Be Myanmarised in the Golden Land

By Tan Kok Keong

/ REMS Advisors, The Edge Property |

June 10, 2015 5:00 PM SGT

Myanmar has been at forefront of investors’ interest over the last 2 years. Its largely untapped economic potential and positive macro-fundamentals has led to a sharp increase in foreign investments into the country. As a result, real estate prices and rents boomed. The buoyant market conditions saw prime office rents reaching as high as $13 per square feet per month, US$6,000 monthly rent for quality apartments, and new property launches that were launched at record prices and sold out within weeks. This has attracted investments from many estate investors from Singapore. The list includes Keppel Land, Oxley Holdings, Pan Pacific Hotels Group, Amara Holdings, Soilbuild, amongst others.

The take-up rate of the development has been affected by the more cautious sentiment on the ground

A different picture has emerged in 2015. Investor sentiment towards the market has cooled somewhat. The Office Rental Index compiled by us showed that prime office rents remained flat in 1st quarter 2015, this is after a decline of 4% in the previous quarter, and 12% off the peak level achieved in 2nd quarter 2013. The completion of newer office spaces like the Union Commercial Centre and the Strand Office have weakened the bargaining position of existing landlords, resulting in a weakening rents. The once-hot residential property market has gone lukewarm. New launches have found buyers harder to come. The take-up of the excellent Rosehill Residences, a high quality residential project by Soilbuild, has been affected by the more cautious sentiment on the ground.

Chart: Office Rental Index

Source: REMS Advisors

A key reason for the less buoyant sentiment, especially in the real estate market, was the increasing uncertainty over the political stability of the country leading up to the elections in 2015. This has inhibited the new investments into the country with many corporations we have met saying that they are adopting a wait and see approach before committing resources to the country.

While the caution is understandable, it might be misplaced. Generally, despite the political posturing, the economic reforms are likely to continue. Fundamentally, all the factors that had drew investors to the country remains intact. Arguably, the country has also become better equipped to manage its growth. The Government’s effort to improve its soft infrastructure like improving the clarity of laws and reducing bureaucracy is started to benefit businesses. The Myanmar Investment Commission has committed to streamlining and shortening its approval process. Numerous improvements have been made to the hard infrastructure like utilities, telecommunications and transport.

This is visible from investments that have continued to flow into the market. Foreign direct investment (FDI) into Myanmar has soared to more than $8 billion this fiscal year, $3 billion more than anticipated according to Aung Naing Oo, head of the state-run Myanmar Investment Commission. The US$8.1 billion in FDI is 25 times the $329.6 million received in 2009/2010, the year before the military ceded power.

Four foreign banks namely, the United Overseas Bank Group (UOB), Overseas Chinese Banking Corporation (OCBC), Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp have commenced operations over the last 3 months. In the oil and gas sector, Britain’s BG Group, Australia’s Woodside Petroleum and Chevron’s Unocoal have announced deals to invest into Myanmar recently. In May, Melia Hotels International announced that it signed an agreement to operate a hotel in Yangon.

The increased presence of these foreign companies will have positive downstream effect on demand for accounting, legal, tax and technology services. Foreigners who are better trained are still needed to manage these projects and companies. This will lead to an increase in demand for better quality offices and apartments. The lack of quality real estate in key cities like Yangon and Mandalay means that demand will still be largely unmet over the next few years.

Once the political situation stabilises, we expect investors to start to put their money to work in Myanmar and as a result, we expect a sharp increase in foreign investments in the coming years. Real Gross Domestic Product grew by 8.5% in 2014 and is expected to average around 8.2% per annum over the next 3 years, according the estimates by the World Bank. At this growth rate, the economy will be one of the fastest growing economies in Asia. Its unfulfilled economic potential lies in the country having an excellent geographic location bordering 2 of the world’s most populous countries, India and China, and being endowed with plentiful resources and minerals and more importantly, with its large population of almost 55 million people.

Other than economics, structural changes are afoot with the real estate market moving from being a largely unleveraged market to one which developers and investors might begin to secure loans for real estate investments. On 6 May, UOB announced that it is offering an onshore loan to a French-Myanmar joint venture. The loan, for an undisclosed sum, will help Rangoon Excelsior Company finance the refurbishment of a former colonial building in downtown Yangon into a new five-storey hotel, said the bank in a statement. This is a significant event as it is the first onshore loan issued by a foreign bank. The transition to a leveraged real estate market could be the single biggest factor to relook at prime Myanmar real estate assets in the second half of 2015.

This article appeared in The Edge Property Pullout of Issue 679 (June 1) of The Edge Singapore.

Tan Kok Keong is the CEO of REMS Advisors, a real estate consultancy, and the co-founder of Fundplaces, a real estate dedicated crowdfunding platform.

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