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YANGON, Sept 20 (Reuters) - Myanmar has approved more foreign direct investment in the past five months than all of last year, but companies setting up operations in the hot frontier market face a growing problem: Southeast Asia's highest office rental rates.
Myanmar has approved FDI projects worth more than $1.8 billion from the start of the fiscal year on April 1 to the end of August, compared with $1.4 billion in the whole previous fiscal year, Aung Naing Oo, a director general at the Ministry of National Planning and Economic Development, told Reuters.
But he said he fears potential foreign investors will be turned away by a severe shortage of office rental space.
The wave of investment comes as Myanmar's quasi-civilian government implements political and economic reforms, initiated two years ago by President Thein Sein, a former general who led the country out 49 years of military rule and global isolation.
The European Union agreed in April to lift all sanctions on Myanmar, while the United States suspended sanctions in May last year and allowed U.S. companies to invest through a general license. Some American executives have urged Washington to go further and lift sanctions entirely.
Most of the approved FDI came from other Asian nations, said Aung Naing Oo.
"Malaysia, which brought about $500 million for manufacturing Nissan cars, is the biggest investor during this fiscal (year) in terms of size followed by Hong Kong and South Korea, who injected funds in the garment industry," he said.
Nissan Motor Co plans to start a complete knock down production of its cars in Myanmar with a Malaysian partner Tan Chong Motor Holdings Bhd, the Japanese automaker said on Friday, becoming the first major global carmaker to be assembling cars in the Southeast Asian country.
The rising tide of foreign investment is fuelling a property boom in the commercial capital Yangon with the increasing demand for rental space feeding the highest office rental rates of any Southeast Asian city, according to real-estate firm Colliers International, which opened a branch in Yangon in July.
Colliers put the average rental rate in Yangon at nearly $80 per square metre, compared to about $25 in Bangkok and $30 in Hanoi. At about $70 per square meter, even the affluent city-state of Singapore doesn't match Yangon, it said.
Scipio Services, a Yangon-based firm that helps foreign companies establish themselves in Myanmar, puts prime office rental rates even higher. According to their survey, commercial spaces in the few business towers available jumped from $50 per square metre in mid-2011 to as much as $90 by May this year.
Some companies choose to rent houses and villas in lieu of office space, said Brett Miller, Scipio Services' managing director. But residential rates have also shot up, with villas ranging in price from $4,000 per month to $25,000, he said.
As a result, some companies "are coming in with a small footprint," stationing only skeleton staff in the country, he said.
Other companies base executives in neighbouring Thailand and fly them to Yangon where they stay at hotels, said Tony Picon, Colliers' managing director in Myanmar. "I call them the 'half-pats', spending around half their time in Yangon," he said.
Aung Naing Oo said the government is taking measures to increase the supply of rental space.
"To solve the problem of the shortage of hotel and office apartments, we are now encouraging investors in these sectors by approving their proposals very speedily," he said.
Drastic rises in property prices are being driven partly by land speculators. Miller at Scipio Services said the government could implement a "holding tax" that would encourage landowners to either build on a property or sell it to a developer.
Picon, however, was sceptical the government could enforce compliance.
"For tax on unused land, the owner could build something small and say the land is being used," he said. "Overall I find using tax often counterproductive especially when you have limited capacity within government to enforce laws." (Editing by Jason Szep/Simon Cameron-Moore)