Will Cambodian real estate sector follow China’s path in the next 10 years?
Not only Evergrande, under the Three Red Lines policy, many other Chinese overindebted developers such as Shimao and Sunac have also missed debt repayment deadlines.
Some foreign analysts claimed that the underlying causes of this crisis are the incontrollable overheated market which led to overindebtedness, overreliance on construction as a failsafe to economic downturns and contribution of GDP, and ineffectiveness of policy changes that do not solve the root cause of the issue.
Others question if Cambodia is following a similar path to China. Will Cambodia face a property crisis similar to China in the next 5 to 10 years?
On the contrary, is there an opportunity that those Chinese overindebted developers turning to Cambodia to diversify their incomes?
Analyzing current figures, the construction and real estate market in Cambodia is at a concerning level. In 2018, the construction sector was at its boom, contributing to approximately 11.5% of economic growth that year.
However, the sector has plummeted after the closure of online gambling in Sihanoukville and the arrival of COVID-19. (Read more)
According to the World Bank’s June economic update, approved foreign direct investment in Cambodia’s property sector plummeted from US$1.7 billion in 2019 to US$142 million in 2020.
The latest data from the National Bank of Cambodia show that approved construction projects, in terms of investment value, area, and the number of projects, decreased by 33%, 32%, and 21% y-o-y, respectively, in the first half of 2022.
Many constructions project has been halted and abandoned by Chinese investors in Sihanoukville, while many condominiums in Phnom Penh remain unsold due to oversupply and loss of foreign buyers and condo sales are projected to decline another 44% this year.
Most importantly, credit provided to construction and real estate has continued to grow larger and larger. As of the end of June, loans in these two sectors have increased to approximately US$14 billion, or 32% of total private sector loans. (Read more)
This high credit growth has always been a concern of international organizations such as the IMF, WorldBank and ADB, stating it as a risk to Cambodia’s economic system.
Based on the figures, the Cambodian real estate sector is going downward following China’s path. However, Grace Rachany Fong, CEO of Century 21 Cambodia and renowned real estate market analyst in Cambodia, sees the opposite.
“By nature, Cambodia is not the same as China, and most importantly we are still managing our economic risk very well,” said Ms Grace.
“First of all, overindebtedness is something the Cambodian real estate market will not face, or not anytime soon. Requesting a loan in Cambodia is not easy, the interest rates are also very high (8 to 10% for housing land), and the loan period is also not as long as in China,” she added.
She explained the National Bank of Cambodia (NBC) has also set a safe CAP that is proportional to the borrower’s income. Therefore, the risk of excessive loans and failure to repay is very low.
According to the latest NBC data, Non-Performing Loans (NPLs) at the banks and microfinance institutions were at controllable rates of 2.6% and 2.3%, respectively.
Ms Grace added Cambodia is a country that still uses a lot of cash, both for buyers and developers. Most buyers prefer to have cash on hand to buy property. Similarly, large developers in Cambodia are also operating based on a high amount of cash flow.
Regarding the second claim over the incontrollable overheated market. Analysts said Cambodia has already been through that during the boom of online gambling in Sihanoukville. However, the market has already returned to normalcy after the closure.
According to data from Key Real Estate Co., Ltd, the renting fee for a house before the online gambling closure in Sihanouk is between US$ 8,000 and US$16,000 per month. After the closure, the price has returned to the normal market price, at around US$2,000 to US$6,000 per month.
“Our market is not yet overheated. Compared to neighboring cities such as Bangkok and Ho Chi Minh, Cambodia has more space to grow and the price are much cheaper in those cities for CBD,” said Ms Grace.
“Local developers are now turning to Borey housing to meet local needs rather than building condos, which is a good direction. At the same time, frozen condos will be sold out in the future as the next generation is starting to shift their preferences to condos over landed property over time,” she continued.
Last but not least, Cambodia does not over-rely on construction and real estate sectors to support the economy.
According to real estate expert and chairman of KW Cambodia Dr. Kim Heang, agriculture, tourism, and industry are the core of the national economy, while the real estate sector is comparable to supplements or fertilizers in the economy.
Overall, the risk of Cambodia’s real estate sector is relatively low as NBC is still having financial policy under control while the government has also recently shifted state policy to a healthier approach through the closure of online games in order to filter only qualified investors.
However, risks can also arise if policies or mechanism of market experience changes while the global economic crisis will also play an important role.
On the contrary, is there an opportunity that those Chinese overindebted developers turning to Cambodia to diversify their incomes?
The Chinese government has been trying to create new sources of revenue by turning to the technology industry. To do so would require requires continued reform in many industries to increase competition and boost the private sector.
Therefore, inevitably investing abroad is one of the options while Cambodia is always a preferable destination for China. The investment may not be a direct investment in condominiums or real estate as before, but could be in form of factories construction or sub-headquarter hubs.
These investments will indirectly benefit the real estate sector, as any opening of a new company will require the purchase and sale of land. Besides, these investments will also help create jobs, increase tax revenue, level up skills for locals, and most importantly inject more cash flow into the economy.
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