Will the end of EU sanctions pop Myanmar’s real estate bubble?

Today the European Union lifted economic sanctions against Myanmar, but European businesses still face obstacles to operations there as the troubled Asian country re-enters the international community. Chief among those problems: a real estate bubble.

EU officials joined the US in re-establishing commercial relations with Myanmar after it transitioned to a civillian government and released political prisoners. Their hope is that foreign investment will lead to more effort from the government to address attacks on the country’s Muslim minority and other human rights abuses.

For businesses, there’s an obvious interest in doing business in a country with more people than South Korea or Malaysia. But forget crony capitalism, the immediate problem is simply finding a hotel room, visitors say. Travelers $TRV are advised to make reservations for rooms well in advance, thanks to a shortage caused by foreigners who have flocked to the country as the US and EU have relaxed restrictions on trade. There are reportedly only 27,000 hotel rooms in the entire country.

And it’s going to be hard to rectify that situation because land is so expensive. Myanmar, perhaps eager to join the world’s advanced economies, has a housing bubble.

Until recently, there weren’t a lot of options for investment. Sanctions made it difficult to invest outside the country, and there was no domestic stock market to speak of. Investors, then, turned to real estate as a place to stash their cash, which has created high land prices around the commercial center of Yangon, according to Paul Wilson of Myanmar Capital Advisors.

“The real estate prices in Yangon—which is twenty or thirty years behind Thailand—are as high as some places in Bangkok,” Wilson said recently at a conference in Los Angeles. “The country actually has a lot of cash. There’s jade sales: official reports of jade sales are $4 billion a year, the unofficial are like $36 billion worth of jade going to China, so people have tremendous amounts of wealth. There’s a lot of illicit money, through narcotics, that’s still a problem. There’s nowhere to put the money. There’s no stock market, you couldn’t convert the currency, so they put it in land.”

For that reason, Wilson advised investors away from real estate in Myanmar, noting that the country also limits foreign investment in land there. But high prices and lack of access to foreign capital could make it hard for infrastructure upgrades to expand the country’s hotels to accomodate the potential for more business and tourist travel. But locals are hopeful that if the next set of elections in 2015 re-affirms Myanmar’s commitment to reform, interest in these more productive sectors will allow the land bubble to subside, creating an opportunity for more expansion.