Once among the highest in the region despite poor urban infrastructure, rental property

rates in Phnom Penh have dropped 30 per cent during the past two years, and the trend

is continuing.

The change has been most discernible in the upper end of the market represented by

sprawling villas marketed mainly to diplomatic staff as well as NGO and UN employees.

Villas that as recently as 1997-1998 fetched between $4,000 and $5,000 a month are

now being rented for $2500 in central Boeng Keng Kang district.

City real estate agents attribute the situation to a construction boom in the past

two years increasing the availability of accommodation and helping to depress rental

values due to an improved supply-demand dynamic.

"In 1997, the owner of a newly built six-bedroom house declined the Brunei Embassy's

offer of $4,500 per month saying he couldn't accept a penny less than $5,000,"

said Kheng Cheng of Cambodia Properties Limited of the change in rental value. "After

keeping the house unoccupied for several years, he had to lease it to the same embassy

for half his original quote."

According to Cheng, a similar house on Street 352 which was rented by a Japanese

diplomat for $5,000 a month in 1997 is now being rented for $2,500 following a recent

lease re-negotiation. Older structures in the same district now fetch between $1,000

and 1,500, a far cry from the once- standard demand of $4000 - $5000 a month to foreigners.

Real estate agents blame the long over-inflated nature of Phnom Penh rental property

rates on the lingering influence of the presence of thousands of Untac peacekeeping

personnel in the city between 1992-1994.

Ly Sambo of Lee's Estate Agency and Hak Bun Tha of the Nigel Hakimex estate agency

echo Cheng's assertions that the average cumulative drop since 1999-2000 has been

around 30 per cent across all categories of accommodation, half of it registered

during the first five months of 2001.

The years 1997 and 1999 are quoted by the consultants as benchmark years in which

rents peaked and then began dropping.

"On an average, most 6 to 7 bedroom brand new or well maintained villas in the

city center are available for a maximum of $2,500, while the cheaper [older houses]

are available within a range of $4 to $6 per square meter," Bun Tha said, adding

that sprawling French colonial villas were not included in the category as they continued

to fetch up to $5,000 per month.

In the middle and lower rung of the market represented by two to three bedroom dwellings,

the trend is similar, with single floor two-bedroom apartments available for between

$200 - $300 a month in the Wat Phnom, Boeng Keng Kang and Olympic Stadium areas,

something that the agents say was not possible until 1999. Travel a few kilometers

away from the city center and the rents - which typically include basic furniture,

air conditioners and security fixtures - are much lower.

Sambo prefers to call the falling rental prices trend more as a "correction"

in the market, saying the rents in Phnom Penh have been highly inflated for far too

long.

"Considering the size of the real estate market that's still driven solely by

the expatriate population, there was no justification for the rents remaining at

such high levels for so long, especially after the availability improved," he

said, adding that as recently as 2000 renters willingly paid inflated quoted amounts

due to safety considerations and a near total absence of quality accommodation in

the city.

Real estate professionals describe the current "boom" in construction activity

in Phnom Penh as a "copy-cat" syndrome in which the friends, relatives

and neighbors of the owners of houses that were fetching inflated rents converted

their more humble dwellings into expat villa structures in order to share in the

spoils of exorbitant rents. Those efforts, Sambo says, might have backfired.

"People embarked on ambitious construction projects without ascertaining the

demand and supply situation [because] after sinking their savings and borrowings,

they are suddenly realizing that even the construction costs could take them 10 years

to recover,"Sambo said.

Hak Bun Tha of Nigel Hakimex is equally pessimistic about the prospects of a return

to the high rents of the past that recent construction investments were premised

upon.

"A 20X30 meter residential plot in the city center can cost up to $150,000,

depending on the location. Add another at least $100,000 for good construction and

recovery [of the investment] could be very slow," he said.

Taking advantage of the situation, several speculators with cash to spare for long

term investments are moving in to acquire these properties in distress sales, for

as much as 30% less than their market value.

Real estate agents report that foreigners with long term commitments in Cambodia

are also moving in to make property purchases to capitalize on the price drops in

the hope of recovering their investments and possibly making a profit. Though foreigners

are not permitted to own property in Cambodia, the law allows them to own 49% provided

Cambodians hold the majority share.