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Logo of Phnom Penh Post newspaper Phnom Penh Post - If in doubt, there is no bubble

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A typical Phnom Penh area under intensive development. While the construction sector adds around 10 per cent to the annual GDP some experts fear the growth might not be healthy. Heng Chivoan

If in doubt, there is no bubble

Post property analysis

“I confess that the ministry hasn’t been able to control and achieve transparency in the real estate sector, but I can say that this sector has yet to show any signs of trouble,” Ngoun Sokha, secretary of state for the Ministry of Economy and Finance, said during Tuesday’s real estate seminar that was held under the title “Opportunities and Potential Risks in Developing Cambodia’s Property Sector”.

Government officials from the Ministry of Economy and Finance (MEF) and the Ministry of Land Management, Urban Planning and Construction (MLMUPC) met with the private sector with the mutual goal of information sharing in order to strengthen one the Kingdom’s fastest growing industries.

Mey Vann, director of the Department of Industrial Finance at the (MEF), said that the ministry plans to gather information from the private sector’s current supply of market demand and do a thorough analysis of the sector.

Remembering the global economic crisis in 2008 that led to a downturn in Cambodia’s property market, the ministry is taking action to prevent another collapse, explained Vann.

While the information system is yet to be in place, it is currently in the stage of “expert recruiting,” but, once completed, the measure would strengthen the investment climate as Vann explained.

As of now, Vann said that he doesn’t see any risk in the property sector adding as explanation: “We don’t have enough data and information to assess where the risks would be.”

Huy Nara, director general of the General Department of Construction of the Ministry of Land Management, Urban Planning and Construction, did bring some data to the seminar.

According to the Ministries’ data, the construction sector has been increasing since 2011. In 2013, investment had increased to $2.7 billion from $2.1 billion in 2012.

Nara added that the construction and property sectors could also connect with the service and industrial sectors and contribute to Cambodia’s economic growth.

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners, however, said that demand for housing coming from those industries could not absorb the current property developments.

“Those other sectors are growing at 10 per cent per year, but I don’t see how they can absorb the number of apartments coming on stream, as most of the jobs they’ll be providing will be at income levels that can’t pay for an apartment in BKK1.”

While employees working in service or manufacturing will likely not be making their home in BKK1, luxury housing developments that dominate central Phnom Penh’s skyline have an effect on prices.

“Currently, the majority of city centre condominiums are being purchased by foreign buyers, which is inflating prices and is not sustainable over the long-term; there needs to be more affordable condominium developments that will cater more to the local market,” Ross Wheble, country manager of Knight Frank, told Post Property.

“It could be viewed that land prices (thus property prices) are rising too quickly compared to Cambodia’s GDP per capita, as local buyers are being priced out of the central Phnom Penh market due to salaries not increasing at the same rate as property prices,” he said.

He explained that many purchasers of condominiums are buying for speculation as opposed to owner-occupation, with the anticipation of capital appreciation. With the existing supply of condominiums at approximately 2,400 units and, assuming all projects in the development pipeline are completed on schedule, there will be more than 16,000 units by the end of 2018.

“When these units come online, that is when Phnom Penh’s secondary market will be tested. When this happens investors [will] come to sell their units to realise their investment, they may struggle to sell the properties at their desired prices due to stiff competition.”

As a consequence prices would likely stabilise as the market corrects itself.

Fortunately, speculative condominium purchases are largely not financed by Cambodian banks.

“Housing credit has increased from $398 million in 2013 to $614 million in 2014 and has since continued to increase rapidly within the first six months of this year compared to last year,” said Charles Van, head financer of the Cambodian Construction association.

Unlike speculative purchases, credit financed property in Cambodia is purchased for ownership said Grant Knuckey, chief executive of ANZ Royal Bank.

“Most residential mortgage lending is going to boreys or higher-quality condos at present, both of which have a reasonable risk profile in terms of sustainable demand and owner-occupation. The true ‘investor’ market for now has relatively low leverage, with good proportions of cash equity - something which needs to be closely monitored,” he said.

With little leverage in the (speculative) investment property, the danger of a credit financed property bubble seems to be held at bay, as Post Property already concluded from an interview with Higgins on March 26 of this year after the Asian Development Bank advised that the growth of credit should be monitored.

Nonetheless, Higgins thinks that there is a bubble – it’s just not credit financed.

“There’s an enormous number of apartment buildings going up in central Phnom Penh. If someone can tell me that more than 75 per cent of those are occupied, then I’ll accept there is genuine underlying demand. Otherwise, there is an awful lot of property being sold to speculators who can’t rent out the apartments,” he told Post Property. “Property is often a useful hedge against inflation, but inflation in Cambodia is fairly low at the moment.”

A clear answer to the question if the market is oversupplied with price-inflated luxury housing is hard to find as the investment volume is not quantifiable.

The (MLMUPC) records the amount and value of development projects – but it doesn’t differentiate between foreign investment and local investment or the different sub-markets the developments cater to. How many of those projects are luxury condos, public housing, office spaces or retail, remains unknown.

The ministry only publishes total sums. In 2013, 1,641 projects were given permits, worth $2.7 billion in investment, a 31.45 per cent increase compared to 2012. In 2014, 1,960 were granted permits worth about $2.5 billion, a subtle decrease of 0.09 per cent. So far, in the first half of this year, 915 projects have been granted permits worth a total investment of $808 million.

While it remains unclear what an information sharing platform between the public and private sector will achieve, strengthening the sector would continue to grow the share of GDP, which accounts for 10 per cent.

“In response to the rapid growth of the construction sector, which plays a major role in the national economic growth, the necessary and immediate actions to strengthen the construction business will be to encourage investors to invest to fund the sector,” said Nara. “All laws and regulations involved will be drafted to set a standard for constructions, citizens and investors to allow permits to be attained more quickly.”

Whilst not transparent but heavily promoted, the question remains how much transparency could help to validate the property market in the first place.

“I don’t think transparency is a major problem with the property market. Excessive optimism, or irrational exuberance, is a much greater issue,” Higgins said.

Knuckey explained that a bubble is characterised by extreme over-supply, high leverage and extreme prices, none of which are apparent right now - notwithstanding the lack of detailed data.

“I think the concern right now should be with the direction of the market and the ability to monitor it, not with the current state,” he said.

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