Phnom Penh's condominium glut.
Lalaine C. Delmendo | September 29, 2020
During the year to Q2 2020, the average price of high-end apartments in Phnom Penh fell by 6.55% to US$ 3,041 per square metre (sq. m), worse than the y-o-y declines of 3.21% in Q1 2020, 2.3% in Q4 2019 and 1.12% in Q3 2019, based on figures from CBRE Cambodia. When adjusted for inflation, condo prices actually dropped 9.45% y-o-y in Q2 2020.
On a quarterly basis, condo prices in the capital city fell by 4% in Q2 2020 (-4.5% inflation-adjusted).
Even before the pandemic, Phnom Penh's property market had been cooling mainly due to an oversupply of apartments. From only 178 condo units in 2009, the supply of condo units in the area reached about 18,000 units in 2019, according to CBRE Research. Last year, the supply surged by 27%.
However due to the COVID-19 crisis, Q2 2020 saw no completions, leaving the total condominium supply unchanged from the previous quarter. This is expected to be a temporarily situation. The construction of delayed projects is likely to resume by year end.
Recently, the World Bank recommended that the Cambodian government should closely monitor the construction boom and develop policies to reduce speculative activity.
The property market is expected to remain subdued during the remainder of the year and will gradually improve next year.
“Maybe in the first or second quarter next year, the situation will improve. In particular, mid-range and affordable condominiums will remain popular,” said Ann Sothida, managing director of CBRE Cambodia.
Property prices plunged by around 40% from 2009 to 2010 due to the global crisis. The housing market started to recover in 2011, buoyed by strong economic growth and the introduction of the new foreign ownership law. From 2011 to 2019, the economy expanded by an average of 7.2% per year, fuelled by strong tourism, garments manufacturing, and agriculture.
This year, Cambodia's economy is projected to contract by 1.6% due to the COVID-19 crisis, according to the International Monetary Fund (IMF).
Relaxed laws on foreign ownership
Under the Foreign Ownership Property Law of April 2010 foreigners can already own apartments and condominium units, but not land, and therefore not the first floor of buildings. Also, foreign investors are allowed to own up to 70% of a condominium project.
In 2005, the Cambodian government amended its investment law to allow foreign ownership of buildings. However, the law was not then implemented and the idea floundered.
Land ownership is against the Constitution and is still out of the question. Land can however be held by foreigners on long (renewable) leases and through majority locally-owned companies incorporated in Cambodia. These structures are argued by lawyers in Cambodia to be safer than legal schemes in any other South East Asian country in which foreign land ownership is formally prohibited.
Attractive returns on apartments in Phnom Penh
In Cambodia, apartments are a different thing from flats. Cambodia defines apartments as non-landed housing units in a building, or what is commonly known in the wider world as condominiums. Flats, also known as shop houses, are landed properties, with a ground floor, and up to two or three floors. Flats are the equivalent of row houses.
Foreigners cannot own land in Cambodia. So they can only buy apartments. We would therefore have wanted to survey the prices of apartments. However, very few, in fact almost none, are listed on the websites of realtors in Cambodia. So our survey is about the prices of flats (row houses) and villas.
Flats in Phnom Penh, Cambodi''s capital city, cost around US$3,000 per square metre (sq. m.). We surveyed flats located in the prime residential areas of Phnom Penh, like Daun Penh (KDP), Tuol Kork (KTK), Chamkarmon (KCKM), and 7 Makara (K7MKR).
Rents range from US$9 per sq. m. to US$13 per sq. m. per month. A 65 sq. m. flat costs US$600 per month to rent. A 120 sq. m. flat costs more than twice as much, at around US$1,500 per month.
The gross rental yields for flats in Phnom Penh, i.e., gross return on investment in a flat if fully rented out, ranges from 3.27% to 5.33%.
Villas are more expensive than flats, ranging from around US$3,500 to US$4,500 per sq. m., with smaller villas fetching the higher prices.
Rents are also highest for smaller villas. For example, a 150 sq. m. villa costs around US$13 per sq. m. per month, while a 300 sq. m. villa costs only US$9 per sq. m. per month.
Villas earn poor rental yields, ranging from 2.8% to 3.43%.
Rental income is subject to withholding tax in Cambodia
Rental Income: Income from property earned by nonresident individuals is subject to withholding tax at a flat rate of 14%.
Capital Gains: Capital gains are subject to profits tax at a flat rate of 20%.
Inheritance: There are no taxes on inheritance in Cambodia. By law, foreigners must apply for citizenship to be able to inherit property in Cambodia.
Residents: Residents are taxed on their worldwide income at progressive rates, up to 20%.
Transaction costs are low at 7.40% to 8.00%
The total round-trip transaction costs of buying property are between 7.40% and 8.00%. Much of this goes to the real estate agent, around 3%.
Foreigners will need to set up a landholding company or a lease structure, which can be more expensive than the buying cost because of legal fees.
Cambodia's rental system is pro-landlord
Cambodia's legal system is generally pro-landlord.
Rent: Rents can be freely negotiated and there is no specific tenant protection law.
Tenant Security: There are no limits to the duration of leases, though residential long-term leases usually last for one year. However, the rental agreement may be terminated prior to expiration if either the tenant or the landlord serves a notice one or two months before termination.
Economic contraction, rising unemploymentCambodia’s economy is projected to contract by 1.6% this year, according to the International Monetary Fund (IMF), in stark contrast to a 7% expansion in 2019, as its main drivers of growth such as manufacturing, exports, and tourism have been heavily impacted by the COVID-19 pandemic. This is Cambodia’s weakest performance since 1994.
The EU’s recent decision to remove the country’s EBA privileges on one-fifth of its exports products will further hurt Cambodia’s already ailing economy.
Cambodia saw strong, uninterrupted growth for most of the past two decades. From 2000 to 2003, the economy grew by an average of 8.3%, and then by an average of 11.1% from 2004 to 2007. After a slight pause during the global crisis, from 2011 to 2019, the economy expanded by an average of 7.2% per year, fuelled by strong tourism, garments manufacturing, and agriculture.
Cambodia was upgraded by the World Bank from low-income to lower middle-income economy in August 2016. Cambodia’s GNI per capita stood at US$1,230 in 2017, and increased to US$1,480 in 2019, and the country’s poverty rate has fallen from 47.8% in 2007 to 12.9% in 2018.
Yet unemployment is expected to surge this year. According to the World Bank, the pandemic will put at risk about 1.76 million Cambodian jobs, particularly from tourism, construction and manufacturing sectors, which together account for more than 70% of growth and almost 40% of employment.
The government estimates that inflation will remain manageable at 2.8% this year and will increase slightly to 3.1% next year due to the expected rise in oil prices.
Economy threatened by EU’s trade preferences withdrawal
Cambodia’s economic growth is concentrated in tourism and the textile sector, which is dependent on most favoured nation status agreements. In October 2018, the EU officially notified Cambodia that it had launched the procedure to withdraw Cambodia’s Generalised Scheme of Preferences (GSP), an agreement that allow Cambodian exports a tariff-free entry in EU under the Everything But Arms (EBA) scheme.
"Our recent EU mission to the country demonstrated serious and systemic violations of, for instance, freedom of expression, labour rights and freedom of association. This comes on top of longstanding issues as regards workers’ rights and land-grabbing," EU Trade Commissioner Cecilia Malmstrom wrote in the European Commission’s official blog. "As I have underlined many times as Commissioner for Trade, our EU trade policy must be led by our values. Accordingly, when we are faced with blatant disregard for those values, the EU must act."
Then in February 2020, EU announced that it will officially suspend the country’s duty-free access for 40 products, effective August 12, 2020. The new tariffs will hit about one-fifth of Cambodia’s exports to EU, equivalent to about US$1.2 billion.
Some events that led to the suspension of Cambodia’s EBA scheme:
- Sam Rainsy’s resignation as president of the Cambodia National Rescue Party (CNRP), the main opposition party, in February 2017. Rainsy’s deputy, human rights activist KemSokha, replaced him as the new leader of the CNRP.
- In September 2017, Sokha was arrested on treason charges.
- The Supreme Court dissolved the CNRP in November 2017.
- Controls on media outlets and civil society organizations critical of the government have continued to tighten.
Cambodia is the second-biggest EBA scheme beneficiary next to Bangladesh, accounting for about 18% of EU’s EBA imports, according to the European Commission. The withdrawal of the EBA scheme would mean trouble for about 800,000 Cambodians employed in the garment industry, since around 40% of Cambodia’s garment exports go to the EU.
Yet the Cambodian government seems unfazed and instead continues on its political clampdown, arresting dozens of government critics. The repression escalated in August 2020 when prominent trade union leader RongChhun was arrested, sparking numerous protests by critics of the government.
Hun Sen, one of the world’s longest-serving prime ministers, has been in power since 1985. However since seizing power from his then co-prime minister, Prince Ranariddh (brother of former king Sihanouk) in 1997, Hun Sen has become increasingly authoritarian, using a combination of corruption, intimidation and electoral fraud to remain in power.
For instance in the July 2018 the ruling Cambodian People’s Party (CPP), headed by Hun Sen, won all 125 seats in the Parliament with 77% of the vote. However, the government’s critics condemned the said election as a "sham" as it lacked a major opposition.
Aside from the EU, other international governments such as the United States, Australia, and Canada also issued statements condemning the election process. In July 2018, the US House of Representatives passed the Cambodia Democracy Act that imposes sanctions against several government and military officials.
“So far, there has not been any indication of progress on these issues,” said the EU.“The EU will continue the engagement with the Cambodian authorities to closely monitor the human rights and labor rights situation in the country.”
“In case Cambodia shows significant progress, notably on civil and political rights, the Commission may review its decision and reinstate tariff preferences under the EBA arrangement,” the EU added.