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Good time to build as costs drop

Good time to build as costs drop

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Prices at the pump are declining.  Only a few months ago the price for a litre of gas in Cambodia was as high as 5,700 riels.  The present price is around 3,500 riels per litre.  

On the face of it, a 38 percent decline in the price is very good news for consumers.  However, considering that international prices have dropped 68 percent from a high of $147.55 a barrel to $48.50, a drop of 38 percent in gasoline prices in Cambodia is at odds with worldwide trends.  

Cambodia imports all of its oil and presently does not have any oil production capability, although the future for exploration and production looks promising.  In fact, Cambodia imports a majority of its commodities, rice being clearly one of the exceptions.  

This is the gist of the issue.  With the exception of the underlying land itself, most of the components of construction costs are generally imported by a handful of importers who distribute the majority of the commodities in the country.

Given the present decline in commodity prices, now would seem an opportune time to consider property developments, which in theory should be much cheaper to build.  

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There is both good and bad news for developers.  The underlying land on average represents about 30 percent to 40 percent of the overall cost of a project in most parts of the world.  The fact of the matter is, land in our capital city is some of the most expensive real estate in the world and land costs can be as high as 50 percent of total development costs. The cost of land can rival other capital cities such as London.  

Land prices have declined approximately 20-30 percent which should lead to lower overall project costs.  Further price reductions would make Phnom Penh more attractive to international developers scanning the globe for appealing opportunities.

Steel, another imported commodity, is generally considered the second largest contributor in terms of construction costs.  In July of 2008, the price of a metric tonne of steel was $1,100; it is now trading at $500-$600 per metric tonne, down 50 percent.

While steel has an internationally recognised trading price, cement and glass, which are also significant components of building costs, do not.  

Both are imported, generally from neighbouring Thailand and Vietnam.  Cement is bulky and heavy and costly to transport.  Thailand is the primary exporter of cement to Cambodia, but because there is not much competition in the cement industry in Thailand, prices have remained stable.  Transportation costs have fallen sharply, but this has only marginally impacted the overall cost.

Glass is imported as well and is a fragile commodity.  Similar to cement, transportation costs have declined but the commodity price has shown only a marginal decrease.

It is no secret many large development projects have been put on hold and workers are now in plentiful supply, meaning employment costs have declined.  Unfortunately, there are too many construction workers chasing too few jobs which has led to wage deflation in the industry.

If you wanted to build a basic brick house in Cambodia and become a homeowner, now may be the opportune time.  You can purchase a brick for 80 riels at today's prices as compared to 300 riels six months ago.

There is a very good reason why prices have declined so sharply; the bricks are actually made in Cambodia and not imported.  Labour is overabundant and also a great deal less expensive than a year ago.  

Finding the right piece of land at the right price may soon be a lot easier too.  

_________________________________________
Anthony Galliano is head of corporate and

institutional banking, ANZ Royal Cambodia.

Should you wish to contact Anthony,

please send an email to [email protected]

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