The end of Cambodia's construction boom spells bad news for the country and its workers. But if land prices also fall, it could kick-start a new wave of development in the Kingdom
If land prices fall , vacant lots like this one near Northbridge International School may become more attractive to developers.
Asharp downturn in activity on construction sites across the capital Phnom Penh is the clearest sign yet that the construction boom that has propelled Cambodia's economy in recent years is grinding to a halt.
The big question now is what effect the downturn will have on property values, which have soared in recent years as land has been snapped up for a raft of ambitious development projects, the majority funded from offshore.
According to Sung Bonna, president of the National Valuers Association of Cambodia and the Bonna Realty Group, property prices in Phnom Penh rose somewhere between 50 percent and 80 percent in 2007, and between 80 percent and 100 percent in the first half of this year.
Prices reached as high as US$5,000 per square metre in June in some prime central city locations before easing off in the lead-up to the July election.
Many expected the respite from soaring prices to be brief, but the prolonged border dispute with Thailand and regulatory uncertainty following the botched implementation of new rules on housing development financing prevented the market from taking off.
The global credit crunch then kicked in, eroding credit lines for international developers, who were responsible for the bulk of the Kingdom's major development projects.
Sung Bonna believes land prices have already started falling, at least in Phnom Penh. He puts the decline at somewhere between 20 and 25 percent from a historic peak in June.
"It seems like the storm has come to hit Cambodia," he said. "More investors are moving out of the country and there are no new investors. Everybody needs the money, so they are trying to sell to get whatever they can."
But even with asking prices dropping, no one is buying, he said. "We are waiting to hit the bottom. I think there is a little further to go, and it will take a little more time."
But Jean-Benoit Lasselin, business development manager at Cambodia Properties Limited (CPL), disagreed, saying a lack of transactions was not evidence that prices were falling.
"We have information that people are selling, but we have no customers looking to buy land," he said.
Rather than drop prices to secure a sale, owners were waiting for confidence to return, meaning at worst the market would stagnate.
"The price is going to stay stable, but there is no fear it is going down," Lasselin said.
ANZ Royal chief executive officer Stephen Higgins agreed with Lasselin that there had so far been no fire-sale prices in Cambodia, but only because people hadn't yet been forced to sell.
He expected that to change as speculators started to come up against the cold, hard reality of financing. Although investors tend to use cash for property purchases in Cambodia, many of the larger developments had borrowed a small amount against the total value of their investment.
"You are starting to see some people getting into financial trouble because they were always reliant on trying to off-load the property," he said. "It's like a game of musical chairs.
"Most people here haven't borrowed, but you still have enough that have borrowed that are going to get hurt. I suspect in the coming months we will start to see some forced sales."
But if prices are also falling, is that a bad thing? Not according to Toby Dodd, general manager for Cushman Wakefield Vietnam. He has long warned a real estate correction was needed in Cambodia or the country risked stunting economic growth through excessive land prices.
"The market is running away with itself and needs to regain affordability. Otherwise, Cambodia will face the same problem as Vietnam," he said.
Vietnam also experienced soaring property prices this decade as economic growth encouraged speculators to snap up land for development. But the speculation pushed prices beyond the reach of locals and foreigners seeking to do business in the country, forcing many to pull out. Ironically, many of those escaped to Cambodia where, until recently, prices were much lower.
"If land prices get too high, then the answer is no, developments won't stack up," he said. "Construction costs in Cambodia are about 15 to 20 percent higher than in Vietnam, so the result is either rents have to be higher or land prices are lower. But if rents are higher, MNCs [multi-national corporations] won't set up shop.
"It's simple: If you can't cover your costs and make money, why bother?"
Bernard Wouters, senior architecture design manager at Archetype, said high land prices constrained end-uses, requiring developers to undertake ambitious projects rather than build the more modest office buildings that Phnom Penh was arguably in more urgent need of.
Keith Oi, country head for property consultancy Knight Frank Cambodia, warned that property values had to be taken with a grain of salt in Cambodia due to the absence of an official body to publicise transactions.
However, he agreed that land was overpriced, and that excessive valuations could impede future development.
"If you are ready to purchase land for $3,000 a square metre, you need to work out what is the best use for the site," he said. "A lot of times when you work backwards, the land value is not worth $3,000. It is much lower."
He said a rule of thumb is that the cost of land should be between 10 percent and 15 percent of the total gross development value, or GDV, of a new project.
With around three acres, or 12,140 square metres, required for a good grade A office development, at $5,000 per square metre the total GDV needs to be in the vicinity of $60 million, a substantial amount for a country of Cambodia's economic potential.
The projected cost of ANZ's planned 10-storey office tower, by comparison, was just $20 million, according to a source close to the company.
"We have talked to a lot of foreign investors who say prices are ridiculous for what they can develop the land into," Oi said. "The asking price for the land is well above any reasonable demand."
But if the bubble really has burst in Cambodia, respite may be on its way for the next wave of developers to hit the country.