WB Warns of Potential Threat to Cambodia’s Financial Stability Amidst Disruptions in Commercial Real Estate Market

• 15 May 2023
• Local News
• 1270 Views

The slow recovery and current disruptions in Cambodia’s real estate market could potentially threaten the country’s financial stability through the connectedness of the sector with the financial system and the broader macroeconomy, warned the World Bank in its latest report.

The report identifies two key issues plaguing the sector: excess supply and a lack of external buyers. The economic crisis, along with factors such as the Russian-Ukraine war, inflation, and high borrowing costs, have further exacerbated the challenges faced by the local buyers, leading to prolonged struggles within the real estate market.

Of particular concern to the World Bank is the significant credit extended to the construction and real estate sectors, which, if not carefully monitored, could have adverse implications for Cambodia’s macro-financial stability.

As of July 2022, outstanding bank credit provided to these sectors reached US$14.5 billion, accounting for 48% of the country’s GDP, a substantial increase from the US$7.9 billion recorded at the end of 2019.

“A real estate market correction may have started, which is likely to increase nonperforming loans (NPLs) in this segment. Thus, it is crucial to closely monitor the current elevated credit growth, high levels of private debt, rising nonperforming loans, and the concentration of related risks in the construction and real estate sectors to ensure macro-financial stability.” read the report.

Why high credit is an issue?

The issue of high credit becomes apparent when examining the period leading up to the COVID-19 pandemic. Many individuals, both qualified and unqualified in terms of finance and experience, entered the market seeking profitable opportunities. Some developers relied on bank loans to acquire land plots for constructing landed properties, known as Borey. However, the prolonged sales crisis spanning over three years has resulted in the suspension of construction projects and permanent closures, leaving buyers in a predicament.

When a developer faces bankruptcy and cannot repay a loan, the bank seizes the collateral, typically the land plot on which the project is being built. This situation intensifies if the market is stagnant, hindering the bank’s ability to sell the collateral and potentially leading to cash flow shortages. Similar scenarios can unfold with individual mortgages, further highlighting the potential consequences of a collapsing real estate market on financial stability.

Despite the challenges, Cambodia’s real estate market sector maintains its resilience, thanks to financially stable local developers who have weathered the storm. The current suspension of construction projects serves to weed out unqualified and financially unstable developers while emphasizing the importance of cautious investment decisions for buyers.

Nonetheless, the stagnant state of the real estate sector demands a solution, whether from the private or public sector. Without the implementation of new mechanisms to attract foreign investors back into the market, the excess supply will continue to burden the industry as the local buyers’ capacity to absorb properties reaches its limits.

 

• Analysis