Myanmar generates real-estate interest

Myanmar generates real-estate interest

Developers unveil ambitious plans for one of Asia's most-undersupplied property markets; 'First-mover advantage'

THANLYIN TOWNSHIP, Myanmar—A possible scene from the future of Myanmar, one of the world's poorest countries, is taking shape on a bluff here overlooking a muddy stretch of the Bago River.

Outside Yangon, Myanmar, a development of 20 residential towers is going up, complete with golf course and shopping. As sanctions ease on the country, real estate is booming. Video by WSJ's Patrick Barta via #WorldStream

When finished, the Star City development will have an 18-hole golf course, at least 20 residential towers—some as high as 16 stories tall—24-hour security and waterfront restaurants. The million-dollar sales center has model condominium units with amenities rare in impoverished Myanmar, like walk-in closets and flat-screen TVs. More than 80% of the first 850 units under construction are sold.

"We're inventing the market" in Myanmar, says Soe Thiha Hlaing, director of sales at Star City, a project of local developer Serge Pun & Associates and its Singapore-based affiliate company, Yoma Strategic Holdings Ltd.

As Myanmar escapes from years of sanctions that largely locked it out of the global economy, the country's real-estate market is among the first sectors to attract serious investor attention. Global hotel chains including Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. have expressed interest, while Hong Kong-based luxury chain Shangri-La Hotels and Resorts is working on a pair of 21-story residential towers for serviced apartments set to open in mid-2013.

Yoma Strategic Holdings, whose backers include U.S.-based investment management firm Capital Group, said Monday it was planning a two-million square-foot, mixed-use development in downtown Yangon with two grade-A office towers, a five-star hotel and condominium, a mall, and other properties. The project, with an estimated cost of $330 million to $350 million, is designed to incorporate a Victorian-era red-brick railway headquarters built in 1877 but now disintegrating after years of neglect.

A currently dilapidated railway building in Yangon would be incorporated into Yoma Strategic Holdings' development.

Local and foreign developers have proposed at least three other towers in Yangon, including a $60 million, 34-story apartment building and a $100 million 38-story office building. The president of one of Myanmar's largest local banks recently unveiled plans for a mixed-use satellite city outside of Mandalay, Myanmar's second-largest city, that could cost as much as $2 billion if completed, according to local media reports. Private-equity funds are kicking in millions of dollars to finish real-estate investments that started but never finished during a short-lived economic opening in the 1990s.

The developers are lured by one of the most undersupplied property markets in Asia, if not the world, which is now seeing its first surge in demand in years. Yangon has only about 1,850 high-end hotel rooms, according to Colliers International, and 740 serviced apartments, even as the country is on track to attract around a million visitors this year. There are only about 680,000 square feet of office space—less than some single office towers in New York. Most of Yangon is made up of crumbling colonial buildings and mildewing shop houses with little of note built since the late 1990s, when Western governments slapped sanctions on the then-military regime.

A new, nominally civilian government took over last year and began freeing political prisoners and loosening constraints on the media, among other steps, which in turn has fueled renewed interest in the country of 60 million people from multinationals such asGeneral Electric Co. and PepsiCo Inc. Myanmar leaders are considering passing a law to allow foreigners to purchase condominiums as early as early next year, which could further juice the market.

Renderings of proposed development in downtown Yangon which will incorporate a Victorian-era railway headquarters.

The average residential property price in Yangon shot up 39% in the first nine months of the year, according to Silk Road Management, a local investment management firm, while hotel room rates increased 65%—among the fastest increases in the world. Office rates have more than doubled since 2011 to as much as $75 a square meter (11 square feet) and will likely rise beyond $110 a square meter in the next two years, Colliers International says. In central Tokyo, office rents average between $60 and $65.

Several big issues stand in the way of a full-fledged real-estate boom. Myanmar's antiquated financial sector and primitive networks for moving money in and out will make it hard for international firms to manage development deals. Meanwhile, land prices are climbing so quickly that it could make many potential deals uneconomical.

"There are a lot of barriers to entry that are going to slow things down," says Matthew Fry, senior vice president of acquisitions and development in Asia-Pacific for Starwood. Even so, "there's definitely a first-mover advantage" for international firms that can overcome the hurdles most quickly, he says, just as there was for some companies like Starwood that launched hotels in Vietnam soon after its opening to foreign investors in the 1990s. Starwood has fielded about 20 inquiries from developers who want to launch Starwood-branded properties in Myanmar, Mr. Fry says, though it hasn't yet made a decision on how to proceed.

Land costs may present the biggest hurdle. Private-equity investors say they are seeing deals with land priced at $5,000 to $7,000 a square meter. At such high prices, many projects such as new industrial developments are unfeasible, says Serge Pun, whose Star City project is being built on land his company acquired many years ago at a time prices weren't as high.

Myanmar's government has responded by raising taxes on property transactions and calling on hotel owners to temporarily cap rates. It also is working on plans to build more low-cost housing and is considering creating a committee to craft further policies to control prices.

Meanwhile, first-mover projects are pressing forward, including Star City. The project, which was launched last December and whose total cost hasn't yet been finalized, is targeted at Myanmar's upper-middle class, which the developers believe will keep growing as Myanmar's economy opens. Spread across 420 acres about 20 minutes outside of Yangon, it is the kind of suburban enclave that is still uncommon in Myanmar, with plans for 9,000 housing units and a population of 25,000 people, as well as a water park, shops and restaurants. Because credit is hard to obtain in Myanmar, the development has counting rooms where buyers can hand over giant stacks of Myanmar kyat currency.

Buyers have included a few local pop stars as well as Myanmar residents living overseas who are becoming more optimistic about their home country. One of them is Htay Htay Yi, a 57-year-old single woman who works in a Singapore hospital performing ultrasound procedures, and wants to retire in Myanmar someday. She bought two units—a one-bedroom unit for about $47,000 and a two-bedroom one for $70,000—which she intends to rent out as investment properties for now.

"There are a lot of people who can afford this," she says.

Wall Street Journal