Four to five years ago, if you were a high-powered foreign executive pioneering Myanmar’s last frontier market, there was really only one place in Yangon to open a downtown office: the Sakura Tower.
Back in the boom days of 2013-2014 – the heady period following then Myanmar President Thein Sein’s economic and political reforms that led to the lifting of most Western economic sanctions on the once-pariah regime and sparked wild optimism about the country’s potential – Sakura Tower was asking and getting Manhattan-level rents.
“The prices at Sakura Tower were about US$110 per square meter,” recalled Dan Davies, managing director of Colliers International/Myanmar. Nowadays, Sakura’s rents have dropped to about US$35 per square meter.
The dramatic decline in average Yangon office rents of about 25%-30% over the past two years, according to Collier estimates, can be blamed on a number of factors, not all of them attributable to the military’s brutal crackdown on Rohingya Muslims in August-September last year, forcing some 700,000 refugees into Bangladesh and re-earning Myanmar some of its pariah status.
“We don’t like to say ‘crashing.’ They are just ‘correcting’,” Davies said of the rent free-fall, which in turn has had a contagion effect on falling land prices in the capital and nationwide.
Part of the “correction” is due to supply and demand. In 2013/14, there was about 80,000 square meters of office space available in Yangon. Now, with the launch of several new office buildings including Junction City and Sule Square – opened last year in the downtown district – there are 400,000 square meters available.
Land prices, especially in Yangon, reached dizzying heights a few years ago as the country’s crony capitalists linked to the previous military regime – now charitably referred to as “tycoons” – sunk their cash into property as one of the few viable, and legitimate, investments in town.
“Now property prices have fallen 35%,” said Khin Shwe, chairman of the Zaykabar Company and one of Myanmar’s prominent property “tycoons,” with vast investments in the Mingalardon Garden City complex – one of Yangon’s first housing developments – and a host of planned hotels and mixed-use complexes.
“It depends on the economy,” Khin Shwe said. “When the economy is going up, property prices go up. When the economy is going down, property prices go down because our Myanmar people don’t have much money and cannot afford to buy property.”
Much of the property price boom spanning 2011-2014 was predicated on predictions of a massive influx of foreign direct investment (FDI) and well-heeled foreign executives who could pay hefty office and apartment rents.
FDI approvals have slowed over the past two years, though, from US$9.5 billion in fiscal year 2015/16, ending March 31, to US$5.7 billion in 2017/18. That’s a collapse of some 40%, according to the Directorate of Investment and Company Administration (DICA) data.
Some US$4.6 billion of last fiscal year’s FDI approvals came from China, Hong Kong, Japan, Singapore, South Korea and Thailand, traditionally the main investors in Myanmar.
“Now the USA and EU never come,” Khin Shwe said. “They are just wait and see.” After the Rohingya refugee crisis, which has sparked claims of “ethnic cleansing” and “genocide” at the UN and elsewhere, they are likely to wait some more.
Economic growth has also slowed under the leadership of State Counsellor Aung San Suu Kyi and her National League for Democracy (NLD) administration, with GDP growth falling from 7% in fiscal yea 2016/17 to 5.9% growth last fiscal year, according to World Bank estimates.
The NLD government has opted for a policy of fiscal prudence and curbed money-printing as a means of financing the budget, an inflationary practice followed by the former military-led regime. The prudence has led to a fairly stable kyat currency in recent months and reduced inflation to a manageable 4%-5%, but has also slowed growth and job creation.
At the beginning of the NLD’s term, several construction projects in Yangon were put on hold by the newly elected government, sometimes for legitimate worries about their environmental and social impact.
That may turn out to have been a good thing, given the growing oversupply and lackluster demand on the near horizon.
Despite the economic slowdown, there has been a spurt of rental activity in new downtown office buildings such as Sule Square and Junction City, but this appears to be fueled by old demand seeking new, shinier quarters.
“What I can report is that there are very few new customers,” said Davies of Colliers, which handles rentals for 25 buildings in Yangon. “The real estate market this year has been supplied by whoever is here already. What you had last year was a chunk of people moving out of villas to new offices – what we call a flight to quality. What that is creating is a real downtown.”
A few years ago there was a heated debate underway among city planners and heritage buffs about whether Yangon’s Central Business District (CBD) should be allowed to emerge in the city’s historical downtown – around Sule Pagoda Road and Bogyoke Aung San Road – or be pushed to the northern outskirts, for instance along Kabar Aye Pagoda Road, site of the Vietnamese-built HAGL office complex and Melia Hotel.
“There was a lot of confusion in the market and conflicting signals about where the center of gravity would be for business and that seemed to be settled last year, finally, with some decisions being made,” said Stephen Purvis, general manager at Meeyatha Development Ltd, a subsidiary of Yoma Strategic Holding Ltd owned by tycoon Serge Pun.
In February 2017, the Yangon City Development Committee (YCDC) gave the go-ahead to Yoma’s long-delayed mixed-use development project on Bogyoke Aung San Road, comprising the 88-room Peninsula Yangon Hotel in the old Myanmar Railways headquarters, two office towers (adding 84,000 square meters to the market,) a shopping mall and a Peninsula Residences apartment tower.
The 10 acre development comprises two separate joint ventures including the Yoma Central Complex, owned 30% by Mitsubishi Corp, 48% Yoma Strategic Holdings and 12% FMI, and the Peninsula Yangon Hotel, 70% Peninsula Group and 30% Yoma.
Across the bridge from Yoma Central – now a giant construction site scheduled to be completed in 2020 – lies another massive development project planned around the Yangon Central Rail Station.
In February, the government selected a consortium of Myanmar’s Mottama Holdings and Singapore’s Oxley Holdings to develop the 62 acre site into another mixed-use complex, albeit with strict orders to preserve the Central Rail Station structure.
The two projects will be built around heritage sites – the Railway headquarters and Central Station – highlighting the challenges that Yangon’s city planners face in preserving downtown’s old British colonial charm while allowing it to evolve into the CBD.
“I think the challenge that everybody has is how you balance the demands of the Central Business District while maintaining a sensible heritage content,” Purvis said. Another future challenge will be to find tenants to fill all the new offices.