Affordability of real estate in Cambodia

• 1 March 2018
• Property Focus
• 1934 Views

With the constant increase in property prices in recent years, the most common question posed by many property buyers is, are we at risk of a real estate bubble?

Cambodia went through the experience of the real estate market crash in 2008. In order to prevent a bubble, all parties within the industry, including buyers and developers, must understand the underlying causes to prevent it happening. Simply put, rising prices will encourage speculation and the price will further inflate demand until the market has reached its peak. In today’s market, the key factor pushing up prices is the general development cost which has increased sharply. Development costs are the combination of construction and land costs. The costs of construction and labour are unlikely to come down and they have been rising sharply over the past few years. Furthermore, land costs in selected areas have increased at an uncontrollable rate.

In Phnom Penh, land cost is a major financial component and is the main factor pushing up development prices higher than market affordability. In the past, land used to account for a small percentage of the total development costs, but today it has increased to over half of the development costs. As land prices continue to rise, local buyers are moving toward accepting the idea of living in a condominium building because it is more affordable. ‘I think the trends are heading towards that – people will prefer to live in condominiums as there are facilities and amenities nearby and normally people would choose to stay near their workplace,’ Nguon Chhayleang, CEO of the Pointer said.

All of us probably realise there is some form of oversupply in certain segments and locations in property development. Developers must exercise more caution when launching their products. They must conduct market and feasibility studies. This is to ensure they are building the right product, setting the price at the right price point and choosing the right location to ensure there is enough demand.

As the market and prices mature, buyers should avoid any short-term speculation as they have done over the past few years. It is also risky for developers if a large percentage of the units are sold to these short-term speculators. ‘It will put the market at risk if most of the properties are sold to the speculators without the actual demand to support it,’ explained Chan Mlop Sokha from Sokha Law Firm.

For the buyers, they need to make sure they are able to afford a house and repay the mortgage. Where a buyer has a single mortgage, it is not so much of a concern, however some individuals may have multiple mortgages, so they have to make sure they are able to afford the mortgage payments. Do not expect to buy units, rent them out and assume the rental income to pay off the mortgage because there are always other fees incurred, and the unit may take time to lease out. There is a risk that the rent may not cover the monthly instalments, or in the worst cases due to high competition the unit may not be rented out.

In the end, all parties should play a part to ensure that appropriate preventive measures are implemented so that the real estate market can enjoy sustainable growth.