Are real estate values immune from downturn?

Are real estate values immune from downturn?

1-Story-1.jpg
1-Story-1.jpg

Photo by: Tracey Shelton

The values of new housing developments should be resistent to the financial crisis due to Cambodian developers limited reliance on bank financing, say experts.

REVERBERATIONS from the collapse of global financial markets will almost certainly be felt in Cambodia's construction sector but experts are predicting that the limited penetration of financing into domestic real estate will mean very little land or property value will be destroyed.

The absence of developed securities and money markets in Cambodia means people use land as a store of wealth rather than as a creator of wealth, Union Commercial Bank PLC chief executive officer Yum Sui Sang said.

"People use their own funds to acquire land. They just transform assets from liquidity into land. Developers may use short-term finance but very few people dare to buy or acquire property through bank loans."

With banks out of the loop, there is little pressure on owners to meet financing costs and little systemic exposure to the global financial crisis. "Cambodia is not really affected because it never joined the game," Yum Sui Sang said.

A prominent banking source said it was hard to get accurate figures on bank leverage in the property sector. However, Campubank has reported to the National Bank of Cambodia  that 14 percent of its loan portfolio was for financing ‘property projects', and Canadia has put its exposure to the property sector at 12 percent.

$1 million in a briefcase

These banks are by far the most active in the property sector with lending levels near the 15 percent of capital reserves limit set by the NBC in June. These figures give guidance as to the portion of bank assets tied up in the sector, but they don't indicate how much the sector itself is indebted to bank loans.

Bonna Realty Group president Sung Bonna agreed it was minimally exposed. "When you use banks to finance properties you are always thinking about interest, thinking about return," he said. "But Cambodian people always have cash. Only in the last two years have we had mortgages." It was not unusual for people to come into his office with US$1 million in cash in a briefcase to buy property, he said.

"That's why I always predict our property market won't be affected. It's always going up."

Anecdotal evidence that land values were falling was also overstated, Sung Bonna said. While it was true that uncertainty over the global credit crunch was causing people to delay purchases, transaction prices remained stable. The only change was that unrealistic asking prices seen over the last half year were moving closer to the prices people were already actually paying.

Local capital

"What [the pessimists] are talking about is only the speculator price, not the real market price which is down just five percent to 10 percent," he said.

Brokers reported sales off by up to 50 percent this year, but prices would only fall if economic conditions deteriorated to where property owners had to free up liquidity, Sung Bonna said.

"They have a lot of money, the rich locals," said Yum Sui Sang. "With no restrictions on the movement of capital, political instability is the biggest threat. Only then would locals be likely to take their money out of Cambodia."

Sung Bonna said the market would gradually become more responsive to monetary and fiscal conditions as foreign investors gave Cambodians greater exposure to modern financing tools.

"Some local investors now are starting to calculate [financing]. Maybe 10 percent to 20 percent are knowledgeable about financing but the other 80 percent don't care."

MOST VIEWED

  • EU officials: Ending EBA an 18-month procedure

    EU officials have confirmed that it will take a total of 18 months to complete the procedure if Cambodia’s preferential Everything But Arms (EBA) trade agreement is to be withdrawn. According to EU Agriculture and Rural Development spokesman Daniel Rosario, the formal process has not

  • IPU slams government claim

    The president of the Inter-Parliamentary Union (IPU), Gabriela Cuevas Barron, has refuted a claim by the National Assembly that she “highly appreciated the achievements of Cambodia” in its July national elections with a tweet saying “Of course not!” before adding “No congratulations”. A delegation from

  • Conflict lingers on Paris Accords

    As the Kingdom prepares to commemorate on October 23 the 27th anniversary of the signing of the 1991 Paris Peace Accords, which ushered in an end to nearly two decades of civil war, there is political conflict on whether the tenets of the agreement are still being

  • EU agrees VN trade deal despite rights concerns

    The EU on Wednesday agreed to a free-trade agreement (FTA) with Vietnam, a country described as having a “major rights-abusing government”. This comes amid the 28-nation bloc preparing the procedure for a possible withdrawal of Cambodia’s Everything But Arms (EBA) preferential trade agreement on