AS property markets worldwide struggle to stay afloat in the wake of the US financial meltdown, investors in Cambodia say that a culprit much closer to home is chiefly responsible for rocking the boat.

Last week, as developers worldwide grappled with higher borrowing costs and vanishing credit lines, Cambodia's Ministry of Economy and Finance backpedalled on controversial new housing development rules originally slated to take effect from September 30.

The turnabout came following an outcry from a worried sector, concerned that the poorly thought-out regulation, or prakas, would lead to a mass exodus of foreign developers.

"It seems that everywhere in the world is worried about the real estate market," said Sung Bonna, president of the newly formed Cambodian National Valuation Association. "But Cambodia isn't like other countries. The main issues we have are about the government itself and how it will implement new rules."

The postponed regulations, which were first circulated by the finance ministry in June, would have required all developers to obtain licences from an inter-ministerial task force, purchase construction site insurance and deposit at least two percent of total project costs in a ministry account at the central bank. They also changed the rules concerning developer access to housing accounts, through which buyers make down payments on units before construction is completed, and opened up the books of developers to extensive auditing.

Impact on foreign investors

South Korean developers, many of whom are responsible for some of the Kingdom's most ambitious projects, were particularly vocal in their opposition. Ros Monin, managing partner at Sewha-Cambodia Law Group, whose clients include several South Korean developers, said that at least two developers had already cancelled plans for projects worth US$200 million to $300 million due to concerns over the government's handling of the issue. He declined to name the companies or the projects involved.

Kang Chandararot, head of the economics unit at the Cambodia Institute of Development Study (CIDS), agreed that the credit crunch alone would be unlikely to lead to a pull-out of existing developers, though he acknowledged there would almost certainly be a slowdown across the construction sector as new investments failed to materialise.

"Cambodia is an emerging market and therefore very prosperous for different investors, and the investors are competing to keep the market for themselves," he said. "I am not sure [about their credit lines] but I think that foreign investors want to keep their investments in other countries."

Many fear the botched implementation of the prakas would lead some investors to reconsider that commitment. The impact of a widespread pull-out from the construction sector could be devastating for a country already reeling under the weight of soaring inflation, a tourism downturn, and ongoing concerns over the viability of the garmentsector.

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

Mao Pov, deputy chief of the ministry's real estate division, responded quickly to developers' concerns about the rules early last week. The ministry postponed implementation of the prakas and gave the real estate sector until last Monday to submit their concerns.

He said the regulations were designed to protect developers and buyers, not make it harder for developers to invest in the country. The ministry planned to reintroduce the regulation next January, he told Prime Location. "We hope that they will be satisfied with our new prakas because we will correct some regulations and rules to facilitate them in doing business here."

British Business Association chairman Senaka Fernando said the ministry restored some confidence in the government through its willingness to postpone implementation.

"I think the government has realised they have made a mistake," he said. "There is a very positive aspect in that the government intended to pass legislation but when the stakeholders expressed concern it was willing to backtrack on it.

"This is another classic example of them listening to the private sector."

Skipping out

Most agree that regulation is necessary, but that it needs to be implemented more carefully.  Union Commercial Bank CEO Yum Sui Sang said that the current rules don't stop developers from skipping the country with buyers' deposits if they manage to pre-sell housing units, leaving depositors out-of-pocket and with no legal recourse.

"The current practice is very dangerous. If a developer does try to cheat buyers, the people will ask why the government didn't make a law to protect them," he said.

It is just such an eventuality that the new regulations were designed to prevent. The ministry began drafting the rules after Chinese-owned Long Chhin (Cambodia) Investment Ltd skipped town rather than deal with legal problems surrounding a luxury housing complex on the outskirts of Phnom Penh.

The company had filled in Kob Srov Lake to build the development, but when the government charged the company with illegal development and demolished the estate company officials fled the country leaving buyers millions of dollars out of pocket.

Real protection

While developers baulked at changes to rules for project financing, Yum Sui Sang said the rules did not go far enough. In addition to requiring a 2 percent deposit on the cost of the project and tightening rules over housing development accounts, the government needed to put tighter controls on when developers could start marketing and selling.

The proposed prakas would require developers to complete three percent of the development before they can begin marketing.

"They say they are protecting the people but I don't believe it," Yum Sui Sang said. "I am worried the government will take the deposit from developers but if the situation happens they will not compensate buyers.

"If they want to protect buyers they need to do like they do in China - if you want to sell you have to build first."

This is the approach voluntarily taken by GS Engineering & Construction, which broke ground in July on its 52-storey International Finance Complex (IFC) project. The firm told Prime Location it would not sell apartments or lease office space until the project was 30-50 percent completed.