Quarterly Business Magazine

Myanmar’s Real Estate Sector Reform: Clear Rights and Messages Necessary to Attract Foreign Investors

Posted :
Wednesday, October 15, 2014
New Construction Sites in Yangon

Myanmar, the Golden Land—increasingly known by the world as a land for opportunity, an awakening, and a frontier market poised for rapid growth—is attracting all sorts of foreign arrivals with magnificence on their minds and money ready to commit.

Foreign oil and gas operators were the first to arrive. Having been awarded new concessions onshore and offshore, they are now negotiating profit sharing contracts for the extraction of discovered oil and gas, bringing revenue to the country and, more importantly, gas to satisfy the ever-increasing domestic demand for power.

The gas will be sprayed into turbines that are built and installed by foreign power infrastructure companies, bringing light to houses and stable electricity to manufacturing plants arriving from other countries.

Textile, cigarettes, auto assembly, pharmaceutical, and other manufacturing plants will continue to enter, employing hundreds in their proximities and improving the efficiency of Myanmar’s cheap, low-skilled labor. The laborers, with their modest incomes, will purchase their first mobile phones, now affordable because of the recent entry of foreign mobile operators.

Within a few years, the bottom will be lifted. The service and tourism sectors will flourish. A middle class will emerge—and lives will be better.

This is the dream. However, the sluggish reform in the real estate sector is an impairment to this dream, given much of the foreign direct investment is land-dependent. Mobile operators require land for towers, manufacturers require plots for factories, service companies require training centers and office spaces, and all foreigners require suitable residences. Unfortunately, essential progress in the real estate sector is not happening.

Presently, as manufacturers arrive in Myanmar, they are soon dismayed by the prohibitively steep prices for prospective plots of land that have not been prepared or maintained. They are further discouraged when they must negotiate or enter a lease on the plots, often committing funds with no guarantee of receiving a Myanmar Investment Commission (MIC) permit within a definitive period of time and with little guarantee that the landowners will honor previously agreed terms for the plots once the MIC permit is obtained.

As service companies enter, they are also intimidated by the high costs for office space and residential units, the inability to furnish a budget since lease terms longer than 12 months are not legally defensible (or allowed under current law), and payment terms that are usually required full in advance of the year—generally without any continued support from landowners for the maintenance of the properties.

On the surface, this seems like a great opportunity for foreign property developers to enter: a massive under supply of space and high rents, which can be increased year-on-year. And in fact, some developers have already entered the property market, particularly in Yangon. These foreign entrants commonly use three approaches in the Myanmar market:

  • Build-Operate-Transfer agreements (BOT): By securing a MIC permit and entering a long-term lease under a BOT agreement with a government ministry, the military, or the local government.
  • Private BOT (in joint-venture or long lease): By entering a joint-venture with local partner(s), whereby all partners form a foreign development company in Myanmar and seek a MIC permit to enter into a BOT agreement. The lead local partner’s entire or largest contribution to the joint venture is obtaining the long-term lease. Or by seeking a landowner with a freehold or grant-hold title with an acceptable number of years remaining and then securing a MIC permit to develop and operate on the plot for up to 70 years (50-10-10).
  • Proxy Ownership: By financing a Myanmar citizen to purchase property or enter a long lease on the foreign entrant’s behalf. There are a few variants of this strategy including utilizing a law firm that assigns a nominee. (Note: this is not legal, and there is no protection under the law.)

Foreign entrants with BOT schemes are generally hoteliers. Specifically in Yangon, hoteliers have entered under BOT agreements because the present supply of rooms is occupied at or near 100 percent for most of the year. Also, room rates in Yangon are significantly higher than regional cities such as Bangkok. With an estimated increase in tourism from approximately 1 million visitors in 2012 to over 3 million in 2015, hoteliers are willing to invest in advance of the 2015 national elections. On the other hand, the residential developments that have gone ahead are dependent upon selling or leasing units that are described in two-party contracts.

However, these early entrants certainly have their own share of risks largely due to the restrictions in the real estate sector. Most apparent is the lack of ownership: since foreigners cannot own property, developers cannot presell units and the developers must make their return over a long period of years from leasing or operating the development. Presently, non MIC-permitted foreigners are limited to leases of 12 months. However, it is widely estimated that many of the residential developments have presold 70 percent or more, including to foreigners. Whether it is legal for foreigners to hold this leasehold grant remains a question.

Furthermore, the government only authorizes land ownership, foreigners or locals alike. Unit ownership has not been created and is not registered with any authority. Sales or leases of units, even between Myanmar nationals, are simply an exchange between two parties in an agreement—with no title, deed, or document recognized by any authority.

In order to develop the real estate sector, the government has drafted the Condominium Law. The Draft Condominium Law—first published in November 2013 then recently sent back for redrafting—allows for foreign ownership and furthers the ability to mortgage property, thus freeing up capital for development. The draft further mentions common area maintenance and title ownership, though seemingly confusing. As the draft is in great need of additional work and little information has been disclosed on the re-drafting of the law, the foreign community is left wondering how the law will progress.

A buyer may hope that the Condominium Law will have been passed by the time the construction is concluded. Obviously, some have assumed it would be and have invested in earlier projects. However, even if the Condominium Law is passed, there is no guarantee that these early developments will be qualified. On May 26th, an article with disconcerting news to “condo” owners was published in The Myanmar Times:

Nearly all of Yangon’s recently constructed “condominiums” may not qualify as condominiums under the draft Condominium Law, according to Yangon City Development Committee engineering deputy director U Nay Win. The draft law has been submitted to the Pyithu Hluttaw, but it stipulates a condo must be built on freehold land or land that was granted to the residents—while most of Yangon’s buildings are on leased land. “Under the condominium law, residents must be proportional owners of their land,” said U Nay Win. “But most residents of the condos don’t own the land, just the rooms. We cannot regard them all as condos.” U Nay Win said “condominium” is often being used as a catch-all term for a high-rise with large rooms, and buildings with this label generally do not meet the legal definition. “People think these buildings will be included in the law, but they are not,” he said. “No recent buildings have followed the condominium law.

Therefore, a coordinated message and continual update to the stakeholders are necessary in the drafting of the condominium law. Uncertainty created by mixed messages is preventing the entry of foreign manufacturers and service companies. If we can eliminate these difficulties, companies will enter with a larger footprint and commit more money and resources. More jobs will be created, and the development dream of Myanmar will continue with good pace. In order to achieve this development goal, policy-makers in Myanmar should consider the following reforms:

Allow foreign ownership of units: Property developers will then have the incentive to commit money to construct condominium units and office space, bringing much needed supply to the market.
Allow foreigners to lease for longer periods without having to obtain a MIC permit: This will encourage renovation and refurbishment projects to commence, bringing supply in short order. This will also allow companies, as tenants, to commit to a budget in leasing office space, training space, and residences for their staff—thereby likely to commit more resources.
Create a title system: The registration of a unit and the use of common space and the access to the unit should be established. The government has a significant incentive to creating a registry for unit title ownership since the tax revenue from the sale and lease of units can then be assured.

Until the government has initiated these reforms, foreign entrants will hold-off their entry until 2016 awaiting the result of the election, commit as few resources as possible until that time, or possibly wait even longer until the risks associated with property are absolved. The dream of Myanmar progressing at rapid pace is approaching a momentary speed bump because the real estate sector is in need of reform.

Brett David Miller

Brett David Miller is managing director of Scipio Services Co. Ltd., headquartered in The Republic of The Union of Myanmar. Scipio has been the first to enter Yangon, Myanmar as a foreign-managed supplier of facility services, property management, and real estate advisory.

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