By M.A.D. Investment Solutions
When investing in real estate in a promising region like Mongolia, it's best to look at smaller, unexploited niche markets. The country still abounds in those, and among them is the self-storage sector.
Nearly every country in the world has some form of institutionalized self-storage solution. Self-storage is all over the United Kingdom and United States and growing rapidly in China. Mongolia is a country where self-storage makes great sense, but surprisingly, no one has yet implemented the concept there.
A Huge Demand for Space
Mongolia is not only a country of nomads, its economy is entirely seasonal, with considerable activity in summer and a very calm winter. The capital, Ulaanbaatar, is a city undergoing massive growth. More than half of its population lives in temporary housing and is looking to relocate to permanent structures. In addition, the country is going through the world’s biggest mining boom and the development of a mining-supply chain as well as infrastructure developments. All this leads to a considerable pent-up demand for self-storage in the capital.
As real estate agents, one of the most regular requests we receive is for a garage space or cheap, empty apartments where tour companies, supply-chain operators and small, seasonal businesses can store equipment, vehicles, tools and stock/inventory for a few months with constant access. Not only that, but as Mongolia is not a manufacturing country, it relies on imports to grow its economy. A vast majority of businesses need to import and store their inventory, be it food, furniture, construction equipment, supplies, spare parts, etc. In fact, we rent two entire houses in Gandan to store our own supplies and equipment.
Potential Building Costs
Let's assume we're going to buy a land parcel of 10,000 square meters. The cost of land connected to infrastructure near the airport is still reasonable at an average of $7 per square meter, and we'll factor in another $10 per square meter for infrastructure improvements. The cost to build a self-storage-type warehouse is about $350 per square meter. The total project costs are $2.97 million. If we assume the built-up area to be 80 percent (8,000 square meters), the construction costs are $362.50 per square meter.
- Land purchase: $7 x 10,000 square meters = $70,000
- Infrastructure improvement: $10 x 10,000 square meters = $100,000
- Built-up area: .80 x 10,000 square meters = 8,000 square meters
- Warehouse construction: 8,000 square meters x $350 = $2,800,000
- Total project cost: $70,000 land purchase + $100,000 infrastructure improvement + $2,800,000 warehouse construction = $2,970,000
- Total cost of construction: $100,000 infrastructure improvement + $2,800,000 warehouse construction = $2,900,000
- Cost of construction per square meter = $2,900,000 total construction cost / 8,000 square meters = $362.50
Now let's assume the leasable area to be 85 percent of the built-up area, or 6,800 square meters. If we charge self-storage rental fees of $5 per square meter per month, there is potential to generate $34,000 per month, or $408,000 per year. This amounts to a gross yield of 14 percent and an estimated net yield at 12 percent. Better economies of scale and use of space can be achieved on a larger plot of land.
In addition, we would expect a capital growth of approximately 15 percent per year for the next five years. Additional advantages of such a scheme are the relative speed of construction and setup (about six to eight months), considerable industry demand, and the low cost of facility maintenance and operation.
This might not be the most lucrative investment, but we believe it to be a unique product in a fast-growing market with considerable potential for duplication and economies of scale.
M.A.D Investment Solutions is a real estate firm specializing in foreign investments in the properties sector of Ulaanbaatar, Mongolia. For more information, visit www.mad-mongolia.com.
