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Foreign businesses face limited, unsuitable options
Sanat Vallikappen and Pooja Thakur
31 July 2013
Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his US-based employer.
He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than US$100 a square foot, compared with less than US$75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.
The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations - all unsuitable to the image of his US$29 billion in revenue engineering and construction company, which he said he wasn’t authorised to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money”, Mr Danley is still looking.
“We can’t move into a space where someone’s cooking up nasi goreng on the sidewalk all night,” he said, using the Indonesian name for fried rice.
Developers are rushing to solve Mr Danley’s problem, one faced by hundreds of multinational companies setting up operations in Myanmar following its political opening and easing of international sanctions. Yangon, the commercial capital, needs at least 800,000 square metres of office space to support the influx, according to Yoma Strategic Holdings Ltd. About 1.9 million square feet will be available by the end of 2015, compared with 600,000 now, the Myanmar office of broker Colliers International UK plc estimated.
“With rentals going up, and the shortage going to become more acute in at least the next seven years, it’s an attractive market for foreign developers,” said Cyrus Pun, executive director of Yoma, a Singapore-listed company that derives most of its revenue from developing property in Myanmar and has seen its share price more than double since the April 2012 elections and subsequent loosening of sanctions that have allowed less-fettered foreign investment.
“There’s still a big gap to be filled,” he said in an interview, adding that Yoma is in confidential talks that may lead to joint projects with Japanese, Singaporean or Indonesian developers. “Whatever is being built right now will not satisfy the immediate demand.”
The opportunity has lured other South-east Asian developers, including Singapore-listed Soilbuild Construction Group Ltd and Vietnam’s HAGL Joint-Stock Co, along with Hong Kong’s Shangri-La Asia Ltd. Each has announced an office, retail, residential apartment or hotel project that it plans to build or manage. At least three more office buildings are being built by local developers, Mr Pun said.
“There is a feeling that this is the last great adventure there may be in South-east Asia in terms of a market opening up,” said David Simister, chairman of CBRE Thailand.
Rents have increased almost five-fold in Yangon’s three towers, none of which is higher than 27 stories, from US$22 a square foot a year as at the end of 2011, before Myanmar President Thein Sein began allowing more political freedom and loosening economic controls, according to CBRE data.
Tenants at the three - Sakura Tower, FMI Centre and Centrepoint Towers - include Standard Chartered plc, PricewaterhouseCoopers LLP, Coca-Cola Co, Nestle SA, Sumitomo Corp, Bank of Tokyo-Mitsubishi UFJ Ltd and Malayan Banking Bhd.
The energy industry is expected to generate a chunk of the demand for real estate as companies such as Exxon Mobil Corp, Woodside Petroleum Ltd and Total SA line-up for a share of the country’s oil and gas reserves.
In 2010, energy and mining contributed US$8 billion to Myanmar’s gross domestic product, according to a June report from McKinsey & Co. By 2030, the sector could contribute US$21.7 billion to an economy that is expected to expand to about US$200 billion, it said.
Unilever NV, the world’s second-largest consumer-goods company, is among companies that have rented villas, such as the ones Mr Danley considered, driving their prices skyward. A four-bedroom residence that rents at US$6,500 a month will probably rise another 46 per cent, to US$9,500, by the end of the year, said Brett Miller, the managing director of Scipio Services Co, a Yangon-based real estate advisory and facilities management company.
Prices are going up by the week, said Cherie Aung-Khin, a local restaurateur who wants to expand her Green Elephant eatery, which serves Burmese cuisine and is popular with foreign visitors. In early June, she viewed a 3,000-square-foot space for a second outlet for US$3,800 a month. When she returned from a trip to Bangkok two weeks later, the landlord had raised the rent to US$4,500. After negotiations, she settled for US$4,200.
US sanctions on Myanmar were in place since at least May 1997, when the country banned Americans from investing or facilitating investments into Myanmar, according to the US Department of the Treasury. They were progressively increased over the next 15 years. Similarly, European Union sanctions on the country were in place from October 1996 until both the US and EU began lifting them last year.
Myanmar, also known as Burma, was hit with these sanctions as five decades of military rule curtailed political freedom and landed opponents of the junta in jail. A closed economy till now means companies setting up new business in the country contend with telephone networks that experience frequent call drops and a cash-only payments system in which credit cards are practically unheard of. Adding to the difficulty of paying for goods and services in Myanmar, business owners typically won’t accept worn US dollar bills, the preferred currency.
The US easing allowed companies to invest in the South-east Asian nation, including acquiring land for construction and development except in ventures connected to Myanmar’s former military leadership.
Real estate was not under EU restrictions, said Bernhard Faustenhammer, interim head of the EU delegation to Singapore. There were barriers to investment in the sector because companies could not choose local partners such as state-owned companies in Myanmar, he said. No restrictions exist now.
“During the period of the sanctions, Western developers did not even enter Myanmar,” said Tony Picon, managing director of Colliers International Myanmar, explaining they didn’t have “working knowledge” of the country as some developers from Singapore or Hong Kong do.
“If you’re a big Western developer, it may be perceived to be too risky to get into a large project in a frontier market, and the small developments may be too messy and not worth your while to pursue,” said Picon.
International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Mr Pun said.
Ambiguous laws related to construction and ownership of property are keeping some away. Far East Orchard Ltd, a unit of Singapore’s largest closely held developer, Far East Organization, isn’t rushing to invest.