Late last year, an intriguing sales leaflet landed in the letterboxes of homes in Mid-Levels, home to cashed-up expatriate bankers. The leaflet, advertising a new real-estate development named 'The Olympic Residence' in the Mongolian capital of Ulan Bator, featured shots of a lavishly decorated luxury apartment. It proclaimed the landlocked country bordering Russia and China a 'new investment frontier' for Hong Kong's property-obsessed investors. As it turns out, the apartment complex in downtown Ulan Bator is only a hole in the ground with a fence surrounding it. Lee Cashell, an American who lives in Ulan Bator and is developing the project, began marketing apartments in the Olympic to foreign investors in 2007. But because of a funding crunch, only the foundations have been laid so far. Another of the developer's Ulan Bator projects, a striking purple structure in the centre of town named the Regency Residence, also remains unfinished after sales began in 2005. Cashell is one of several budding real estate barons whose dream of modernising the Mongolian capital's skyline with shiny new skyscrapers has not yet come true. Besides a shortage of finance, other obstacles for developers and investors include murky property ownership rules and a potential oversupply that could overhang any investment. 'I would say 90 per cent of property developments in Ulan Bator fail,' says Joachim Bertot, a real estate investment adviser who has lived in the city for eight years and helps run a company called Make-A-Difference Mongolia, which goes by the name MAD Mongolia. Most of the unfinished properties in the capital city were launched during a real estate frenzy in 2007 and 2008. Poor government oversight of the nation's construction laws gave rise to a land grab by local property developers - or wannabe developers. A recession in 2009 scuppered the construction plans. In 2007 and 2008, 'everyone started building because they thought property prices would rise and rise but the commodity crisis happened and banks stopped lending,' says Christopher de Gruben, Bertot's business partner at MAD Mongolia. Today, 83 cranes dot Ulan Bator. Most of them are idle. While the city itself lacks basic infrastructure, the areas surrounding its single railway line and its few congested potholed roads are jammed with unfinished construction projects. About half the city's one million residents live on the outskirts in the so-called ger district, a slum-like community of nomads' tents, according to estimates by aid organisation World Vision. 'The cranes are a legacy of Mongolia's recent banking crisis,' says Alisher Ali Djumanov, chief executive of Central Asian investment bank Eurasia Capital. Fuelled by buoyant metals prices, inflation soared in mineral-dependent Mongolia, peaking at 30 per cent in 2008. The result was negative real interest rates, which prompted Mongolians to withdraw their cash from banks. The banks responded by curtailing loans, particularly to real estate developers and mortgage borrowers, according to a report by the European Bank for Reconstruction and Development. That left developers, who were relying on bank loans, suddenly without funds. Then the global financial crisis began to unfold sending copper prices plunging, and Mongolia's economy with them. Now, Mongolia's banks are choking on bad debts with the official figure for sour loans put at 7 per cent of the banks' combined asset base. This is down from a peak of 17 per cent in late 2009, but the International Monetary Fund, among others, has criticised Mongolia's central bank for under counting. Whatever the true bad-debt picture, it is easy to see that Mongolian banks are foreclosing on unfinished construction projects. Figures for November 2010 from the Bank of Mongolia, the central bank, show that as of October 31 the nation's banks owned 23.6 billion tugrik (HK$146.49 million) worth of real estate, or triple the amount they held a year earlier. There is a 'complete lack of money in Mongolia,' says Jargalsaikhan D, chief executive of Xas Leasing, an arm of Mongolia's Xas bank, and author of a popular Mongolian-language blog on the sorry state of his country's real estate business. 'And to put it very simply, it is hard to build tower blocks without money.' So developers such as Cashell are doing the best they can in a difficult funding environment and turning to individual investors for finance. Cashell declined to be interviewed for this article. But Jess Lampe, a 27-year-old business development manager for Asia Pacific Investment Properties, which is associated with Cashell, said the developer did not rely on bank loans for either the Olympic or Regency developments in Ulan Bator. Lampe was in Hong Kong in November to promote the Olympic residence to potential investors who gathered at the city's swank Mandarin Oriental hotel. In an interview, Lampe described Cashell's financing model as 'fund through pre-sales'. When an apartment is sold, the funds don't go in an escrow account but 'the off-plan construction (sales) are used to finance the building,' Lampe says. The company does have certain 'construction milestones' in place, he adds, that mean the developer has 'to reach for the next payments to come due'. Developers in places such as Hong Kong sell apartments off-the-plan before they are completed but those funds are typically held in an escrow account and construction of the building does not directly depend on the pre-sales. In Mongolia, though, the upshot of the 'fund-through-pre-sales' strategy is that any investor buying into an incomplete project has to hope that enough people buy units for the developer to afford to complete the job. Another risk for potential investors buying off-the-plan is that under Mongolian law, foreigners do not get full legal title to their apartments until the developer has finished construction of the entire building. Lampe concedes that one reason both the Regency and Olympic projects have been slow to get finished is that they both have depended on down payments on units from investors to fund construction. 'We resumed sales over the course of 2010 in a very concentrated effort,' Lampe says, so 'we can get up to a completed superstructure sometime in the next year and a half.' Because most locals cannot afford the luxury apartments, developers are banking on a potential minerals rush - and foreigners connected to the mines who are expected to move to Mongolia - to bail them out. Right now, there are only about 9,000 expatriate mining staff living in Ulan Bator, according to Mongolian property developer UMC. But some big mining projects are in the works, including Oyu Tolgoi, a copper and gold deposit the size of Macau that will draw foreign workers and is projected to lift Mongolia's economic output by a hefty 30 per cent when it comes on stream in 2013. Indeed, after a lull, Lampe says that investor interest in Mongolian property is warming 'now that [Oyu Tolgoi] is moving forward'. Jim James is one foreign investor who got in early. The 43-year-old Briton who runs a public relations company in Beijing and Singapore, says he spent US$100,000 buying a unit in Cashell's Regency project in January 2006. James says the developer told him the 100-unit apartment block would be finished within two years. 'I was expecting to achieve rents of US$2,000 a month on the apartment from early 2008,' James says. 'I have missed out on a few years' worth of rental income.' The exterior of the Regency is complete and Lampe says the lobby and parking garage are finished and the elevators are installed. He says the developer is now beginning to furnish the apartments. James is sanguine about his loss of rental income because he believes land values have risen since he invested in the Regency unit, and that he could sell his unit for a profit. He could be right. Although there are not any official statistics, anecdotal evidence gathered by property researchers point to an upturn. For instance, UMC says that values of newly built luxury apartments in UIan Bator were US$1,600 a square metre in September, up 24 per cent from a year earlier and that annual rental yields are at 11.5 per cent. Eurasia Capital estimates the average price of all apartments in Ulan Bator is US$900 a square metre, a 20 per cent gain from late 2009, and puts the average rent yield at 15 per cent. Still, other market participants advise would-be investors to proceed with caution. 'There are a lot of empty apartments in Ulan Bator,' says MAD Mongolia's de Gruben. 'We have had [empty rental] properties on our books for months.'