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Logo of Phnom Penh Post newspaper Phnom Penh Post - Analysis: Prices likely to fall in credit crunch

Analysis: Prices likely to fall in credit crunch


Investors worldwide are experiencing the worst case of global wealth destruction since the Great Depression of  the 1930s, with almost every asset class depreciating. This includes primary residences, pension funds, investment portfolios, education savings plans, and commodities such as oil, copper and precious metals.  

As we bid goodbye to October, one of the worst months in history for the markets, and certainly one of the most volatile, there is an enormous cloud of uncertainty, anxiety and concern as to what the coming months and years hold for the markets and asset classes of all kinds, including property.

Property has played a significant role in the subprime mortgage crisis, which has now become the global financial crisis.  It all began in 2007 with the bursting of the United States housing bubble.  

The Great Depression also originated in the United States, following the stock market crash of October 29, 1929, known as Black Tuesday. 

The causes of the Great Depression are generally believed to be under-consumption and over-investment, an economic bubble, malfeasance by bankers and industrialists, and a large-scale lack of confidence.  There are some similarities to the present crisis, but aggressive and coordinated measures by governments around the world have thus far avoided a new depression.

As Cambodia is a developing economy and yet to establish significant international links with financial markets, it is thought that the global financial crisis may have only  a limited impact.

Because Cambodia imports most of its goods, including food and energy commodities, the decline in commodity prices and the strengthening US dollar will have a double positive effect on consumer prices and inflation.  

The fact that Cambodia has not yet established capital markets also shields its population from wealth destruction from these asset classes.

The question then is, How will property prices be impacted?  

On the positive side, the National Bank of Cambodia (NBC) took appropriate measures to cool the property market earlier in the year by raising reserve requirements for banks from eight percent to 16 percent, thus reducing liquidity in the market.  This caused banks to aggressively seek deposits and resulted in higher interest rates for loans and mortgages, cooling demand and thus prices.  

prices will again become attractive and opportunities to buy will surface.

The NBC also encouraged lower portfolio concentration in property lending, and more lending to productive assets.  These early prevention measures stabilised prices prior to the extraordinary events in September and October.

On the negative side, there are a large number of international developers in Cambodia, and events in their home countries are impacting their capacity here. In particular, severe drops in the Korean won and Indonesian rupiah are placing severe pressure on the parent companies of developers from these countries.  

Given the shortage of liquidity and cash, sales may be accelerated at lower cost to support the cash flow needed to continue projects.

Demand for property has also decreased.  Foreign direct investment (FDI) in property projects is likely to decline dramatically over the next couples of years as foreign countries and companies repair their balance sheets.  This will also decrease demand for property.  

With the anticipated decrease in tourism, property projects related to hotels and hospitality may be put on hold, impacting demand and land prices.  With both FDI and tourism slowing, the economy will grow slower, as will jobs and incomes.

There is already plenty of evidence that the property market has slowed, some believe considerably.  Some of the larger scale projects are reducing their prices on presales.  The pace of construction has slowed.

If anything is certain, it is that property valuations are cyclical.  There are up and down cycles, and then up again.  It is the duration of these cycles that varies.   

Property has proven to be a solid long-term investment and an asset class to include in an investor's portfolio.

We are likely to experience a further stabilisation and potential drop in prices in Cambodia.  As we go through the stages of the cycle, prices will again become attractive and opportunities to buy will surface.

Anthony Galliano is head of corporate and institutional banking, ANZ Royal Cambodia



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