Barbarians reach Mongolia

As it seeks outsized returns, capital keeps finding its way to new, more interesting and more obscure markets. By Aaron Lovell.

While groups like Apollo and New York-based property firm Tishman Speyer have focused time and resources on India, other funds are hedging their bets on China: buying up office buildings in Shanghai, investing in Chinese property companies or forming JVs with established mainland developers. But as the herds of investors continue to scour the globe for the next place to invest, it sometimes pays to look a bit further off the beaten path.

Russia, for example, is a market that is drawing interest from a number of firms. In 2005 and 2006, a reported 3 million square feet of housing has been built, as luxury communities spring up around Moscow for newly moneyed Russians and wealthy ex-pats. As one of the few cities in Russia with a growing population -not to mention a growing middle class – a bet on the Russian capital could turn out to be a smart one.

A recent Newsweek feature set forth the planet’s ten most dynamic cities. Of course, some of the usual suspects made the list – Moscow, London, Las Vegas – but so did a lot of cities most people have never heard of. Ghaziabad? It’s a suburb of Delhi that is home to a red-hot real estate market thanks to the city’s growing economic fortunes. Others on the list include towns like Goyang, a suburb outside of Seoul, and Fukuoka, a major Japanese city on the island of Kyushu and a bustling manufacturing center for blue-chip firms like Sony, Toshiba and Canon.

Some adventurous investors are already moving further away from the pack. The suburbs of Delhi or the Southern tip of Japan may be exotic to someone in an office in London, but what if you traveled east out of the City, past the expanding economies and bustling property markets of Eastern Europe, over the growing promise of Moscow, beyond the Volga River, the great plains and steppes of Siberia and the Sayan Mountains?

You would be in Mongolia, somewhere between the hot markets of Russia and China. But even here savvy investors are finding big returns in real estate. 

With just under a million inhabitants, the capital city Ulaanbaatar might not strike one as the sort of place that lends itself to real estate investing. But Baron Christopher de Gruben would probably beg to differ. His Asia Pacific Investment Partners, which focuses on the emerging markets of Asia, has found that Mongolia offers up some attractive opportunities.

Gruben says that, with the recent discovery of gold and large amounts of minerals, Mongolia’s economy has grown. Expatriates working in the mining business are coming to the country in increasing numbers and the improving economy has created demand for better housing stock from locals. But, at this point, Gruben says, more than half of the population is still living in traditional nomadic dwellings known as “gers.”

“This situation is analogous to Hong Kong in the 1950s and 1960s, when a large percentage of residents actually lived on junk boats without any permanent housing,” he says. “As the economy in Hong Kong grew, interest rates came down and mortgage products entered the market place, the demand for housing became quite substantial. Subsequently, there was a movement from the junks into apartments.”

While Gruben says a similar shift is taking place in Ulaanbaatar – and therefore stimulating high demand – growth has been stymied by a construction industry that cannot keep up. He says, while there was demand for around 8,000 units in 2005, only 2,800 were able to be built.

In its first vehicle, Asia Pacific invested exclusively on Mongolia, but Gruben is currently looking to raise a second vehicle with a target of $30 million that will be more diverse in sector and geography. In addition to Mongolia, the vehicle will focus on retail, residential and office space in Siberia as well as the Inner Mongolia region of China.

It isn’t just Central Asia. Small, focused vehicles are taking advantage of everything from resort opportunities on the Dalmatian Coast in Croatia to residential developments in India’s secondary cities like Cochin, Pune and Chandigarth.

As more money is invested in opportunity funds, many market participants are going to keep moving into emerging – and sometimes untested – markets. While Europe was once the new and exotic flavor de jour, the continent has since become commonplace and the teeming economies of India and China are the current bastions of excitement. And as those emerging markets become more crowded, some investors will move on in search of more outsized returns.

Suddenly, Ulaanbaatar doesn’t seem so far away.