Lee Cashell, CEO Asia Pacific Investment Partners: Mongolia is a rare real estate market that offers both high rental yields and capital appreciation. The key is finding the right local partner to manage your property for you.
If you are a property investor, the success story of Lee Cashell and his real estate business in Mongolia is bound to pique your interest. Still unknown to many people, Mongolia is one of the fastest growing economies in the world with a staggering GDP growth of 17.5% in 2011. Despite a recent decline in the economy due in part to a drop in commodities prices, this mineral-rich country is still achieving an enviable 7% growth rate and has a thriving property market in which Cashell is accruing wealth for his clients who invested in Asia Pacific Investment Partners’ developments.
Formerly a private equity fund manager in Hong Kong for JAFCO Investment Asia, Cashell has held various positions within the investment banking industry in Asia as an economist, financial analyst and corporate finance manager. He founded Asia Pacific Investment Partners (APIP), a Mongolia-focused operating group in 2002. While APIP’s main business lies with property development, the company owns a wide range of subsidiaries including a real estate agency, a cement plant, a construction company, and a non-banking financial institution.
Mongolia is still an exotic investment destination to many. How did you first gain interest in the country?
I went to Mongolia 14 years ago, the primary reason being that it was the only country I had not yet visited after a long finance career in Asia. What I quickly realized was that with its rich mineral reserves, Mongolia was likely to become another Perth or San Francisco with a mining boom legacy that spawned numerous millionaires from real estate. With USD $30,000 as my seed money, I started buying, refurbishing, and renting out apartments which ended up yielding over 60% per annum. I brought this story to the Mongolian tax office and when they said there was no capital gains tax, I decided to stay and started the country’s first real estate agency. The rest is history. APIP has been profitable every year for the past 14 years of operation, our real estate agency is the largest in Mongolia, and we successfully acquired a cement plant, a construction company, and a non-banking financial institution to achieve a vertically integrated business model. We are currently the largest foreign company operating outside of the mining sector in Mongolia.
What is the real estate market like in Mongolia?
Mongolia’s property market boasts one of the highest cash rental yields in Asia as well as strong capital appreciation prospects. From 2005 to 2013, the average annual rental yield from residential space was around 11% across all of Ulaanbaatar; Since 2010, rental yields from retail space have averaged a staggering 20% per year across the city. Rapid growth in GDP per capita, disposable income, and real wages are driving demand for high quality residential and retail space, which in turn is increasing property values. Properties developed by APIP have achieved rental yields between 12% and 45% per annum. Capital appreciation has also been substantial, varying from 100% to as much as 400% over a 5 to 10 year period. This high cash rental income coupled with strong capital growth performance make unlevered IRRs of 25% readily achievable in the market.
Have you had any legal difficulties as a foreign businessman?
The legal system in Mongolia is surprisingly clear cut and favorable for foreign investors. Foreigners enjoy the same rights as local Mongolians in regards to property ownership. When you purchase real estate, you are presented with an immoveable property certificate that specifies you as the exclusive and rightful owner of the property. APIP once had an incident where the city’s mayor tried to take our land unjustly. We took him to court, and won the case within six months. A foreign company taking a native Mongolian mayor to the city’s court and winning the case means a lot. We have never had any serious legal issues during our 14 years of operation in the country.
Are you seeing any decline in property values considering the current situation of the economy?
It is true that the past year has not been easy for Mongolia. GDP growth is estimated to have dropped to around 7% as opposed to 17.5% in 2011, while FDI has also declined approximately 80% from last year. We get a lot of questions from potential clients regarding these troubling signs in the economy: wouldn’t property values fall? What we have seen is internal demand pick up despite these economic headwinds, last year total exports and consumption increased by 35% and 10% respectively. The 2014 balance of trade was recorded as a USD $538m surplus, exceeding many people’s expectations.
The fact of the matter is that Mongolia is already on track to harvest its mining wealth and the people’s demand for higher quality living is increasing like nowhere else in Asia. We are close to completing the Olympic Residence, our most expensive residential apartment yet, and already sold about 60% to local Mongolians and 20% to foreign investors. This is a considerable increase from our last development in 2010, the Regency Residence, of which only 30% of the buyers were Mongolians despite the economy then growing at a much higher rate than it is now.
We have not seen any decline in demand for luxury properties and foresee more capital appreciation as available land is becoming scarce in the city center. With the government replacing the prime minister and forming a new coalition to answer the people’s call for a revamp of the economy and progress in negotiations with Rio Tinto at Oyu Tolgoi, one of the largest copper mines in the world with an estimated value of USD $350bn, I have optimistic views on a quick recovery for the economy and more upward momentum for real estate prices.
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