» Made In Mongolia

Rapid economic expansion in Mongolia over the past half-decade has played out across many of the country’s constitutive industries, and construction is no exception. According to the National Statistical Office (NSO), works carried out in 2014 totalled MNT2.2trn ($1.3bn), up 16.3% on 2013. Much of this growth took place in the residential segment, which has been the focus of an increasing number of large-scale, state-led development projects in recent years.

One of the latest initiatives, a low-cost mortgage scheme, has had a major impact on the housing market, as have a clutch of others aimed at redeveloping Ulaanbaatar’s sprawling informal residential neighbourhoods. More than half of residents in the capital currently live in makeshift areas, known as ger districts after the traditional circular felt tents of their inhabitants. Given the attention the sector is drawing from the public and private sectors, most local construction firms are looking forward to rising revenues in the years ahead.

A less elemental challenge is the country’s small and low-skill pool of labourers. In 2013 the construction sector employed around 6.6% of Mongolia’s workforce, up one percentage point from 2012. In general, it is hard for local contractors to find well-trained workers, so to meet their staffing needs in the face of rising demand for new construction, many have had to hike wages regularly – a practice which may not be sustainable over the long term.

Nevertheless, the industry’s rapid growth over the past five years is widely seen as a success story, and most local players expect to see continued growth in the future. Despite an increasingly challenging domestic economic situation and declining levels of foreign direct investment (FDI), demand for new space of all kinds has continued to rise.

The government has played a major role here. As of the end of 2014 the state was in the early stages of a series of residential development projects, with the goal of adding 75,000 new homes in the ger districts in the short term. Similarly, the government has been proactive in expanding Mongolia’s transport infrastructure in recent years, which has been a boon for the construction industry. In 2013 investment in road building and repair jumped by 745% year-on-year from a low base, according to M.A.D. Investment Solutions, a local property research firm. With such levels of activity, plus Mongolia’s steadily urbanising population, the construction industry is looking forward to years of continued expansion.

At the same time, many challenges remain, starting with Mongolia’s harsh climate. Temperatures drop as low as -40°C from October to April, putting construction activity almost completely on hold during the winter months. Most local construction firms carry out more than 90% of their business during the short summer period, which stretches from April or May to September or October, depending on the year. The shortness of this window affects all facets of the industry, from labour contracts to materials prices and delivery schedules.

History

Like the rest of Mongolia’s economy prior to the fall of the Soviet Union in the early 1990s, the construction sector was an entirely state-run affair. During that period, an official workforce of around 28,000 people, directed by the government, was responsible for all building in the country. Construction Company Number One, which was based in Ulaanbaatar, took on most of the work in the capital city and its environs, and many of the Soviet-era apartment blocks it built are still operational.

The construction sector downsized in the early and mid-1990s as the state worked to transition to a democratic political system and a market-based economy. Most of the existing state-owned building firms were listed on the Mongolian Stock Exchange, which began operations in early 1991. As in many former Soviet countries, through the 1990s Mongolia’s construction industry went through a volatile period of privatisation and consolidation. From 1990 to 1995 the sector’s GDP contribution fell by about 15% on an annual basis.

By the end of the decade, the market had stabilised somewhat, due largely to the nation’s steadily improving economic situation and a handful of early state-led development projects. In 2000 the government began work on its 40,000 Homes residential building programme, the country’s first formal ger development scheme.

From 2000 to 2008 the construction sector grew rapidly, driven by rising real estate prices and urbanisation, which continues to swell the population of Ulaanbaatar today. Indeed, between 2000 and 2010 population density in the capital increased by two-thirds, according to M.A.D.

While Mongolia as a whole is famously known as the world’s most sparsely populated nation, with a density of fewer than two people per sq km, according to the 2010 census, in Ulaanbaatar the figure is nearly 250 people per sq km.

The construction sector took a hit in 2008 as a result of the global economic downturn, which led to many building projects being put on hold in Ulaanbaatar and elsewhere. The crisis affected foreign firms in particular. By 2011, however, Mongolia was once again clearly ascendant, due chiefly to a series of massive new projects in the country’s booming mining industry. Since then, the construction sector has posted solid growth. While declining FDI levels have caused anxiety about the future in some quarters, the industry continued to experience strong growth throughout 2014.