Investors searching for the next real estate that could offer extraordinary returns have been asking REMS Advisors for our views on investing in the Myanmar real estate market, especially after the US abolished all sanctions against Myanmar on Oct 7.
We started exploring the market in 2012, during the initial frenzy over the last untapped real estate market in Southeast Asia. In 2015, the peaceful election and subsequent transition to a civilian government further raised expectations of a country’s being finally unleashed from its shackles to realise its potential.
The lack of financing for developers and end-users is also inhibiting the growth of the market, resulting in weaknesses in Yangon’s real estate market
Expectations not matched by reality
A year on, it has become apparent that a lot of work remains to be done. Participants in the real estate market have been spooked by the government’s decision to cancel the five large projects that had been pre-approved and already in various stages of construction; the stop-work orders issued to almost 200 high-rise construction projects; and the continuing lack of clarity on the implementation of the Condominium Law. The lack of financing for developers and end-users is also inhibiting the growth of the market. These have resulted in weaknesses in the Yangon real estate market.
High-end residential: Foreign purchasers needed to stimulate the market
The residential sector in Yangon almost ground to a halt in 2015 and only sporadic sale activities resumed in 2016. The much hyped-about Condominium Law was finally passed in January 2016. The law allows foreigners to purchase and own condos subject to certain types of underlying land title. The units should be above the sixth floor and total foreign ownership is capped at 40%.
As the associated by-laws or regulations were not put in place, however, foreigners remain locked out of the market. In addition, there is a large number of units under construction, which could put the market under some price and rent pressure in the coming years.
Office: Flight to quality
The prime office segment in Yangon continues to underwhelm, as the lack of new inbound investments means that new demand for offices remains low. The market is also struggling to absorb the large supply from the completion of about 874,000 sq ft of the Myanmar Centre Phase 1. As at 3Q2016, prime office rents continued to decline, marking the ninth quarter of decline (see Chart 1).
We expect overall office rent to come un- der more pressure in the next few years, with the imminent completion of various large office developments such as Sule Square and Junction City. Older buildings and poorly managed office buildings are likely to bear the brunt of the easing of rents.
Serviced apartment: Resilience due to lack of supply
The serviced apartment sector has been the most resilient in Yangon. Average rents eased 7% in 3Q2016 from its peak in 1Q2015 (see Chart 2). The key reason for its resilience is the general lack of new completions over the last two years.
Despite easing rents, overall occupancy rates have remained above 90%. Newer serviced apartments are still operating at near full occupancy and have long waiting lists. The larger three- and four-bedroom apartments seem to be enjoying an increase in demand in recent quarters.
Ingredients for growth of real estate market are in place
All the theoretical factors that could drive demand for real estate in Myanmar are falling into place. The economy enjoyed its fastest pace of growth over the last three years and is expected to be the star performer in the coming three years, according to The International Monetary Fund’s forecast. Foreign direct investments are climbing after a hiatus in 2015. Effectively, the country is now free of sanctions and that could further boost its FDIs.
An increase in new investments is likely to bring in more foreigners, who will need hotel rooms, serviced apartments, offices and retail options. More economic activity is likely to increase the pace of urbanisation. Taken together, continued economic growth will fuel the virtuous circle of attracting more people to the city and increasing demand for real estate.
The slowdown in new construction starts provides some breathing space for the market to absorb the large projects that are due for completion in the next two years. Investors should be looking at serviced apartments operated by reputable operators, high-end residential developments and warehouse or logistics property investments in Yangon.
Are you ready to invest in Myanmar?
Without a doubt, we should be seeing investment schemes or projects that will be brought by developers or real estate agencies to market in Singapore in the coming months or years.
Singaporeans’ insatiable appetite for small quantum investments in property is apparent from the positive sales of newly launched residential projects in Singapore and the good sales momentum for Cambodian residential projects in recent months.
Thus, Myanmar property might fit into the low quantum investment space. Investors should consider five important factors when investing in Yangon:
• Is there a resale market for the location or sector they are in?
• Are they getting clear, unencumbered ownership of the property they buy?
• Does the developer have the resources, discipline and capability to complete the project as promised?
• Are there people or entities that can help with absentee management? and
• Can they withstand the risks and policy shocks that can happen?
Invest a little, diversify a lot
In general, we would like to advocate that investors consider their appetite for risk when investing in emerging markets and not invest because it is cheap. Alternatively, investors should consider taking part in shared investment schemes (which have clearly defined investment terms) and allocate small amounts to each investment and diversify their risks.
Tan Kok Keong is CEO of REMS Advisors and co-founder of FundPlaces
This article appeared in The Edge Property Pullout, Issue 756 (Nov 28, 2016) of The Edge Singapore.