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Property-bubble worries prompt sit-down

Workers erect scaffolding on the construction site of a residential building in Phnom Penh earlier this year.
Workers erect scaffolding on the construction site of a residential building in Phnom Penh earlier this year. Heng Chivoan

Property-bubble worries prompt sit-down

Amid rising fears of a potential bubble in Cambodia’s real estate sector, the government has called a meeting next week to address concerns of overheating in the sector, as high prices fuel anxiety of increased speculation in the market and a lack of demand-driven growth.

The Ministry of Economy and Finance has invited all relevant stakeholders, including the Ministry of Land Management, Urban Planning and Construction, the National Bank of Cambodia and private developers, to a meeting on August 18 to assess possible risks to Cambodia’s fast-growing construction and real estate sector.

“If prices are reasonable for the [purchasing] ability of the buyer, it is OK, but we are afraid that the high price is the result of speculation,” said Mey Vann, director of financial industry at the Ministry of Economy and Finance.

“If there is speculation, we need to find solutions to prevent this bubble price.”

According to Vann, another concern is the rising debt in the real estate sector.

He said that if developers are using their own capital to fund projects, there is less risk, but if they are accessing credit and then fail to complete these projects, it will result in “ghost buildings” and hit the buyer hardest.

“In 2008, we have just a few cases but it was not much, compared to other countries, to make us worried,” he added, comparing today’s market situation to the real estate slump post the global financial crisis.

Huy Nara, director general of the General Department of construction at the Land Management Ministry, was less cautious.

He said despite the increasing number of construction companies entering Cambodia, demand was keeping up pace with the supply.

“Even though there are some condos that are not yet sold but they will be OK,” Nara said. “Clients will come.”

While he was yet to receive an invite for the meeting, he said apart from discussing risks to the sector, the meeting will look at also improving the investor climate in the country to facilitate increased investments.

Earlier this year, both the World Bank and Asian Development Bank warned of the increase in credit to the construction and real estate sector, suggesting the strengthening of supervision and monitoring of such lending.

In lieu of these warnings, Grant Knuckey, CEO of ANZ Royal Bank, said the National Bank of Cambodia should increase vigilance of real estate lending; however, it was “much harder in practice than in theory”.

“Money ostensibly lent for productive activity can in reality be diverted for property investment – it can be hard to police,” he added.

A “classic bubble”, he said, was characterised by extreme over-supply, high leverage, which is the amount of debt used to finance a firm’s assets, and extreme prices.

Knuckey said that he didn’t see any of these criteria being met in current market circumstances.

“However left uncurbed, it is probable one [bubble] may develop given the trends are all moving in that direction,” Knuckey said.

However, Nguon Chhayleang, CEO of Regent Realty, a Century 21 franchise, said in the next six months he expected to see a “small bubble” forming in Cambodia’s property sector that could burst in a few years.

“It will be a combination of failing projects and lack of investors coming in,” said Chhayleang.

“If neighbouring countries open up their country, to attract investors, there will be a smaller number of investors and potentially the bubble will burst.”

Sung Bonna, director of the Bonna Realty Group, said the upcoming ASEAN Economic Community (AEC) integration could spark increased investor inflow to the sector and can balance the excessive supply currently in the market.

“If the AEC integration results in more activity and more demand, then construction projects will be completed,” he said.

“But if it is not much activity, then we will feel concerned.”

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