MYANMAR and the Myth of Cheap Land

by Aung Kyaw Myo, MBA '13

Since 2011, the world has been closely watching a small nation in southeast Asia emerge from decades of economic sanctions and military rule. Formerly an outcast state, Myanmar appears to be on a steady path toward rehabilitation and economic development. The opportunities for foreign investment are plentiful in a country with a 2010 per-capita gross domestic product of $876.1 But the unique conditions on the ground may challenge basic assumptions about investing in emerging markets.

Myanmar has only recently earned the label "emerging" after significant reforms, starting with the installation of a democratically elected government in March of 2011. A few months after being sworn in as the president, Thein Sein invited opposition leader Aung San Suu Kyi to get involved in rebuilding the country. New labor laws were passed and censorship laws were abolished. Taking note of these positive changes, the European Union suspended all nonmilitary sanctions against the nation for one year in April of 2012. A few months later in July, President Barack Obama eased sanctions to allow U.S. companies to invest in Myanmar, a major development.

On Nov. 2, 2012, Sein signed a new law designed to address the demands of local and foreign investors. Seventeen days later, Obama made history when he became the first sitting U.S. president to visit Myanmar. He traveled to the city of Yangon to announce that the U.S. stood ready to help the people of Myanmar as they emerge from decades of isolation.2 While political leaders set the stage for change, members of the business community began their research.

A Complex Picture Surfaces

Since the installment of the new government, various foreign investment groups have held conferences and summits to explore business opportunities in Myanmar. One of those early-bird investors was from a Hong Kong real estate investment firm; his objective was to buy land and buildings. He believed that prices would only go up when the economy started booming. However, he was disappointed to learn that real estate prices in Myanmar were not as low as he had expected for such an isolated country.

Even though there had been economic sanctions from Western countries, Myanmar had long been doing business with neighboring Asian countries. According to a 2010 Eurostat report,3 China, Thailand, and Singapore represent 75.1 percent of total imports for Myanmar while China, Thailand, and India represent 69.7 percent of total exports. Overall, those four countries represent 75.3 percent of foreign trades in Myanmar. Given this reality and the fact that political unrest was limited to border areas, major cities in Myanmar have seen significant economic development even though it may not be substantial compared with other countries' levels.

Another layer of context to consider is the past volatility of Myanmar's currency, the Kyat (MMK). In 1952, one U.S. dollar was equivalent to MMK4.74; in 2000, it equaled MMK344, and during the most recent political crisis in 2007, it was equal to MMK1,350.4 The Kyat had a compound annual inflation rate of 21.57 percent for seven years. Meanwhile, the official exchange rate has been one dollar for about MMK6. In April of 2012, the new government decided to float the currency, which has since been relatively stable at about MMK850. Because of these dramatic movements in the value of the currency, many local investors have bought gold or real estate to hedge against inflation. While the price of gold reflects the global gold price through the exchange rate, the prices of real estate have been protected from such foreign influence until now.

Within the local real estate market, property prices vary because of the state of the nation's transportation system, which is considerably underdeveloped. According to a report from the Asian Development Bank,5 the overall road density for the Association of Southeast Asian Nations is about 11 kilometers per 1,000 people, while Myanmar's is about 2 kilometers. When it comes to vehicle density, Indonesia has about 250 vehicles per 1,000 people, while Thailand has about 370; the equivalent figure for Myanmar is just 18. As a result, prices within a city zone are much higher compared with those in the outskirts.

Big Cities, Huge Price Tags

Real estate in the most expensive areas in Yangon, the biggest commercial city in Myanmar, costs as much as $1,860 per square foot of land.6 In comparison, the most expensive property listed in La Jolla, Calif., in November of 2012 is $34,000,000 for a 28,749-square-foot lot - in other words, $1,183 per square foot.7 Who would think that an underdeveloped country like Myanmar would have property more expensive than one in San Diego? And it's not just that one property; there are multiple properties in Yangon in that price range.

In a regional comparison, a house in Singapore with 26,456 square feet of land is listed at S$50,000,000 ($40,816,326)8 with a per-square-foot price of $1,542.80. Myanmar's estimated GDP in 2011 was $51.9 billion, while Singapore's GDP was five times that of Myanmar's, at $259.8 billion. Singapore also happens to have the most expensive real estate market in the world. Given the difference in GDP, the size of the countries, and the land available for real estate development, the property prices in Yangon are very expensive.

After Yangon, the second-largest commercial city is Mandalay, where a 2,400-square-foot, two-story building9 is listed at $3,139,534. It is just one of thousands of houses on major roads in Mandalay. Because there is no separate zoning for commercial and residential areas in most cities, houses in good locations can be bought or rented as offices or factories. In particular, properties on major roads are popular among big companies looking to open offices and therefore two to three times as expensive as those on the side road, around the corner, even though they are in the same community. In places that lack adequate transportation and are far from popular areas, prices can be as low as $10 per square foot. For example, a 2,000-square-foot house is listed for $21,176 in Thanlyin City, near a major port city.10

One interesting fact is that the price of the property is predominantly the price of the land. The building price is negligible in most cases. Nice buildings may attract higher prices, but they are valued by the per-square-foot price of the building cost, and most of the time, their values are insignificant compared with the value of the land. There are too many idiosyncratic elements with each property, so there is no clear way to come up with an average selling price for a community. Moreover, no real estate price index or official sales statistics exist in Myanmar, but it is possible to discover an overall trend of rising prices in the market.

Pricing of Rents

With the ever-increasing price of properties, landlords are not seeking as much return from rent as they would from other investments. For example, deposits in savings accounts provide a minimum interest rate of 8 percent per annum, but the return from rental properties is much lower. A 2,300-square-foot furnished apartment near major roads has a selling price of MMK600,000,000 ($705,882) but a monthly rental price of MMK2,000,000 ($2,350).10 That's just slightly higher than a 3 percent annual return. Landlords are just hoping to get some extra income while the property value appreciates.

As a result, rents in Yangon and other cities are not expensive compared with the selling prices. Unlike with sales, the condition of the building determines the monthly rent. For example, in downtown Yangon, the rent for a new seven-story apartment building, with 1,250 square feet per floor, is listed as $5,882, or $840 for each floor.10 In San Diego, a 1,250-square-foot apartment would go for $1,500 to $2,000, depending on the location. An apartment of similar size in the same neighborhood in Yangon may only be rented for $300 if it's in an old building. Overall, the significant disparity between interest rates and return on rental properties creates an expectation for future price corrections for these residential/commercial properties. When it comes to pricing industrial land, a similarly complicated picture emerges.

Industrial Land Use

According to a Center for Strategic and International Studies report11 on land issues in Myanmar, two-thirds of the population relies directly or indirectly on agriculture, a reality that raises ethical concerns about uses of land for other purposes such as mining or factories. There have been protests from farmers who have lost their land to industrial use. In order to prevent such conflicts, industrial zones may need to be developed in areas that may not be ideal.

Sales prices for industrial land range from $147,200 per acre to $1,680,000 per acre in the industrial zones near Yangon.10 In San Diego County, the asking price for a plot of industrial land was $308,000 per acre in November of 2012.12 In Myanmar, location is even more important for industrial properties because of the high cost of transportation. For example, the cost of shipping one 40-foot container from Thilawa port to Singapore is $150, while the cost of transporting that container from Shwe Pyi Thar industrial zone, located west of Yangon, to Thilawa port, east of Yangon, is MMK250,000 or $294. As a result, monthly rents range widely from $336 per acre to $22,000 per acre.10

Of course, in the search for industrial land, the availability of electricity cannot be taken for granted. According to the Asian Development Bank, only about 26 percent of Myanmar's population had access to electricity in 2011,13 and that includes access to off-grid supply sources. A government corporation owns the electricity grid, and since it cannot provide enough power to factories, most businesses run on their own power generators. That reality leaves them vulnerable to the following market conditions: The majority of gas and diesel is imported, and the price of fuel is high. Even though the country produces natural gas, it cannot widely use it locally because of contractual export commitments.

Since hydropower from the government's grid is much cheaper than diesel generators, all things being equal, industrial land with access to a public utility is more valuable. For example, in the listings of industrial land, the capacity of an electric transformer connected to a public utility is billed as a major feature. When all the necessary infrastructure for businesses becomes available for all industrial zones, the gap in the prices of industrial land may get smaller. For example, when the transportation system improves, people and businesses can move away from expensive city centers. A lot of residential and industrial lands in inaccessible areas are currently undervalued; therefore these properties could see a significant jump in prices as the economic development of the country marches on.

Changing Landscape

In Myanmar, new cities are also being developed with new business zones. For example, Yadanapon Cyber City, located 41 miles east of Mandalay, has been established as the biggest information technology park in the country, with housing projects being developed nearby. The introduction of new businesses could also bring prosperity to existing, underdeveloped cities. For example, a deep-water port that Italian-Thai Development Public Company Limited plans to build could bring new businesses to the Dawei area in southern Myanmar. Those new businesses could change the balance of real estate prices in different parts of Myanmar.

The unique conditions that protected property prices in Myanmar may no longer hold as the country transitions out of its status as a closed economy. While these prices had been in the uptrend for a long time, unaffected by global financial crises, they may not keep increasing in the future since outside investors can now make comparisons between properties in Myanmar and those in countries such as Laos, Thailand, and Vietnam. And local investors who bought properties as a hedge against inflation could start selling them if the currency stabilizes and there are more business opportunities that provide better returns. However, the market may not crash if the demand for real estate stays strong because of an influx of foreign businesses. Economic development could bring balance in real estate prices and overall exposure of Myanmar to the outside world (and vice versa). One thing is certain: The world is witnessing a unique moment in time for this budding economy.

Aung Kyaw Myo (Full-Time Class of 2013) is a native of Myanmar who has worked in product development in software and consumer electronics. His post-MBA focus is technology, operations, and entrepreneurship, and his goal is to build businesses with a positive social impact.


Endnotes
  1. United Nations Statistics Division. 2012. "GDP and its breakdown at current prices in US Dollars." Accessed November 22, 2012. http://unstats.un.org/unsd/snaama/dnllist.asp.
  2. The White House. 2012. "President Obama Promises Support for the People of Burma." Last modified November 19, 2012. http://www.whitehouse.gov/blog/2012/11/19/president-obama-promises-support-people-burma.
  3. European Union. 2012. "Myanmar - Trade Statistics." Accessed November 22, 2012. http:// trade.ec.europa.eu/doclib/html/113423.htm.
  4. MoeMaKa. "The History of the Burmses Kyat by Zaw Aung." Last modified October 1, 2011. http://moemaka.org/index.php?option=com_content&view=article&id=520:the-history-of-the-burmses-kyat-by-zaw-aung.
  5. Asian Development Bank. "Myanmar: Transport Sector Initial Assessment." Released October 2012. http://www.adb.org/documents/myanmar-transport-sector-initial-assessment.
  6. Myanmar Housing. "Show room and make another business, good place in Pyay Road!" Accessed November 22, 2012. http://www.myanmar-housing.com/svdetail.php?number=1267.
  7. Zillow. Accessed November 22, 2012. http://www.zillow.com/homedetails/6340-Camino-De-La-Costa-La-Jolla-CA-92037/51080045_zpid/ 8. Property Guru. "Good Class Bungalow For Sale - Belmont Road (D10)." Accessed November 22, 2012. http://www.propertyguru.com.sg/listing/8619702/for-sale-belmont-road.
  8. Myanmar Housing. "A good landed house for business in Mandalay City!" Accessed November 22, 2012. http://www.myanmar-housing.com/svdetail.php?number=1443
  9. Center for Strategic and International Studies. "Land Reform: A Critical Test for Myanmar's Government." Last modified November 9, 2012. http://csis.org/publication/land-reform-critical-test-myanmars-government.
  10. LoopNet. Accessed November 22, 2012. http://www.loopnet.com/Listing/17878643/8075-Siempre-Viva-Road-San-Diego-CA/.
  11. Asian Development Bank. "Myanmar in Transition: Opportunities and Challenges." Released August 2012. http://www.adb.org/publications/myanmar-transition-opportunities-and-challenges.
Note: Exchange rates of MMK850 per $1 and S$1.225 per $1 are used for this article.
Winter 2013

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