"The forecast calls for pain", if I can use a quote from blues artist Robert Cray, which probably best describes expectations for the property market in 2009. For better or worse Cambodia is experiencing a "property cycle", perhaps its first in modern times.

A property cycle is defined as a logical sequence of recurrent events reflected in factors such as fluctuating prices, vacancies, rentals and demand in the property market. It means that property prices can't rise indefinitely for the simple reason that at some point they become unaffordable. Wages can't rise as fast as property prices when prices are rising in a frenzy, so there is a point when most of the population can't buy property, and prices have to fall, which they are now doing.

So how did we arrive at this point in the property cycle?  A brief review of the events of 2008 will offer insight.

Upon reflection it is thought that the property market grew too fast and the planned capacity may have been overly optimistic.

In 2006, global financial markets and the economic environment were robust and emerging markets were enjoying  strong developed market demand for goods and services, capital flows and foreign direct investment.Cambodia's core industries of garments, tourism and agriculture were benefiting from the boom. Given the global rise in property prices, interest and investment in Cambodian property accelerated. It is estimated that property prices rose 60 percent in 2006, 80 percent in 2007 and 30 percent from January to May 2008.

AFP

Pedestrians walk past a model of Gold Tower 42 in March as officials break ground on what is hoped will be the country’s first skyscraper, dwarfing all other buildings in the low-slung capital.

International property developers planned dramatic changes to Phnom Penh through large-scale developments such as the International Finance Complex, Camko City, Gold Tower 42 and Grand Phnom Penh International City.

With the absence of domestic capital markets and very limited access to international capital markets, asset investment options in Cambodia were limited to cash, businesses and property.  The yield on cash was sub-five percent and could not match the price appreciation seen in property, so the latter became the asset of choice among those able to afford it. The banking market introduced mortgages allowing creditworthy Cambodians to borrow to purchase property, some business owners funneled profits back into the property market, and some even borrowed against the assets and cash flow of their businesses to buy property. 

Banks significantly increased lending to property investors and raised interest rates to attract deposits to fund loan growth.  Combined with dramatically increased foreign investment in real estate and large scale developments, this meant the property market was running on all cylinders.

Although the overheated and highly speculative US property market was already well into a correction, the consequences really came home to roost in 2008. Exposure to sub-prime mortgages, consumer household debt, home equity loans and credit derivatives caused an unprecedented burden on the financial system, which led to notable failures such as Bear Stearns and Lehman Brothers and a government bailout of the banking and auto industries. 

Financial institutions worldwide required government bailouts, unemployment rose, consumer spending ground to a halt, countries entered recessions, emerging-market currencies experienced severe drops, market liquidity dried up, banks stopped lending and foreign direct investment was severely curtailed and, in some cases, delayed.

Most property markets across the world began to experience drops, and it is estimated these hit Cambodia in May of 2008.

Misplaced optimism

Upon reflection, it is thought that the property market grew too fast and the planned capacity may have been overly optimistic. Cambodia, with its population of 14 million and per capita national income of $600, is materially smaller than Vietnam and Thailand, both of which have large populations and more mature economies. 

The demand for and affordability of all the large-scale developments in aggregate may not have been realistic. Planned reductions in scope and longer development periods will benefit the property market in Cambodia as less supply enters the market.

Sentiment has soured and confidence is deteriorating.  With broader access to the media and internet, Cambodians are more aware of world events, and the global financial crisis is dominating everyday news. It is estimated that property transaction volumes have declined as much as 95 percent, liquidity has become extremely tight, and the ratio of sellers to buyers has become significantly high.

 A true reflection of market prices may only return with liquidity.  Cambodian banks are less inclined to lend on property transactions and are more focused on managing exposure to the sector.  Some pundits are calling for a decline of 30 percent in property prices in 2009.

Property prices will, of course, recover and Cambodia will not experience the same degree of problems as the rest of the world: Only a very small portion of property owners actually have borrowed, the World Bank expects the economy to grow 4.9 percent in 2009, a large majority of property investors are under no urgent need to sell, and there is no material imbalance of supply and demand for residential dwellings.  Confidence, liquidity and prices will eventually come back. However, things are likely to get worse before they get better.

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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]