Yangon Real Estate Market and Heritage Property Survey

Prepared for: Yangon Heritage Trust

By: Spencer Sheehan

29/6/2014 Disclaimer: This publication has been produced with the assistance of the European Union. The

contents of this publication are the sole responsibility of Mr. Spencer Sheehan in partnership with Yangon Heritage Trust (YHT) and can in no way be taken to reflect the views of the

European Union.

Executive Summary

• Myanmar is experiencing a period of accelerating economic growth, driven by rapid expansion in investment, construction and manufacturing.

• Underlying trends such as rapid monetary growth, rising inflation, increased urbanisation and infrastructure shortages are challenging the government and the real estate sector.

• Supply pipelines across all real estate sectors have burgeoned, with significant increases in property supply expected in the coming years.

• Office:Yangon’s office market is seeing slightly weaker sentiment due to electoral uncertainty, the high costs of leasing and downward pressure on rents from the growing supply side. Average rent levels are expected to fall through 2015 as Yangon’s supply side expands.

• Hotels:Yangon’s hotel market remains relatively small in international terms, but is expected to see rapid growth in the coming years as the supply of new locations ramps up, which may depress room rates and push lower-end, local hoteliers out of business.

• Retail:Demand and occupancy remains high. A lack of developable space, plus logistical challenges, is impeding the development of organised retail in the downtown area. Developers are raising rents for new projects and average city rents are expected to trend upward through 2015.

• Residential:Demand has weakened due to electoral uncertainty, higher sales taxes and lack of progress on the Condominium Law. Surveyed agents said enquiries and prices were down compared with a year ago. Yangon’s growing supply side is depressing price growth and very few developments are scheduled for the downtown area.

• Looking ahead, Myanmar is expected to see economic growth of 6-7% y-o-y during the next five years. For the real estate market in the downtown area, demand for space from the business sector will increase, housing demand will become more sophisticated, improvements will have to be made to infrastructure and consumers and investors will require stronger legal protection and more clearly defined administrative processes.

• However, it is quite telling from our research that there is little or no new development or investment in either of the four covered real estate sectors in the downtown area and that many new developments are emergingoutside of downtown.

• While this reflects government policy to develop suburban areas, this also suggests a lack of incentives for both occupiers and investors to build in the downtown area.

• This reflects many factors, such as a lack of investible stock, a land titling system ill-suited to the needs of investors and occupiers, plus poor public services and infrastructure.With significant growth expected in the urban population, this will need to be addressed in order to upgrade and improve the living and operating environment in the area.

• Our interviews with different occupier groups in the city found an appreciation of the value of heritage buildings and the unique character of the downtown area, but found a lack of interest in paying premium prices for them, due to major disincentives to investment that include a lack of government commitment to infrastructure improvement, structural flaws with older buildings, land titling problems, scant incentives to invest in older, heritage buildings and lack of faith in the enforcement of building codes in the city.

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1. Myanmar’s Macroeconomy Summary:

Economic growth is surging in Myanmar, exceeding average growth in the Asia-Pacific region, and is likely to remain relatively high in the coming years. Growth is mainly being driven by rapid growth in investment, which is feeding a construction boom. An uptick in the manufacturing sector is also supporting the economy following the easing of trade sanctions and recent increases in domestic demand. Myanmar is facing many near-term challenges. The main challenge includes controlling monetary expansion, which is feeding rapid growth in real estate investment, driving higher inflation and causing the Kyat to devalue against the US$. Also, increased migration to the Yangon region and growth in the urban population is putting pressure on the stock of real estate and city infrastructure, both of which remain relatively undeveloped by international standards. Looking ahead, economic growth of 6-7% is expected between 2015 and 2019. This will impact Yangon in many ways but, from the point of view of real estate and the downtown area, it will expand investor demand for real estate projects, since the growth outlook implies a larger private sector and increased population of urbanized consumers. Government challenges in this scenario include improving legal protection for investors and occupiers, managing real estate investment so that the supply-side meets the sophisticated and diverse needs of the populace, and investing in infrastructure to improve the liveability of the area.

1.1. GDP is Surging and Outperforming Average Growth for the Asia Region The International Monetary Fund (IMF) estimates that Myanmar’s economy grew 7.7% y-o-y in 2014, compared with 8.3% y-o-y in 2013. Though down slightly in 2014, Myanmar is growing at an accelerated pace compared with past years and is outperforming average growth in the Asia region. Figure 1: Annual GDP Growth (%): Myanmar vs. the Asia Region, 2010-2016(f)

Source: IMF Asia-Pacific Outlook, 2012 & 2015 As such, Myanmar’s economy is atrracting investor interest. For real estate investors, Myanmar’s growth outlook is particularly attractive, especially while global monetary policy remains loose and yields on core commercial real estate assets have compressed across the region.

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1.2.Investment, Construction and Manufacturing Myanmar’s economy has seen growth across most parts of the economy, but the most influential growth drivers stem from increased investment, rapid growth in construction and a pick-up in manufacturing output.

Rapid Investment Growth Spurred by loosened trade and investment sanctions and government reforms, investment in the Myanmar economy has grown rapidly in recent years, registering annual growth of 13.2% in 2012, 14.6% in 2013 and 26.9% in 2014. Figure 2: YoY Growth in Total Investment, 2012-2015 (f)

Source: IMF, 2015 In part, the government is leading investment in the economy, raising its spending from 16.9% of GDP in 2010 to 28.7% of GDP in 2014, with initiatives focused on improving infrastructure and public services. Total government investment grew from US$7 billion in 2010 to $17 billion in 2014. The private sector has also ramped up investment in the economy, with foreign investors particularly active. Foreign direct investment (FDI) totalled $6.5 billion in 2014 – effectively doubling y-o-y compared with the US$4.2 bilion registered in 2013. Figure 3: Total FDI into Myanmar (US$ Millions), 2011-2014

Source: Directorate of Investment and Company Administration, 2015

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For outside investors, Myanmar has an attractive investment case, which breaks down as follows:

• Comparatively low wages: as wage rises pick up in China and companies look to migrate to lower cost hubs, Myanmar has emerged as an attractive option. Minimum wages in Myanmar have recently been set at $3.20 per day, which compares with $10-$12 per day in Guangdong, China’s main manufacturing hub.

• Attractive demographics: Myanmar has a relatively young population. According to

UN estimates, the percentage of the population of working age (16-59) will hover at around 67% of the population from now until 2020, compared to 41% in China and 43% in Korea. With population growth of 1.2% y-o-y expected during the next five years, IMA Asia estimates that the labour force will expand by 200,000 new workers per year.

Figure 4: Myanmar: Population Distribution by Age Group (%), 2010-2020(F)

Source: UNESCAP, 2014

• Natural resources: Myanmar has a solid base of extractable natural resources, including gas, oil, wood, tin, zinc, copper and coal.

• Rapidly urbanising populace: Yangon’s population is estimated at 5.1 million, which is

expected to grow 10 million by 2030. Among other impacts, this is expected to increase demand for property across all asset classes.

• Proximity to China and India: with the build-out of transport links, connectivity and

trade flows are expected to increase, putting Myanmar in a good strategic location to serve both markets.

• Strong potential for growth in tourism: the total number of tourists visiting Myanmar

reached 3 million in 2014, with 47.1% growth expected in 2015, taking total number of visitors up to 4.1 million.

With these factors in mind, the top five FDI recipients by sector include manufacturing, oil & gas, transport, real estate and hotels and tourism. Table 1: FDI by Sector (US$ Billions) Sector 2012 2013 2014 % of Total FDI Oil & Gas 0.3 0 3.2 37.8% Transport 0 1.2 1.7 19.7% Manufacturing 0.4 1.8 1.5 17.6% Real Estate 0 0.4 0.8 9.2% Hotels/Tourism 0.3 0.4 3.6 4.2% Source: Directorate of Investment and Company Administration, 2015

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2. Booming Construction Fundamental factors - rapid urbanisation, lack of real estate stock and weak infrastructure - together with increased investment flows have driven a construction boom in recent years. Annual growth in construction has increased from 4.6% in 2012, to 8.5% in 2013 and 12.0% in 2014. This is significant because the construction industry accounts for approximately 15% of Myanmar’s total GDP. Figure 5: Annual Growth (%) in the Construction Sector, 2012-2019(f)

Source: CEIC, 2015 This factor, supported by the rapid acceleration in investment in the economy, is manifesting itself in many ways but, most notably, a boom in real estate development. The Yangon City Development Committee has recently released data showing that building permit issuance has increased rapidly in recent years, illustrating the ongoing construction boom in the city and the wider economy. Figure 6: Building Permit Issuance in Yangon, 2008-2014

Source: Yangon City Development Committee, 2015

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3. Manufacturing has Rebounded The acceleration in domestic economic growth, together with the reversal of export sanctions, has driven a rebound in Myanmar’s manufacturing sector. Annual growth has picked up from 1% y-o-y in 2012, to 8% in 2013 and declined slightly in 2014 to 7% y-o-y growth. IMF forecasts expect 7-8% growth in the coming four years. Figure 7: Annual Growth (%) in Manufacturing Output, 2012-2019(f)

Source: IMF, 2015 Expansion in the manufacturing sector will impact the economy by driving rural-to-urban migration and increasing employment in the economy. These dynamics will generate more stable incomes, but more pressure on the housing stock as migration to cities increases. This will be felt particularly keenly in Yangon, where the government is promoting new industrial hubs in special economic zones around the city. 1.3. Current Challenges Myanmar is not only undergoing a transition from low-to-higher growth but also one from a state-led, totalitarian system to one that is both increasingly run on market principles and more open to outside investment. The challenges currently being faced within such a transition are numerous but, from the perspective of Myanmar’s real estate sector, stem from rapid monetary growth, an increasingly urbanised populace and greater pressure on infrastructure. Rapid Monetary Growth Increased investment, the influence of the ‘shadow’ economy and a lack of management capacity within Myanmar’s monetary system has seen a major increase in the supply of money within the economy. Broad money (M2), an indicator of the total amount of money in the economy, has grown rapidly in recent years and has exceeded actual economic growth, indicating excessive liquidity in the economy.

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Figure 8: M2 Growth & GDP (YoY Growth/%), 2011-2015(f)

Source: IMF, 2015 Rapid M2 growth in excess of the pace of economic expansion affects the economy in a number of ways but, most importantly, it contributes to inflation. High monetary puts pressure on the supply-side by raising demand for goods and services, which the economy may not be able to produce at current price levels, thus fast growth in the money supply can be inflationary. It is no surprise then that consumer price inflation (CPI) has increased rapidly at the same time as M2 growth has picked up. CPI has increased to between 6-7% annually in 2013 and 2014. Figure 9: M2 & CPI Growth (YoY/%), 2011-2016(f)

Source: IMF, 2015 Rapid monetary growth and consequent inflation is a huge challenge for the government. From the point of view of Myanmar’s real estate sector, the impacts are as follows:

• Increased investment in real estate as a store of value: in a undeveloped economy with few investment options to hedge against inflation, investors have channeled capital into the real estate sector. This has had the effect of driving up the value and price of real estate assets, most notably residential housing, and seen an increase in capital being allocated to real estate development projects.

• Devaluation of the Kyat vs. US$: with inflation speeding up, demand for protection has

increased with an uptick in dollar holdings, which has subsequently caused Myanmar’s currency to devalue sharply against the US$. By the end of June, the Kyat was down 28%compared with the prevailing exchange rate at the end of 2012.

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Figure 10: Myanmar Kyat vs. USD, 2012-Jun 26,2015

Source: Google Finance, June 26

• Increased construction costs for real estate developers: developers are, to a large extent, dependent on imported construction materials; therefore the recent devaluation in the kyat is putting significant upward pressure on construction costs. Furthermore, higher inflation will put additional pressure on wage and other input costs.

Increasing urbanisation Yangon’s urban population was estimated at 5.14 million at the end of 2014, representing growth of 900,000 new urban residents compared with the last estimate of 4.21 million in 2005. Based on these estimates, Yangon’s urban population has grown by approximately 2.1% per year, far exceeding growth in Myanmar’s total popualtion which was estimated to have grown 0.9% per year during the same time period. This means the following:

• Increased labor forces: migration to Yangon will increase the available labor force which, as the economy grows, will need to be accomodated in work premises, putting upward pressure on demand for commercial real estate.

• Increased pressure on housing stock: there will be more demand for housing, putting

pressure on the supply side of residential housing development.

• Demand for housing improvements and greater efficiency: landlords and occupiers will demand better living conditions and housing. Also, new markets will emerge for new classes of property.

Increased Pressure on Infrastructure Myanmar already has a low infrastructure base, but the rapid growth in the economy, increased urban populations and investment boom is putting this under pressure. This has ramifications across many aspects of life. One of the most important from Yangon’s point of view is from traffic. The growing economy and increased consumer base has fired strong growth in car ownership, which has made the problem much worse.

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Figure 11: Number of Registered Road Motor Vehicles (1,000s)

Source: IMA, 2015 Traffic is emerging as a major issue in Yangon, contributing to congestion, increasing journey times and worsening pollution in the main downtown areas. These factors also put increased pressures on business too through higher logistics costs and supply chain interruptions. Furthemore, increased urbanisation puts pressure on public services, ranging from health and public utilities. These are particular concerns for residents in the downtown area. 1.4. Outlook and Impacts Future Prospects Forecasts for Myanmar’s economy vary. Optimistic assessments, incorporating continued reform and liberalization, expect growth of 8.2% y-o-y between 2015 and 2019. In contrast, less optimistic views, based on uneven policy progress, expect growth of 5.6% y-o-y during the same time period. Figure 12: GDP Forecasts (Billion Kyat), High, Medium and Low, 2014-2019(f)

Source: IMF, ADB, Trading Economics and CEIC

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Future growth is largely expected on the basis of further reforms. While there are currently approximately 200 bills under consideration by the government, the following areas are policy are vital to Myanmar’s future growth outlook and are included in growth forecasts:

• Continued liberalization of the services sector: reforms to open up a whole range of sectors, including financial, legal, technology, telecommunications, logistics, are absolutely vital to encourage investment in the economy, promote efficiency, expand the range of available services, increase employment and provide incentives to the labor force.

• Increased openness to foreign investment: as well as services reform, it is anticipated

that Myanmar will become more investor friendly, by removing bureaucratic processes, clarifying investment rules, opening special economic zones for investors and encouraging smoother trade and investment procedures.

• Establishment of the rule of law: the government will need to establish both a robust

land titling system and clear guidelines for foreign ownership of property classes, such as condominiums. Expanded and better-protected leasing practices, alowing longer than the current 1 year standard, is a necessity to allow companies to make longer-term commitments to their operations in Yangon.

The outlook for the economy, and expected policy progress within the forecasts, will have a number of impacts. From the specific point of view of Yangon’s real estate sector and the conservation area, the overarching macro-level developments implicit in the outlook break down as follows:

• Growth of the private sector: liberalization and reform will expand the role of the private sector in the economy. This will have many impacts, most notably a increase in demand for commercial real estate space across all sectors, including office, retail, hotels and industrial.

• Growth in formal employment and increased consumer demand: workers will

increasibly find employment in formal companies, in contrast to casual, unregistered work, as the needs of the private sector expand. This will have many impacts, most notably higher incomes, stronger purchasing power and increased demand for services.

• Greater pressure on infrastructure: at the macro-level, a larger economy will put

greater demands on public transport, roads, electricity and water services.

These factors will have the following impacts on Yangon’s real estate market and the conservation area.

• Demand for space from the business and resident population will expand. This will have positive demand ramifications for both commercial and residential property sectors and act as an incentive for developer investment.

• Housing demand will become more sophisticated. The consumer base will diversify,

spurring demand for better living standards and quality of accomodation. Consumers will look for better living standards, better facilities and choice of housing to meet their aspirations.

• Solutions and improvements will have to be found for infrastructure services.

Increasing urban populations will put more pressure on infrastructure services, including

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basic utilities, public transport, roads, public hygiene services, and this trend will require greater attention from the government.

• Occupiers and investors will require stronger legal protection and more clearly

defined administrative processes. Clearer land titles, well-defined leases, straightforward processes for renovations and investment will have to be delivered to meet the needs of occupiers and investors.

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2.1. Yangon: Office Market Summary Leasing has weakened slightly in recent months, stemming from electoral uncertainty, high costs associated with leasing at current market levels and downward pressure on rents from the growing supply side. As such, rents have weakened slightly compared with their peak in late 2013. Yangon’s office market is growing outward, with new supplies of space scheduled for suburban areas and emerging business centres. The downtown market will evolve to be highly concentrated in the area surrounding the Shangri-La hotel, with little or no new major developments scheduled in the wider downtown area. Average rent levels are expected to fall through 2015 as Yangon’s supply side expands. Current Market Conditions Occupancy remains high in some of the more estabished office spaces in Yangon, but our channel checks have revealed that, while there remains a lot of interest in taking on office space in the Yangon market, many businesses are holidng off on making leasing decisions. Table 2: Rents & Occupancy in Selected Office Locations, June 2015 Building Rent($/sq.ft./p.m.) Occupancy (Q1 2015) Centerpoint 60-75 65-70% FMI Centre 48 90-95% UBC Centre 60 90-95% The uncertainty in the market stems from the following key factors:

• Current high prices of office space: Despite being a relatively new market, its office space ranks as one of the most expensive in the world, considerably higher than other locations in the Asia-Pacific region. This is particularly hard to swallow for companies, particularly because many are in ‘market-entry’ phase and are not yet making money in the country, making it hard to justify a singificant outlay on rent.

Figure 13: Grade A Office Rents Compared, Q1 2015

Source: Knight Frank & Frontier Research, Q1 2015

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• Potential decrease in the price of office rents: Yangon has a burgeoning supply of office space in the pipeline, which has led many occupiers to believe that prices will come down in the near future, enforcing the aforementioned caution about making a significant commitment to a rental lease.

Figure 14: Office Stock Annual New Supply (sq.m.), 2012-2018(F)

Source: Colliers & Frontier Research, Q4 2014

• Political uncertainty: uncertainty about the outcome of the election and fears of a derailment to the the recently introduced reform and opening up policy is compounding concerns about high costs and the potential for cheaper rents in the future and is causing many MNcs to hold off on making a decision.

As such, rental growth has flattened considerably compared with previous years. Rents for higher-end, international standard office space were around $67 per sq.m. per month in Q1 2015, down slightly from their peak of $70.2 per sqer month reached in Q4 2013. This reflects the factors previously mentioned, but it also reflects the changing structure of office stock in Yangon. Most new developments released during the past year have come in out-of-downtown locations, and often carry lower rents than in the downtown area. Figure 15: Rents for International Standard Office Space in Yangon, Q1 2010-Q1 2015

Source: Frontier Research, Q1 2015 Office rents for local businesses

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For local businesses, traditional options remain a more cost effective option but don’t offer perhaps the same kinds of faciltiies as the more modern, international buildings. Figure 16: Rents Compared Across Townships (US$ per sq.m.)

Source: Yangon Heritage Trust, June 2015 Yangon’s Office Market: Structural Issues Massive Supply Increase Expected Independent estimates foresee a significant increase in new supply of office space from the 75,500 sq.m. recorded at the end of 2014 to a total of 850,500 sq.m. expected by the end of 2019. Figure 17: Total Office Stock (sq.m.), 2014 vs. 2019(f)

Source: Frontier Research, Q1 2015 Ex-Downtown Areas to Take a Larger Share of the Office Market

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Of the 625,000 sq.m of new office supply expected to be added from 2015 to 2018, Dagon and Bahan townships are expected to account for about half of new releases, followed by the downtown area. Figure 18; Distribution of New Office Stock by Township, 2015-2018

Source: Yangon Heritage Trust, June 2015 From having a dominant position share (c.90%) of the market, the downtown area will account for a much smaller share of Yangon’s office market in future years. Locations such as Dagon and Bahan will emerge as major office centres and other outlying townships will emerge with their own space options. Rents in these emerging areas are priced lower than the core downtown area (see tablexxxx); as such, it is likely that the average rent for office space in the city will come down as the new pipeline comes to market. Figure 19: Projected Distribution of Office Space in Yangon, 2019

Source: Frontier Research, Q1 2015 Downtown Market To Become Concentrated

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New developments in the downtown area are concentrated in the region of the exisitng Shangri-La building on Sule Pagoda Road. Notable projects such as Sule Square (28,800 sq.m.), Landmark (68,000 sq.m.), Junction City (33,400 sq.m.) and Emotion (10,564 sq.m.) will add a significant amount of space, and create a hub of commercial offices. This reflects many factors but, importantly, it is based around favorable infrastructure connections, since the area is supplied by two main roads. Height Limits Impacting Office Stock Growth in Wider Downtown Area Also, there are heightened regulatory risks for developers. Office developers are looking for scale and height and currently there are height limits imposed on new developments in the downtown area and the threat and possibility of extra government legislation coming in the future. Table 3: Office Project Pipeline, 2015-2018 Project Size

(Sq.m) Delivery Date Rent (US$

per sq.m) Township

AWBA Office 5410 2015 45-55 Mayangone HAGL Myanmar Centre 170,000 2015 55-85 Bahan Knight Morgan 3,800 2015 16-32 North Okkala Novotel Yangon 1,200 2015 55-70 Kamaryut Pyay Garden 4,038 2015 80 Sanchuang Union Financial Centre 7,150 2015 70-80 Bothataung Vantage Tower 9,200 2015 TBC Kamaryut KBZ Tower 6,835 2016 29-32 Sanchuang Junction City 33,400 2016 TBC Pabedan Naing Tower 2,230 2016 43-45 Kyauktada SanYeik Nyein 3,187 2016 TBC Kamaryut Sule Square 28,880 2016 85-110 Pabedan Times City 44,000 2016 27-29 Sanchuang Junction Square 13,450 2017 33.5-41 Kamaryut Kantharyar Centre 24,989 2017 35 Mingaladon Manawhiri Complex 56,300 2017 TBC Dagon Merchant Luxury 2,550 2017 36-40.5 Bothataung Pyay Tower 22,193 2017 64-76 Mayangone Shwe Gone Emotion 10,564 2017 36-38 Kyauktada Capital City 15,000 2018 55-65 Hlaing Golden City 26,950 2018 TBC Yankin Landmark 68,000 2018 TBC Pabedan The Century 2,322 2018 44.6 Hlaing Union City 57,640 TBC TBC Hlaing Dagon City 1 42,000 TBC TBC Dagon Dagon City 2 14,000 TBC TBC Dagon Source: Yangon Heritage Trust, June 2015 Outlook for 2015

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• Occupier caution may impact leasing: political uncertainty, high rents prevailing in the market and the prospect of new supplies and choices may weigh on leasing activity in 2015.

• Office stock will double within 2015: a total of 122,000 sq.m. is expected to come onto

the market, which will double Yangon’s office stock within one year.

• Supply ramp-up will likely dampen rents: numbers alone will put pressure on the market, but also, looking at the supply pipeline, lots of space is coming on the market out of town, with cheaper prices, which will alter the supply mix in the market and dampen overall rents in the city.

• Ex-downtown regions will emerge as rival business centers: land availability,

cheaper rents, proximity to emerging industrial and commercial areas and escape from congestion, infrastructure issues, and high costs in downtown will drive a shift out of the downtown area.

• Downtown area will lose its dominance of the Yangon office market, a concentrated

cluster of top-quality office space will emerge around the Sule Pagoda/Bogyoke Aung San Rd crossroads, but there will be very little in the way of major developments in the downtown area.

• New builds will be favored as opposed to renovations. Developers are interested in

building scale and the downtown area is not really suited to that, due to a mixture of height restrictions, the challenge of developing and renovating older buildings and ensuring build efficiency. While there are some cases of renovation, these remain limited and small in scale, since regulations and the practicalities of renovation in a weak institutional environment.

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3.1. Yangon: Hotel Market Summary Yangon’s hotel market remains relatively small in international terms, but is expected to see rapid growth in the coming years as the supply of new locations ramps up.The hotel stock in the downtown area is skewed toward the lower end and, aside from a few major high-end developments, will likely remain so in the coming years. There is very little in the supply pipeline in the downtown zone. Room rates are expected to fall in the coming months and year, which may make it more difficult for local operators, many of whom are focused on the low-end and have little in the way of density.The majority of major new developments are occuring outside of the downtown conservation zone, reflecting the challenges - land availability, difficulties in building scale - for developers and investors in the downtown area. Supply Side Yangon currently has 146 hotels spread across the city with a total room stock of 8,981 rooms. While precise data on new supplies added over the years is absent, it is estimated that this has risen by 15-20 per cent between January 2014 and June 2015. Compared with other cities in the region, Yangon still has a relatively small supply of hotels, particularly of international standard. Looking solely at total registered hotels, the number of 146 compares starkly with the 1,713 hotels of all levels registered in Bangkok. This disparity in supply is also reflected when compared with the total amount of hotel rooms in different cities across the region. Figure 20: Total Stock of 3-5 Star Hotel Rooms, Asia-Pacific Comparison

Source: Savills Market Briefing, Yangon Heritage Trust, June 2015

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Distribution of Hotels Looking at the distribution of hotels by star across the city, the stock of hotel rooms is weighted towards the middle-market, i.e. 3 to 4 star hotels. This reflects many different factors, namely, the relative undevelopment of the high-end and the skew of the hotel stock toward facilities for the local market. Figure 21: Yangon: Room Stock Distribution by Hotel Star Rating, June 2015

Source: Yangon Heritage Trust Bahan stands out as having the most hotels of townships surveyed in Yangon. This reflects the density of the township – it is one of the largest townships in Yangon - and its proximity to major tourist sites, such as the Shwedagon Pagoda and Kandawgyi Lake. Figure 22: Total Hotels by Township, June 2015

Source: Yangon Heritage Trust, June 2015

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Source: Yangon Heritage Trust, June 2015 Downtown in Focus Looking solely at the downtown area, we have identified 43 hotels (30% of the 143 total hotels tracked in Yangon), with a total room stock of 2,611, 28% of the total 8,961 rooms tracked in the city. Dagon accounts for the largest share of hotel rooms, followed by Kyauktada, Lanmadaw, Bahan and Bothataung. Dagon’s primacy as a hotel destimation stems from its comparatively larger share of higher star hotel rooms. It has the largest amount of four star hotels compared with other townships either in or bordering the conservation area. In contrast, Kyauktada has a more even distribution across the hotel classes, with a stronger weighting toward the middle-end, plus a large amount of five star hotels. Locations in the downtown area, such as Latha, Lanmadaw and Pabedan are more heavily weighted toward the lower end. Which reflects a number of different factors, including a lack of investment in high-end, the difficulty of acquiring land for major developments and the difficulty of building sufficient scale in tight space conditions.

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Fig 24: Distribution of Hotel Room Stock by Township & Room Rates, June 2015

Source: Yangon Heritage Trust Note: Room rate refers to the price of a standard double room for a one night stay. Average room rates in Dagon and Kyauktada, $131 and $94 per night for a double room, respectively, reflect the skew in the hotel distribution toward the higher end. In contrast, average rates in townships such as Latha, Lanmadaw, Bothataung and Pabedan are much lower, reflecting the prominence of lower-end hotels in these township markets. Table 4: Average Room Rates by Star & Township, June 2015 Star Ahlone Bahan Latha Bothataung Dagon Kyauktada Lanmadaw Pabedan Pazandaung 1 - 49.3 37.0 32.0 - 37.5 33.3 36.3 32.3 2 43.0 63.9 50.0 - 26.0 51.5 45.3 49.5 27.5 3 - 71.2 65.7 65.3 84.5 70.4 65.3 67.5 55.0 4 85.0 148.0 - - 138.5 124.0 90.0 - - 5 - - - - 275.0 189.0 - - - Ave 64.0 83.1 50.9 48.6 131.0 94.5 58.5 51.1 38.3 Source: Yangon Heritage Trust, June 2015

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Occupancy in the Downtown Area Our measures of occupancy taken in mid-June 2015 show solid occupancy in the higher-end bracket, with lower occupancy toward the lower end. Figure 25: Occupancy in the Downtown Area by Hotel Star Rating, June 20-27 2015

Source: Yangon Heritage Trust, June 2015 This reflects the lack of space in the higher-end, particularly in the downtown area. Also, the lack of popularity of lower-end hotels, which are mainly located in places far away from the main tourist sites. Seasonal factors may also be playing a part, since June to August is considered a low season, particularly for domestic tourism. Table 4: Occupancy by Star & Location (No. of Hotels in Brackets), June 20-27, 2015 1 2 3 4 5 Ahlone 98.3% (1) Bothataung 68.6% (1) 84.7% (2) Pabedan 50.0% (3) 64.7%(2) 64.7%(2) Kyauktada 66.1% (3) 84.9%(2) 84.9%(5) 100%(1) 89.4%(2) Pazandaung 56.3% (2) Latha 81.3% (3) 74.4% (2) 92.0% (3) Lanmadaw 66.7% (2) 70.3% (2) 82.5% (2) 100%(1) Source: YHT, June 2015 City-wide Occupancy Research by Colliers dated at the end of 2014 puts average hotel occupancy at higher end locations (3-5 star hotels) across the whole city, rather than just the downtown area, at approximately 72%, reflecting increased build-out in the city and increased price competition.

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Fig. 25: Average Occupancy at 3-5 Star Hotels in Yangon, Q4 2012-Q4 2015

Source: Colliers Q4 2014 Yangon Hotel Report Looking longer-term, Colliers expects that city-wide occupancy will fall to 70% in Q4 2015 from the 81% recorded in Q4 2012, driven by increased build-out of hotels in the city and price competition. 2015 Outlook

• Another Strong Year for Tourist Arrivals: Total tourists coming to Myanmar are expected to reach 4.5 million in 2015, up 47.1% y-o-y. This follows 50% y-o-y growth in 2013, and supports the supply-side case for increased investment in the hotel sector in Yangon.

• Hotel Supplies to Keep On Growing: Official statistics reveal a significant pick-up in

foreign direct investment in the hotel and tourism sector. In three years, cumulative investment in the sector has grown from virtually zero to US$1.1 billion, reflecting high investor interest and Myanmar’s persuasive fundamentals.

Fig. 26: FDI in the Hotels & Tourism Sector (Annual & Cumulative), 2011-2014

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Source: Directorate of Investment & Company Administration, 2015 Colliers estimates that investment in the hotel sector will drive a rapid build out in hotel stock, with an estimated 2,700 extra rooms to be added to the existing stock of 2,200 by the end of 2017. This amounts to a doubling of the stock within three years.

Fig. 27: Hotel Stock (Total Rooms in International Standard Hotels), 2012-2017(f)

Source: Colliers, Q4 2014 Hotels Report

• Outward growth in hotel development: Not much in the pipeline in the downtown area. Looking at the 21 new hotel licenses issued so far in 2015, not one of the newly licensed locations is in the downtown area. Also, looking at the higher-end market, there are 3 main projects in the downtown area, with the rest increasingly out of the city centre.

Table 5: Major 5 Star Hotel Projects Project Size

(Rooms) Completion(Year) Location

Sedona Hotel 420 2015(H2) Inya Wing Centrepoint Towers 300 2015(H2) Peoples Park Accor & Myat Min 300 2015(H2) Yangon Myat Min HAGL Myanmar Centre

429 2015(H2) Inya Lake

Rangoon Excelsior 50 2016 Bo Sun Pat St Daewoo Amara 667 2016 Pyay Road State House Hotel 240 2016 Strand Rd/Sule Pagoda Rd Peninsula Hotel 80 2017 Burma Railway HQ Sheraton Yangon 375 2017 Kandagwi Lake Golden City Hotel 200 2018 Yankin Rd Source: Yangon Heritage Trust, June 2015

• Some pressure on room rates as supply increases: As with many aspects of Yangon’s real estate industry, the burgeoning supply pipeline will put pressure on room rates. While high-end hotels funded by international groups are in expansion mode, there is also a lot of activity from local developers and smaller-scale operators.

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• Tougher competition for downtown hotels: There is not much to recommend around the downtown area, and it may well be the case that many go out of business in the area.

Yangon: Retail Real Estate Market Summary Demand and occupancy remain high, putting pressure on rents, which is being keenly felt by local retailers. Demand for retail space is diversifying, with occupiers from the financial sector increasingly prominent. New supply of retail space will tick up in the coming years, but this is increasingly being developed out of the downtown area. A lack of developable space, plus logistical challenges are impeding the development of organised retail in the downtown area. Developers are charging high rents for new projects, which will put upward pressure on average rents in Yangon through the next 1-2 years as the supply side expands. Solid Demand, High Occupancy Our channel checks indicate that leasing in the commercial retail sector has remained firm in recent months. New spaces, such as the retail element at the Union Financial Centre in Bothataung released in Q1 2015, saw strong demand with a major local bank taking up the available space. This trend followed on from solid activity in the retail sector during 2014, which saw city-wide occupancy in commercial retail space reach a solid level of 98% across the city, according to Colliers. Demand for retail space in downtown locations has remained firm but, increasingly, retailers are looking outside of central areas for space, with projects in suburban areas outside of downtown seeing strong demand recently. Tight Markets Downtown, Retail Migration Our checks with local brokers yield insight into the tightness in the market and support our views on occupancy. We found very few spaces available across both international standard properties and more local properties. In total, we found 14,000 sq.m. of space up for lease, with nothing in the downtown area and with most available space being low-end, targeted at local businesses. These conditions support recent anecdotal reports that local retailers in the downtown area are facing significant rent increases, which is raising pressure on business costs and squeezing profits. As a result, many local retailers are looking outside of the downtown area for retail space. With strong demand and high occupancy, average rents for the best quality retail space in Yangon ranged between US$25-30 per sq.m., up approximately 15-20% y-o-y. Colliers has predicted that rents in all areas of the market will grow through 2015 as new and modern retail facilities are introduced.

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Fig. 28: Yangon: Retail Rents (US$ per sq.m. per month), 2011-2014

Source: Colliers, Yangon Retail Market Report New Supplies In The Pipeline, Out-of-Downtown Focus Colliers estimates that total retail stock reached 150,000 sq.m. by the end of 2014, having seen an increase of 24% y-o-y with an addition of 28,000 sq.m. during the year. New developments such as the AKK Shopping Centre (Outer City), Ocean Super Centre and Myanmar Culture Valley (Inner City Areas) in Tamwe and Dagon townships, respectively, mainly constituted the 2014 stock increase. Increasingly, new projects are coming in the outer city area as developers plug into previously untapped markets. New retail centres will be strongly evident in the area going forward on the back of strengthening commercial development, supported by the availability of developable land. Very little supply coming to the downtown area between 2015 and 2017, a factor that will put additional pressure on rents in the region, and push retailers out into areas of the city where space is more abundant. Table 6: Retail Project Pipeline, 2015-2018 Project Size(sq.m) Location Release

Date Township

HAGL Myanmar Centre 38,364 Kabaraye Pagoda Rd 2015 (Q3) Bahan Riverview Point 2,657 Thit Taw St 2015 (H2) Ahlone Golden Link 4,500 Link Lane 2015 (H2) Bahan Sule Square 3,300 Shangri-La 2016 (Q1) Pabedan Shwe Moe Kaung 6,050 Mk Rd 2016 Yankin Junction City 6 Storey Bogyoke Aung San Rd 2016 Pabedan Time City 53,000 Kyun Taw Rd 2016 (H2) Sanchuang KK San 1,023 KK San Rd 2017 Tamwe Capital City 6 Storey Insein Rd 2017 Hlaing Golden City 8,083 Yankin Rd 2017 Yankin Union City 8,241 Pyay Rd 2018 Hlaing Landmark 37,000 Bogyoke Aung San Rd 2018 Pabedan Pyay Tower 7,476 Pyay Rd 2018 Mayangone Dagon City 1 8,600 Kabar Aye Pagoda Rd 2018 Dagon Source: Yangon Heritage Trust

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2015 Outlook

• Solid demand. Major Western brands, such as KFC and Pizza Hut, are entering the Yangon market, supplementing strong demand from local retailers.

• Retail demand will stem from a broader range of sectors. As well as traditional retail

tenants, banks are emerging as a major occupier of retail space and with recent liberalization in the financial services sector, we can expect occupiers in this sector to remain prominent.

• Dispersal of demand. Yangon’s retail sector is growing outwardly, pushed out by high

rents and logistical dificulties and scarce space in the downtown area, to areas where supply is coming on stream and where new sources of consumer demand are emerging.

• Upward growth in rents. The market remains undersupplied, with the expansion of

new, higher quality retail space coming into the market, we can expect rents to grow. According to Colliers research, rental rates in both Downtown and the Inner City zone are to trend strongly as new developments emerge, many of which are priced at US$50-60 per sq.m. per month, approximately double the current level in the market.

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Yangon: Residential Market Summary: Demand has weakened compared with previous years, due to electoral uncertainty, higher taxes and lack of progress on the Condominium Law. Surveyed agents said that enquiry levels are down significantly compared with a year ago, with prices down between 5 to 10% compared with the same period in 2014. Yangon’s burgeoning supply of high-end residences and condos is depressing prices. Very few developments are scheduled for the downtown area. Current Market Conditions Recent market trends indicate a slowdown in demand and sales. Following significant interest in residential property in 2012 and 2014, levels of enquiry and transactions have slowed across all classes of residential property, including standard and higher-end residential units. We surveyed 15 agents affiliiated with the Myanmar Real Estate Services Association and they told us that the current level of new enquiries for properties in Yangon, particularly the downtown area, remain weak and are down approximately 10-20% compared with June 2014. Weak levels of enquiry are feeding into lower transaction volumes, which more than half of respondents said are down more than 20% y-o-y. As such, the momentum that built up in the market during 2013 & 2014 has not continued so far into 2015. These trends can largely be explained by the the following factors:

• Elections/political uncertainty: There are fears that the upcoming elections and possible instability will derail the process of economic reform and liberalisation that has supported the recent uptick in economic growth.

• Policy changes: The Myanmar government has raised stamp duties payable by buyers

and sellers, which has eaten into the profits from real estate transactions.

• Lack of progress on the Condominium Law: the proposed law remains unapproved, thus curtailing demand and sales. The Condominium Law was enacted by parliament in December 2013 and was expected to pave the way for foreigners to buy condominium units.

• Fears of a correction in house prices: After increasing rapidly during 2012 and 2013,

buyers are exercising caution because significant new supplies of property are due to enter the market in the coming two years, which may push down prices.

Pricing Weakness in demand and the prospect of a burgeoning supply pipeline has softened price growth in recent months. Agents told us that prices of standard residential units in both downtown Yangon and the wider city have declined between 5-15% compared with the same period last year. This softening in price growth has also extended as far as the higher-end condominium property market, with average asking prices falling slightly from their peak in Q3 2014.

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Fig. 30 Asking Prices at Condominium Projects, 2009-Q1 2015

Source: Frontier Research, Q1 2015 Supply: Burgeoning Pipeline, But Slippages Likely Approximately 20,000 high-end residential properties are expected to be released onto the market between 2015 and 2019. Assuming all are released, this supply increase will almost triple the stock of these assets within 4 years. Fig. 31 Stock of Hi-End Apartments in Yangon, 2009-2019 (f)

Source: Colliers, Q4 2014 This outlook is taking away some of the vim behind recent price appreciation in previous years. Markets overshoot and there is a case that prices are at ridiculous levels. However, it seems likely that there will be development slippages, for reasons that break down as follows:

• Regulatory uncertainty: some projects have been shelved for regualtory reasons due to planning and conservation issues.

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• Rising cost bases: the recent devaluation in the kyat – 28% against the dollar – will raise costs for developers, most of whom are dependent on imported construction materials. Also inflation is running at an official rate of 6%, which likely understates the real rate.

• Lack of productive base: Myanmar is under huge pressure to develop but it lacks the

building blocks to get it going: skilled workforce, reliable infrastructure and power supplies.

Downtown Supply: Few Developments in the Pipeline The downtown area will see little in the way of new residential developments, with an estimated 4% of new-build properties planned between 2015 and 2019 being located in the area. Table 7: DCA Pipeline Projects, June 2015 Project Company Location Size Junction City Shwe Taung Bogyoke Aung San

Rd 28 Serviced Apartments

Landmark Yoma Strategic Bogyoke Aung San Rd

90 Units

Mahar Nawarat Condo

Myan Golden King Merchant Rd/ Mahabandoola Rd

46 Condos/140 apartment units

Merchant Luxury Condo

Moon Sun 50th St 51 units

Merchant Suite Naing Group 49th St/Merchant Rd

37 units

Naing Group Tower II

Naing Group Sule Pagoda Rd 90 Units

Source: Yangon Heritage Trust, June 2015 Suburban areas and townships away from the downtown area are seeing the majority of new building activity. This largely reflects land availability and cheaper pricing, as well as heightened regulatory risk around building scale in the downtown area. Fig. 32 Distribution of New Residential Units, 2015-2019

Thanlyin, 17%

Hlaing, 12%

Dagon, 11%

Yankin, 11% Tamwe, 10%

Mingalardon, 9%

Bahan, 6%

Mayangone, 6%

Downtown, 4%

Ahlone, 4% Sanchuang, 3%

Kamaryut, 3% Mingalartaungnyunt, 2%

Thingungyun, 2%

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Source: Yangon Heritage Trust, June 2015 Focus: Downtown and The Yangon Conservation Area Table 8: Residential Sales Prices (Upper & Lower, US$ per sq.ft), June 2015 Township Lower Average Upper Ahlone 36.9 128.6 163.9 Bothataung 39 142.1 240.0 Kyauktada 60 138.1 360.0 Lanmadaw 19.9 139.7 225.0 Latha 19.6 161.0 267.2 Pabedan 60 173.4 600.0 Pazandaung 75.3 133.9 264.7 Source: Yangon Heritage Trust, June 2015 Townships close to the core business areas – Pabedan and Kyautada – carry the highest average residential sales prices. This is justified by the location of the township close to the city centre with access to the main transport links, exit roads, shopping centres, markets and government buildings. More dispersed properties in Latha, Lanmadaw and Pazandaung carry lower values, reflecting their distance from the centre of the region, and relative underdevelopment of housing stock. This is also reflected in rents, with the same, central regions attracting higher rental rates from occupiers. Table 9: Rental Rates (US$ per sq.ft.) in Downtown Townships Township Lower Average Upper Ahlone 0.76 0.99 1.64 Bothataung 0.24 0.98 5.4 Kyauktada 0.24 1.19 12.5 Lanmadaw 0.23 1.16 2.68 Latha 0.29 0.88 2.8 Pabedan 0.48 1.28 2.88 Pazandaung 0.41 0.65 1.2 Source: Yangon Heritage Trust, June 2015 Land Prices & Link With Proximity to Roads The more expensive properties reflect their proximity to major roads. For example, standard land prices assessed by the Yangon City Development show higher rates close to major roads, such as Bogyoke Road and Maharbandoola Road, with lower rates in numbered streets, such as 28th and 29th Street.

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Table 10: Pabedan Township: Standard Land Prices Location Land Price (Kyat per Sq.ft) Bogyoke Road 300,000 Anawyahtar Road 300,000 Maharbandoola Road 300,000 Merchant Road 300,000 Strand Road 300,000 Sule Pagoda Road 300,000 Shwedagon Pagoda Road 250,000 Shwebonthar Road 250,000 Bosoonpet Road 250,000 Konzaydan Street 250,000 Numbered Streets 175,000 Source: Yangon City Development Commission, June 2015 Floors & Prices One aspect ignored by our research includes the floor of the property in question. Higher floors have lower prices. Government schedules for property tax assessment and land prices detail the difference in valuations according to floor. Table 11: Standard Prices of Apartments in Lanmadaw, Latha, Pabedan, Kyauktadar , Botahtaung, Dagon Townships, June 2015

Floor Standard Price ( Kyats / sq. ft )

Streets Roads Main Roads

Ground floor 67000 82000 101500

1st floor 52000 63000 77000

2nd floor 44000 55000 66000

3rd floor 37000 49000 58000

4th floor 32000 42000 50000

5th floor 28000 36000 44000

6th floor 24000 33000 38000

7th floor 19000 25000 31000

Outlook 2015:

• Weak year for sales expected: with political uncertainty rife in thr market, it is likely that the general level of sales transactions for residential properties in Yangon will fall year-on-year. Rough estimates from agents that we have spoken to highlight an expected drop of 10-15% y-o-y.

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We see this as a city-wide phenomenon also extending into the downtown area. Pricing is a concern and alternative locations are emerging in suburban areas in Yangon which offer a more attractive option, in terms of pricing and standard of living, than the downtown area.

• Supply-side expansion: supplies of new properties will grow during the coming year

from the private sector and also from housing projects being pushed by the local government. This is a necessary step given the pressure on Yangon’s relatively low housing stock.

• Residential development will largely ignore the downtown area. Looking at current

developments, the majority of new residential property will be developed outside of the downtown area. Of the 20,000 residential units currently being built approximately 7% are located in the downtown area

• Downward Pressure on Prices: with a slowdown in speculative capital active in the

market, lower demand and the prospect of a jump in supply of residential properties, prices are under downward pressure. Agents in them market are reporting that sales prices and asking levels are down 5-10% compared with the same time last year.

• Risks are weighed on the downside: it is unlikely that the election will be a swift result,

with political inertia making decisive policy action unlikely in the wake of the election.However, the introduction of the Condominium Law may give the market a boost but this is unlikely at the minute.

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3. Anecdotal Views on Heritage Properties During the course of the research into Yangon’s real estate market and the downtown area, I spoke to many different people, including executives at local and international real estate development firms, local agents, researchers, local residents and government officials. Regarding the question of ‘Are occupiers willing to pay a premium for heritage buildings and, if yes, under which conditions?’ I have the following general findings which summarize the responses that I received during the course of my research. In principle, the attractions of heritage buildings and their unique values that might justify a premium price were well-understood by the people I interviewed and they can be summarised as follows:

• Heritage buildings have aesthetic value. Compared with recent standards of development in Yangon, the older, heritage buildings have a completely different look and design that makes them unique.

• Heritage buildings are increasingly scarce and therefore have rarity value that

modern properties do not have. For investors, this is an important factor that can create value and justify a premium price.

• The fact that heritage buildings have history lends them prestige. For example, one

prospective occupier was attracted by the old colonial history of apartments and buildings in what he would regard as a heritage property.

• Heritage buildings largely exist in established neighbourhoods. This is a direct

contrast to new areas under development in the Yangon area. Because many heritage buildings are in established areas, they are surrounded by amenities, public services and a well established, functioning community. This is a particular draw for residential occupiers, though would also likely apply to investors and developers.

However, there was a general consensus that, under current market and development conditions, it is difficult, in practice, to justify paying a premium for a heritage property in Yangon. The reasons for this can be broken down as follows:

• Modern properties are comparatively better living spaces. Many would-be occupiers desire robust buildings with modern facilities, something which can’t always be found in heritage properties. Furthermore, the opportunity cost of furnishing, renovating and improving older, heritage buildings can be so large that the effort might not make financial sense, particularly for, but not necessarily limited to, residential investors.

• The current state of land titling and registration in Yangon makes heritage

buildings difficult to invest in. Exchanging land title and asserting ownership on an asset is a fundamental part of occupying and/or taking ownership of a real estate asset. The current situation in Yangon makes it very difficult to ascertain clear land titles and ownership. The processes involved with clarifying land title are apparently onerous in the extreme and, often, don’t yield any result. As such, this is a major disincentive for investors.

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• Heritage buildings are, by definition, old and are prone to structural decay. A frequently cited criticism was that heritage buildings in Yangon were often built of steel which has, over time, corroded. In such situations, it is difficult to assess the actual cost in terms of renovation time and inputs that would be required to improve the building, thus increasing financial risk for a development project.

• The surrounding environment and infrastructure around many heritage buildings

can be a disincentive for investors. Yangon’s streets are increasingly congested and are not walkable, making access to occupiers and would be customers or visitors a real problem. Also, infrastructure weaknesses, such as electricity blackouts, intermittent water supplies, poor standards of general hygiene in local streets, increase operational risk for developing and operating heritage buildings for commercial developments in downtown Yangon.

• There is a lack of either incentives or compensation for the risk involved in taking on a heritage project. Two respondents mentioned that, while heritage preservation is seemingly a stated goal for the local government, the risks involved with taking on a heritage property are too large and it seems that there are little or no incentives or assistance to developers, upgraders and renovators to take on the risk of heritage project.

• Although heritage buildings are being identified and are increasingly being protected, it is not clear that there are controls and/or regulations being made to buildings/developments surrounding the heritage properties. For example, the value of a heritage property might be compromised by the development of a unsuitable property inclose proximity. If investors are going to be asked to pay a premium for a heritage property, the surrounding area must also have some development controls to preserve value. For the respondent concerned, there seemed no information or confirmation from the government that these kinds of controls were in place.

• There seems to be no credible, identifiable commitment in the part of local government toward infrastructure improvement. Investors and occupiers need to make an investment thesis and this is difficult to make given the current state of infrastructure in the downtown area. While there have been many statements about improving infrastructure quality, it is difficult for investors to either verify this commitment, or gauge any sense of improvement in the infrastructure in the surrounding environment. These conditions undermine the basis for investing in heritage properties and paying a premium for them.

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Appendix: Leasing/Purchasing Processes Transfer of Property Act

Originally dating back to 1882, this law was most recently amended in 2013. It governs various types of property transfer, including sale, exchange and lease, and defines the basic rights and obligations of the buyer and seller.

All transfers of property over Ks500,000 ($485) in value, as well as leases above one year in length, are required to be registered according to the Registration Act, which was updated in 2013.

Transfer of Immovable Property Restriction Act

The 1987 Transfer of Immovable Property Registration Act prohibits foreigners from owning land or property in Myanmar, as well as theoretically restricting international leases to one year. The law is itself an amendment of an earlier act.

Companies that have “direct, beneficial contracts” with the state are exempt from the law, as are embassies.

Stamp Act

Originally dating back to 1899, this law has been amended several times, most recently in March 2014 when several other key pieces of legislation were also edited.

Stamp duty is levied at a flat rate of 7% for properties located inside the Yangon administrative area, and at 5% for those elsewhere. If a buyer cannot prove the source of funds, additional fees are levied on the transaction.

Buyers making their first transaction who are unable to demonstrate the source of funds are required to pay a sliding scale of fees ranging from 3% for transactions under Ks50m ($48,500) up to 30% for those above Ks300m ($291,000). Buyers making second purchases of immovable property, and who are unable to prove the source of their funds, are subject to the 30% rate for all values of transaction.

Duty is also levied on leases of immovable property, ranging from 1.5% to 3% depending on the length of the lease involved. Stamp duty is charged at the time of transfer of ownership.

For buyers purchasing off-plan, duty is only payable upon the completion of the building, at which point developers provide purchasers with final ownership documents.

Given the relatively commonplace practice of under-reporting the actual value of property transactions, in order to reduce stamp duty liability, the Internal Revenue Department (IRD) has issued appraised values for different areas of Yangon. These provide a minimum threshold for tax payments.

The prices were most recently updated in October 2014 and range from around Ks50,000 per sq.m to Ks400,000 per sq.m, depending on the area. This equates to between approximately $500 and $4,000 per sq m.

The minimum stamp duty on any sale transaction is Ks600 ($0.6), and for any lease is Ks25 ($0.26).

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Foreign Investment Law (FIL) and FDI Incentives

Approved in late 2012, the FIL is one of the key pieces of investment legislation in Myanmar. It is the primary channel for large scale international investors and developers to gain direct access to the real estate sector, and allows the lease of land for investment projects for up to 50 years, plus two possible extensions of 10 years each.

Foreign companies seeking to invest under this rule are required to apply through the Myanmar Investment Commission (MIC) and are eligible for tax incentives. The FIL is mainly considered appropriate for larger-scale projects.

Several foreign investors in the real estate sector have gained approval for projects through the MIC, including some involving land tendered by the YCDC on a BOT basis. The investment law also applies to privately-owned land.

However, even with MIC approval, foreigners and their Myanmar-registered companies cannot own freehold or grant land. It is expected that an exception will be made for foreign ownership of condominium units, but such a law has not yet been passed.

Under the FIL, foreign companies can operate as an investor in a variety of sectors, either as a wholly foreign entity or through a joint venture with a Myanmar national or corporation, or under a contract. The most common form of contract is a build-operate- transfer with the government.

Specifically, in the real estate sector, several activities are only permitted to foreigners through a joint venture with a local company, including the construction, sale and renting of condominiums and apartments, offices and commercial buildings, as well as enterprises involving the construction of low-cost housing, and the development of new townships.

In addition, the construction and development of office or commercial buildings requires separate approval from the Ministry of Construction, which tends to be a very challenging process. Any large-scale projects also require the company to carry out environmental and social impact studies.

Build-Operate-Transfer (BOT) Agreements

BOTs allow the private sector to finance, design, build and operate investments on government-owned land for a fixed term.

Following political reforms in 2011, the government began offering BOT tenders on government-owned property in Yangon.

Tenders are usually managed by the ministry that owns the site, and terms can vary but typically may involve a land premium, annual rent or profit sharing. Furthermore, BOTs on heritage buildings include restrictions on preserving original architectural features.

The tendering process is overseen by the MIC and the President’s Office. BOT contracts are signed between the proprietor ministry or department, the winning company and the MIC, which supervises progress on the project.

If the development does not proceed according to the agreed terms and conditions, the government may expel the company, cancel the contract and issue another tender.

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However, if a developer faces obstacles due to reasons outside of its control, the BOT framework can be re-negotiated with the relevant department.

For example, a developer may propose to build a 30-storey tower on a particular site, but a new zoning law only permits up to 16 floors for that particular area, making the original terms offered by the developer commercially unviable. In such cases the terms are re-negotiated.

Myanmar still lacks a privatization law to regulate tenders of government land and buildings, and many aspects of the BOT tender process are not in line with international standards—for example, there is no standard among ministries for tendering and each has its own way of working.

There is a growing call among developers and investors for reforms to the tendering process, as in many cases little to no guidance is offered regarding the type of development required, or even the zoning regulations for the site.

After the expiration of the contract, the construction is transferred to the government. The structure is common for hotels, office buildings, commercial buildings and conference centers as well as mixed-use projects.

Sales transactions

Properties can be sold or leased either by the entitled owner or by someone who has received power of attorney from the entitled owner.

Prospective buyers or tenants are advised to check the legal status of the property at the Department of City Planning and Land Administration Record Maintenance Department of the Yangon City Development Committee (YCDC). Property records can be accessed electronically upon application.

Rental contracts

In general, most residential and commercial leases in Yangon are made for either 6 months or one year. If both parties decide to enter into a contract of over a year, they are advised to include price appreciation clauses for the each of the years, plus payment terms.

Demand is currently so strong in the rental market that upfront payments of anything from three months to one year are demanded by landlords as a standard procedure.

There are various requirements for tenants to register with local authority offices. Tenants must report to the Ward administration office as guest residents. Furthermore, if the tenant is an expatriate, they should report to the Ward office with a copy of their passport, as well as recommendation from the company employing them in Yangon.

Expatriates must hold a business visa in order to rent property. Under current immigration regulations, those with tourist visas are not allow to stay in residential properties, only in hotels or serviced apartments. Tenants are not legally allowed to sublet property.

Finally, tenants and landlords should inform each other in advance about whether they want to extend the rental period or terminate the agreement at the due date.Landlords and agents often draft two contracts—one with a high value for the tenant, and another with a much lower, ‘official’ value (often around a tenth of the first contact), which they use to avoid paying tax.

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