Cambodia’s construction boom is set to continue through 2008 but the industry could be vulnerable to fluctuations in global commodity prices and at some point the new building supply could outpace demand, industry insiders warn.

Economic growth has been boosted in recent years by a flurry of urban construction fueled by foreign investment, especially from China and South Korea.

“The construction sector contributes a lot to people’s welfare – both for industry specialists and for unskilled workers,†said Kang Chandararot, head of the economics unit at the Cambodia Institute of Development Study (CIDS), a local research institute.

CIDS estimates that construction now contributes about 7-8 percent a year to the country’s GDP.

“The main factor that has fueled the construction boom is the expectation of future development,†said Chandararot. “This expectation … is helped by political stability and by the fact that the government wants to promote economic development.â€

The Cambodian economy has grown an average of 9.5 percent each year since 2000 and is expected to continue growing at about seven percent until the end of 2009, the International Monetary Fund’s resident representative, John Nelmes, announced at an economic outlook conference in February.

Sung Bonna, president and CEO of Bonna Realty Group, is confident that the upward trends will continue. “Once we have nice, modern constructions more tourists and investors will come to visit or invest in Cambodia,†he said.

“In addition, unskilled workers are earning a full day’s wage on construction sites,†further fueling economic growth.

Im Chhun Lim, Minister of Land Management, Urban Planning and Construction, said at the launch of the Gold Tower 42 project in January this year that the government had received building applications worth over $1.5 billion in the first nine months of 2007.

The minister on March 25 also announced plans to introduce licensing for land brokers in an attempt to harness more of the economic benefits of the boom. Land transference and business taxes brought in approximately $21 million in revenue in 2007.

But inflation topped 10.8 percent in December last year and some analysts fear that rising oil prices – already at record highs – could put a dent in Cambodia’s construction industry.

“Now that we have stability, the people need places to live, to work, to do business,†said Chandararot. “But the high price of oil will have a very negative impact on Cambodia, especially on the construction sector. The cost of investing in [construction] has grown and grown and this has reduced the capability of investors to finance and finish construction projects.â€

Even if projects are completed as planned, rising housing costs have the potential to drive buyers out of the market.

Eng Chhay Eang, Sam Rainsy Party parliamentarian and former deputy president of the National Authority for Resolving Land Issues, said the high-flying property market is good for Cambodia’s economy but warned that if demand for new housing outstrips supply, there may be problems in the construction sector.

“Construction is advantageous when it offers jobs for workers but it can be a disadvantage when the construction is superfluous,†said Eang.

“Investors could face losses if there is no one to buy or rent the new buildings,†he added.

Chandararot said: “It is clear that there is a need for construction but the issue is the demand, and whether need can be translated into demand or not has to do with future income … and many future buyers may also have a lot of financial difficulties of their own because of rising costs.â€

Some of the potential economic benefit of Cambodia’s construction boom is not transferred locally because some large-scale residential projects in Phnom Penh are being developed and built by foreign firms.

Korean developer Yon Woo Cambodia Co., Ltd, which is building the $240-million Gold Tower 42 building at the corner of Monivong and Sihanouk Blvds, has brought in Hanileng Construction of South Korea to handle construction.

New Central City Plaza, an integrated development comprising housing, entertainment and shopping facilities on Russian Federation Blvd, is being developed by the Indonesian Lipo Politan Corporation and will be built by an unnamed Indonesian contractor, according to Lipo Politan spokesperson Mach Forng.

Nhem Sothea, marketing manager of Grand Phnom Penh International City, a joint venture development between Indonesian firm Cinputra and RCAF General Ke Kim Yan, would not disclose Cinputra’s contractors. He said there were “several†companies involved and all are Cambodian.