Owning Real Estate in Ulaanbaatar
I’ve been to two different countries in the last year that impressed me with their vibrancy and the financial opportunities they offered. One was Albania, the other Mongolia.
To recognize opportunity you need to see change. I’ve been to Mongolia three times now; the last time was about four years ago. When I landed a month ago, I thought I had landed in an entirely different country than the one I landed in years ago. Mongolia is one of the world’s fastest growing economies. With almost a dozen major construction projects including coal projects, iron ore mines, oil refineries, highways and railroads, the country is going to continue with massive growth for many years.
The capital, Ulaanbaatar is home to 45% of the Mongolian population. The city lies in a valley with limited horizontal space for growth. The city can only grow vertically.
A little history lesson first for readers who are as ignorant as I was when I first visited Mongolia. In 1921, the ruling leader invited the Russians in to the country and Mongolia became a satellite state of the USSR. With the collapse of the Soviet Union starting in 1989, the military wasn’t being paid so they simply loaded up their trucks with their equipment and belongings and drove back to Russia. Without subsidies, government officials weren’t being paid so they too, simply went back to Russia. There wasn’t any sort of coup, simply an evacuation. There is literally no Russian presence in the country today.
So one day there was a Communist government running things and the next day, Mongolia was on it’s own. The country has thrashed back and forth for years trying to figure out just what kind of government they wanted. Literally, as with Albania, the economy flourished because there was so little government. Less government meant far more freedom. But that is always true everywhere.
Mongolia is undergoing a transition today as the leadership is being transferred slowly from those who grew up under the Communist regime to the young people who went abroad for education after the collapse in 1991 and returned with new aspirations and ideas. The country is rich in natural resources with giant deposits of coal, gold, copper, moly, uranium and iron.
An American fund manager out of southern Florida did something I haven’t seen happen very often. By and large, Americans are insular and pretty much ignore what is going on in the rest of the world. They scare me in their massive ignorance of the world. What happens in basketball or what actress is boffing whom is important but not local events outside of the US.
But in Mongolia I ran into Harris Kupperman, chairman of Mongolia Growth Group (YAK-V). With a partner, he went to Mongolia in 2010 to see what opportunities there were there. The two founded Mongolia Growth Group and became listed as a Canadian shell in early 2011. The company raised over $51 million between 2011 and 2012 and poured it into high quality real estate in Ulaanbaatar or UB for short.
I travel a lot, doing 150,000 miles a year visiting countries all over the map. I don’t see many American entrepreneurs outside the US. On occasions I see someone who works in the US and is traveling for business but I don’t see Americans founding companies outside the US.
MGG is the exception. Harris and his partner saw opportunity and took advantage of it. They have raised a fair amount of money and deployed it into an interesting market. Their plan is simple. They plan on purchasing quality assets in the form of land or developed real estate in UB for good value. Then redevelop and refurbish those suitable. Rent quality investments to businesses or families and when possible resell for a higher profit and reinvest the proceeds into more properties.
If you pick the right market, it’s a recipe for success. Mongolia is the most booming economy in the world. Interestingly enough, because of the barriers to entry and the limited banking experience, they have become the go-to guys in UB even if the money they are dealing with is really chump change.
I went on the tour with a number of real estate investors who had already put money into the company. Naturally the company would love to raise more money; their only limit to profit is access to capital. The investors on the tour were very knowledgeable about real estate and fascinated by Mongolia. MGG would like to leverage OPM on their projects to increase the returns to MGG. Eventually they would like to be earning stable fee-based revenue and become a property developer with Sovereign Funds or high net worth investors.
Mongolia has gotten a lot of bad press lately regarding their taxation of the Oyu Tolgoi copper mine. As is common with a lot of emerging countries, corruption and bribery have been a problem. A government with a strict view towards ownership of natural resources entered power and immediately came to blows with Rio Tinto, the major owner of the giant Oyu Tolgoi copper mine. The government wanted $130 million they claimed was owed in back taxes. Rio claimed they owed nothing. The issue was settled just this last week with Rio agreeing to pay $30 million more to the government.
Other mining companies were unhappy with the conflict and foreign investment in the mining sector plummeted. Settlement with Rio means the mining investment climate will improve and money will start flowing back into the sector.
It’s just my point of view but from what I saw, MGG is really well dialed into the powers that be in Mongolia. I was very impressed with the caliber of local talent they have brought on board. Their success will simply ride on their ability to maneuver financially. They have built a franchise in three short years and are perfectly positioned to much higher financial success than their numbers show.
The company is sitting on two of the most key properties on Peace Avenue. They are remodeling one of the projects in order to create cash flow but mere possession of either project will eventually bring in more profit than their existing market cap. The company is a low risk, high potential bet on the future of Mongolia.
With all the geopolitical issues facing the world today and the US doing everything possible to goad Russia into a war, the sanctions are merely forcing Russia into relationships they had ignored before. Mongolia used to be a big exporter of food under the Communists and may well be again. Both Russia and China have made it clear they intend to be good neighbors with Mongolia.
The management team is as good as any I have seen this year. Their ability to find and recruit a good local team speaks well of their understanding of local customs. They have a brilliant team and that will pay off down the road.
MGG is not an advertiser and I own no shares. Please be responsible for your own investment decisions.
Mongolia Growth Group