to no political impact on policy in the short to medium term,

apart from the perceived gain of reputational capital.

Investors may seek reassurance in the fact that a clear majority of the coalitions members

are from the generally free market minded Democratic Party. It is unlikely any currently

minority, anti-FDI sentiments will be likely to gather momentum whilst the governments

power is distributed so heavily in favor of the pro free market grouping.


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Legal System


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Legal System

The Rights of Foreign Citizens in Mongolia

Foreign citizens for the most part enjoy the same legal rights as Mongolians, meaning those

interested in investing in real estate are provided with a wide range of legal protections.

Made explicit in Article VIII of The Law of Mongolia on the Legal Status of Foreign Citizens,

the following conditions can be assumed to apply in general throughout the rest of this

report unless otherwise stated:

All persons legally residing in Mongolia are to be considered equal before the law

and its courts.

Foreign citizens whilst in Mongolia are to enjoy the same rights and freedoms as are

conferred on to Mongolian citizens by the law.

There is one notable exception regarding the rights citizens are allowed to enjoy over land

plots, which shall be made explicit and examined in detail in the following section.

The rights of international investors over immovable property assets are however identical

to those enjoyed by Mongolian citizens.

Land Ownership Rights in Mongolia

The 2002 Law of Mongolia on Land creates three classes of land rights:

Supreme Court Justices of Mongolia


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Land ownership, or to own land, meaning to be in legitimate control of land with the

right to dispose of this land;

Land possession, or to possess land, meaning to be in legitimate control of land in

accordance with its purpose of use;

Usage of Land, or to use land which means to undertake a legitimate and concreteactivity to make use of some of the lands characteristics in accordance with contracts

made with the owners and possessors of land. However, Land Use licenses of the

foreign invested companies shall be granted by Citizens Representatives Khural.

It is clearly stated in the 2002 Law of Mongolia on Land that land ownership is only open

to Mongolian citizens, who are entitled to claim small plots between 0.35 hectares and

0.7 hectares in size. Mongolian governmental companies, non-governmental Mongolian

companies, and registered foreign invested companies do not qualify for land ownership

rights under Mongolian law.

Instead, land possession rights are oered to Mongolian governmental companies

and non-Mongolian governmental companies, but not to registered foreign invested

companies operating within Mongolia. Such rights oer signicant protections upon the

claims of the possessor over their land, and as such are seen as a satisfactory alternative.

Land Possession Rights in Mongolia

Land possession rights are established through procurement of a license for land

possession, a document bestowing the holder with the authority to possess land in

accordance with Mongolian law.

The maximum size of land associated with a license awarded to companies for the purposeof production or service provision is at the discretion of the Mongolian Government entity.

Governors of the soum or district are tasked with the identication of land to be

auctioned o for possession. Plots selected are subsequently published in the annual land

management plans of the respective authorities.

Acquiring the land possession license

The 2002 Law of Mongolia on Land outlines two basic requirements that must be met for a

possession license request to be considered:

Applicants for a land possession license must be either Mongolian citizens, companies

and organizations;

The location of the land requested for possession shall have been marked in the

annual land management plan of the capital city or soum as available.

Applications are initiated for companies and organizations by submitting a request to the

governors of the appropriate soums and districts. In addition to the application itself, it is

necessary to submit the following information:

The name of the company or organization, jurisdiction to which the company belongs,

its address and location, and a copy of the state registration certicate;


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The code of the territorial unit(s) requested which shows the territorial and administrative

jurisdiction upon which the land where the company intends to undertake production

or services provision belongs, along with its size and location;

The desired purpose and duration of land possession;

Proof of creditworthiness.

A successful applicant will then be entered into a silent auction for the plot. The highest

bidder will receive a notication of their success, along with their payment obligations.

If payment is not received within a pre-determined time scale, the right to possession of

the plot of land in question is automatically passed down to the next highest bidder (be

it a citizen, a company or an organization). If upon the second attempt payment is not

received, the license is required to be put up for auction once again.

Any entity that has acquired the right to possess land for undertaking the production of

goods, or the provision of services must complete a general environmental assessment

within 90 working days of receiving the right. If the results are positive a contract on land

possession will be made, the license issued, and a record of ownership noted in the

Mongolian national registry.

The Rights and Duties of License Holders

Those who hold possession licenses are endowed with the following rights over their plot:

The right to use the land according to the purposes set forth in the contract;

The right to obtain a State Certicate on the land characteristics and quality from the

owner; The right to be awarded damages, compensated by the guilty person in accordance

with established procedures;

The right to transfer the license, or provide it as collateral subject to the approval of

the person who made the decision on giving the possession license initially;

The right to have the license extended upon expiration, provided that the license

holder has duly met their obligations concerning land legislation and their contract;

In return, the holder of a land possession license is required to fulll the following obligations:

To meet the terms and conditions set forth in the land possession contract: To use land eciently and rationally in order to protect their given space, to comply

with legislation on protection of nature and environment, and to meet common

requirements related to land use, as issued by the relevant government authorities;

To pay land fees in a timely manner;

To have state certication of land characteristics and quality made according to

established procedures;

Not to infringe upon the rights and legitimate interests of others, related to the

possession of their land;

To have registered at the National Registry if the license is to be used as collateral.

Readers of this guide should note that the option of land possession license transferal, and

the ability to use the documents as collateral are legally only open to Mongolian citizens,


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companies and

organizations.

Extending the

Land Possession

License

The duration of a

land possession

license is

a n y w h e r e

between een

and sixty years in

its original state.

As stipulated

above, the

land possession

license holder

enjoys the

explicit right to

extend the term

of the license,

provided they

have fullled

their obligations

on the plot.

Each renewalwill prolong the

license for no

more than forty

years at a time.

An extension

request must be

submitted to the

governor of the

relevant soum ordistrict a minimum of thirty days prior to expiry. The application must be supported by the

following documents:

The initial land possession license;

Documents proving that land fees have been paid on a timely basis;

The status of implementation of the recommendations made upon the environmental

impact assessment test.

Once received the appropriate ocial will review the documents, and will reach a verdict

within 15 days. Provided the duties of land possession have been consistently met, little in

the way of diculty should be expected.



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Legal System

Expiration of a Land Possession License

A land possession license may expire under the following circumstances:

If the land possession license expires naturally, and no request is made for it to beextended;

If the license holder (a natural person) has died, is announced dead or missing, and

the license holder has no legitimate successors; or if a license holder (a legal person)

is dissolved or liquidated;

If a license holder makes a request to terminate his/her possession license;

If compensation is paid in full to the license holder, in the event of the plot being taken

into state control to fulll exceptional government needs.

The relevant authority may only remove land prior to the scheduled expiration date for

special state purposes once an agreement has been reached with the owner of the

license. The request for removal must then be submitted through the State Cabinet, who

must consent to the proposal. If this is achieved, the governors of the relevant soum or

district will then make a contract with the citizen, company or organization in question

and remove the land from their possession with or without asset replacement and with

compensation.

Reimbursement calculation depends upon a range of variables, including the prior

arrangement with the land possessor, the value of immovable constructions and other

properties on the plot, and the costs to vacate the land estimated at current prices. If the

license holder remains unsatised with the package oered, then the appropriate legal

channels are in place for the decision to be challenged in the Mongolian courts.

Termination of a Land Possession License



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Legal System

Governors of soums and districts are allowed the ability to terminate land possession

licenses in the following circumstances:

If the license holder has consistently or seriously violated obligations set forth in theland legislation, or it the provisions and the conditions of the land possession contract;

If it is established that the land has been used to the detriment of human health,

nature, or national security;

If a license received from others is not registered, and a new contract is not made;

If recommendations made from the general environmental assessment are not

implemented;

If the license holder has not paid land fees according to the law, on time and in full.

In the event of a termination notication being issued for whatever reason, license holders

have a ten-day window to appeal to the court if they consider a contract termination

illegitimate. With proper management techniques in place however, it should be easily

manageable not to fall foul of the Mongolian law.

Immovable Property Rights in Mongolia

Mongolia has in place an eective mechanism of property rights to protect the owners of

immovable properties. These protections are so eective that the countrys government

has recently found implementation of town and city planning initiatives (such as the JICA

master plan) and the development of Ulaanbaatars many ger districts impractical if not

completely impossible. Both regional and central governments have found themselves

legally ineective in their ability to develop infrastructure and new constructions on existing

low quality real estate in many regions, as the owners simply do not want to move.

The foundation of the states guarantee on immovable property rights stems from Article

Five of the Mongolian Constitution, which stipulates:

Mongolia shall have an economy based on dierent forms of property consistent with

universal trends of world economic development and the countrys own specics;

The State recognizes all forms of public and private property and shall protect therights of the owner by law.

In order to protect private property under the Mongolian constitution and law, it is necessary

to make sure the structure is properly registered through the appropriate channels. If not

done successfully, ownership is not acknowledged (and in turn protected) by Mongolias

legal institutions.

Registration of Real Estate through the Immovable Property Oce

The Law of Mongolia on the Registration of Immovable Property holds that:


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Legal System

Subject to the provisions of the law, the right of a person or legal person to own

immovable property arises upon registration at the Immovable Property Oce of

Mongolia.

The process is initiated when an individual, a legal person, and/or their legal representativesprovide the Oce for the Registration of Immovable Property (hereinaer referred to as

the Registry Oce) with the following items:

A document certifying the applicants right to ownership of the immovable property;

A document by a competent authority setting out the dimensions and valuation of

the property;

Applications from non-permanent residents of Mongolia should (technically) be made

through an authorized permanent resident of the country, in the owners name. However

in reality this condition is rarely enforced, as foreigners who are familiar with the registration

mechanism generally face little problem in completing the process.

Upon receiving an application, the Registry Oce is required to decide whether a

property can be registered or not within thirty days. If the oce considers all application

requirements to be met, the property is registered in the Registry Oces records, and

endorsed by the State Registrar and the Assistant Registrar.

The Floating Freehold

Whereas in many Western countries the rights of ownership to the land beneath a given

piece of real estate naturally accompany the ownership of the building, the prevailing

system across the post soviet space is that of the oating freehold. These ownership

structures are found to operate across the majority of the Mongolian market, being

eectively the only option to foreign investment interested in purchasing real estate. Such

a system allows the owner of a building to control the land upon which their property is

built, without actually owning the land themselves (instead simply being endowed with the

right to use the land). The actual owner of the land may be the Mongolian government,

or a private individual or business entity.

Despite the investor owning less, their inuence remains just as considerable. Development

or the sale of a piece of land that houses a real estate asset is impossible unless the

developer owns every Immovable Property Certicate connected with the plot. Thus with

oating freeholds, investors may technically not own the land that their property rests

upon, but are able to stop the alterations to the land, in a way consistent with the concept

of land ownership in the western world.

Expropriation

The Mongolian government has rights of expropriation over private property and

immovable assets under specic circumstances. Such powers are common across markets


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Legal System

globally, being known as eminent domain in the United States, compulsory purchase inthe United Kingdom, and expropriation in South Africa and Canada.

The powers are outlined in the Law on Allocation of Land to Mongolian Citizens for

Ownership, and may only be utilized in certain instances:

During occurrence of environmental or public disasters such as damages to lives

and health of many people, loss of animals and livestock, earthquakes, strong winds,

drought, dzud (exceptionally cold winters), ood, re, outbreak of lethal infectious

diseases that may cause signicant damage to property and environment or

emergency situations such as big scale industrial accidents, outbreaks of radioactiveor poisonous chemical substances. Land (and property) owned by Citizens may be

expropriated according to procedures provided by law and based on decisions of

an authorized state entity for purposes of taking measures in order to protect and

rescue the populations livestock, animals and property and to eliminate the negative

consequences. Damages caused to citizens owning land due to such expropriation

shall be compensated to the full extent.

If it becomes impossible to return the expropriated land, the owner shall be

compensated for the value of the land and the damages according to the market

rate at that time or the damages shall be compensated by allocating other land not

worse than the expropriated land by its status and quality.

If there is a dispute regarding the determination of the rate of expropriated land and

damage caused to the landowner, it shall be resolved in court.

There are next to no examples of the doctrine being applied in and around Ulaanbaatar,

even though it is necessary for the infrastructural development of the citys suburbs. Several

gers are normally enough to cease the development of huge construction projects, as

the government is not prepared to use its theoretical conscatory powers to enable the

commencement of sizable ventures.


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International Comparison

When looked at in the context of the region, Mongolia is more similar to the real estate

legal structures of its post Soviet neighbors, than those prevalent across Asia. The extent to

which the actual ownership of real estate assets is allowed in Mongolia, resembles muchmore closely the investor friendly policies common in Kazakhstan than China. Mongolia

also lacks much of the administrative baggage that is problematic for those interested in

entering the Chinese market.

Despite having a far more developed property market, China is well known for its

investment restrictions and market uncertainty, which severely limits the maneuverability

of the foreign investor in a way not problematic in Ulaanbaatar. The Chinese state requires

that neither land, nor immovable property can be owned, instead stipulating that all real

estate assets must be leased for terms, usually between y and seventy years in length.

Eorts to control Chinas property bubble, which have caused house prices to triple over

the last ve years in Beijing, have seen the real estate legislative environment tighten in

the country. Legislation passed in July 2006 holds that any residential property not for the

individual owners personal use is classiable as commercial real estate (even if it is not to

be rented out to third parties). Furthermore any commercial property investment, whether

funded by an individual investor or a business entity, may only be invested in through a

mechanism involving a Chinese commercial vehicle (such as a Foreign Invested Enterprise,

a Wholly Foreign Owned Entity, or a Contractual Joint Venture).

Those looking to enter the property market in China therefore not only lack access to the

permanent structural ownership available to them in Mongolia, but must also face a far

more obstructive bureaucratic apparatus.

Many of the transition economies of Central Asia have embarked upon legal trajectories

far more favorable than China. Kazakhstan (widely held as the regional leader in open

real estate legislation) stipulates in it Law on Investments that the rights of foreign investors

are virtually indistinguishable from those of Kazakh citizens. As such, international entities

are permitted to own both immovable property and land (with the exception of large

agricultural plots) as long as the countrys Real Estate Center correctly registers their assets.

Kazakh competitiveness is unsurprising given how the countrys growth has played out. The

property markets of Astana and Almaty have already developed in a way that those of

Ulaanbaatar can expect to do in the coming years. Technically Kazakhstan is the more

liberal of the two countries, however the tangible rights endowed to foreign investors in all

but the longest of time frames (with reference to how oen contracts must be renewed)

are very similar. The current institutional framework suggests many shared attributes

between the two countries. Given the success the Kazakh property market has enjoyed

since the turn of the Millennium, Mongolias legal system looks set to provide the structure

needed for similar development well into the medium term and beyond.


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Tax


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The Mongolian Tax Regime

Mongolias economic success over the past ve years has been based upon the countrys

natural resource wealth, eective market liberalization, and signicant ows of Foreign

Direct Investment. To encourage this FDI, the Mongolian government has implementedone of the most generous foreign investor tax regimes globally. Although much of the

countrys eort has been devoted to streamlining policy facing the mining industry, many

of the attractive rates have spilled over to benet investors in the economy as a whole,

including those with exposure to the real estate industry.

P e r s o n a l

Income tax

rates have

recently been

reduced to

a rate of 10%

for foreigners,

identical to

that faced

by Mongolian

c i t i z e n s .

C o r p o r a t i o n

tax rates vary

between 10%

and 25%, or are

xed at 20%,d e p e n d i n g

upon the way in

which a given

company is

structured and

how its chooses

to utilize its

prots. Property

Holding Tax

is currentlyextremely low,

set at 0.6% of a properties estimated value, although this is set to marginally increase to 1%

as of January 1st 2013. Some real estate investments may be required to pay VAT, which is

charged at a at rate of 10%

Personal Income TaxThere are eectively two types of individual entities in Mongolia as laid out by The Mongolian

Law on Personal Income Tax: permanent resident taxpayers and non-resident taxpayers.

A permanent resident taxpayer is dened by The Mongolia Law on Personal Income Tax

as:



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Individuals with residence in Mongolia

Or

An individual who resides in Mongolia for 183 days or more a year

Conversely, the same document identies a non-resident taxpayer as:

An individual who has no residence in Mongolia and has not resided in Mongolia for

183 or more days in a tax year.

The legislation goes on to state that any individual classied as a permanent resident

taxpayer must pay tax to the Mongolian authorities on their worldwide income. Those

who manage to qualify as non-resident taxpayers (by fullling neither of the conditions

stipulated above) are required to only pay the Mongolian authorities a proportion of their

income earned within Mongolia itself.

The Mongolia Law on Personal Income Tax sets the personal income tax rate at a at

rate of 10% (reduced for foreigners from a rate of 20% as part of the countrys 2007 tax

rationalization).

This at rate of 10% is applicable to the following income streams that may aect the real

estate investor:

Salaries, wages, and bonuses;

Total taxable income from activities; Total taxable income from property;

Total taxable income from sale of property;

Total taxable income is dened in The Mongolia Law on Personal Income Tax as aggregate

annual income minus all allowable expenses. This is applied to real estate incomes through

the following framework:

The total taxable income from property is determined by deducting the cost of

leasing from the total income from leasing;

The total taxable income from the sale of property is classied as the total proceedsfrom the assets sale.

Any individual interested in purchasing real estate should note one exception to the total

10% at tax rate:

The total taxable income from the sale of property is to be charged at a rate of 2%

Corporate Income Tax

The Economic Entity Income Tax Law of Mongolia governs the taxation of prots acquired

by the following dierent forms of taxable entity:


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An economic entity formed under Mongolian law, and their subsidiaries;

A foreign economic entity headquartered in Mongolia;

A foreign economic entity earning income in Mongolia, and its representative oces.

The rst two categories are charged a variable rate of corporate income tax subject atthe following rates:

All annual income between 0 and 3 billion Mongolian Tugrugs is to be charged at a

rate of 10%;

All annual income which exceeds 3 billion Mongolia Tugrug is to be charged at a rate

of 25%

The nal category (foreign economic entities earning income in Mongolia, and its

representative oces) however face the following completely separate rate of tax, their

activity being classied as a repatriation of funds:

All annual income transferred out of Mongolia by foreign economic entities is to be

taxed at a at rate of 20%

The above condition does not apply to FIFTA registered companies and joint ventures who

reinvest their prots within the Mongolian economy.

Property Tax

Entities facing property ownership taxes upon immovable assets are:

Any company that owns property in Mongolia;

Any NGO that owns property in Mongolia;

Any citizen that owns property in Mongolia;

Any non-citizen that owns property in Mongolia

However, the following types of immovable property are exempt from property tax:

Immovable property of legal entities which are subsidized by central or local budget.

Residential/dwelling property

Building and facilities for public use Management and production units in production and technological parks

Buildings, facilities and other immovable property within technological parks

Those required to pay property tax on the immovable assets are to be taxed in accordance

with the following conditions:

Property tax is currently charged at a at rate of 0.6% of the immovable assets value;

The value of the property necessary to determine the total property tax liability is determined

by data from the one of the following sources, listed in order of legal preference:

The value of the property as it is listed with the immovable property state registry;


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If no such information is available, then the value is to be determined based on the

properties assessed worth for insurance purposes;

If neither of the above are available, then the value of the property is to be based

upon the estimated book value of accounting record.

Withholding Tax

Mongolian entities are required to withhold tax on dividends, royalties to economic entities

resident in Mongolia, and royalties to individuals at a rate of 10%.

However, dividends to individuals are exempt from taxation until 2013.

Withholding tax is also applied to gains on the sale of immovable property at a rate of 2%.

Non-residents with no presence in Mongolia are subject to 20% withholding tax on

Mongolian source income, includeing the following:

Dividends

Certain types of loan interest

Royalties

Rental income

Management and administrative expenses

Income goods, work or services provided in Mongolia

Value Added Tax

V.A.T. is charged on an ad valorum basis in Mongolia, at a rate of 10%



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Taxation Bureaucracy

The Mongolian Law on Personal Income Tax stipulates that:

Income tax reports are to be compiled by either the individual or their tax agent;

Income tax reports are required to have both hard and electronic copies submitted;

Both the electronic and the paper copy of the income tax report must be submitted

in Mongolian, or alongside certied Mongolian translations

The Economic Entity Income Tax Law of Mongolia stipulates that:

Annual corporate income tax statements are due by the 10th February of each year;

Quarterly corporate income tax statements are due before the 21st of the month

immediately following the end of the previous tax quarter;

Corporate income tax payment schedules are to be issued by the authorities by the25th of month;

When total corporate income tax paid exceeds a companies total corporate tax

liability, the company in question can credit the excess against future payments.

The Immovable Property Tax Law of Mongolia stipulates that:

Taxpayers must submit immovable property tax returns to the Mongolian tax oce

before the 10th February each year.

Legal persons and corporate entities are liable to pay property tax before the 15th of

the last month of eac