Market in Depth

Phnom Penh's housing market woes

Lalaine C. Delmendo | October 03, 2021

Phnom Penh's condominium prices continue to slide, amidst a severe supply glut, coupled with falling demand.  The COVID pandemic's impact on the tourism industry has been catastrophic.

The average price of high-end condominium units in Phnom Penh fell by 7.86% to US$2,802 per square metre (sq. m) during the year to Q2 2021, worse than the y-o-y declines of 2.53% in Q1 2021, 6.19% in Q4 2020, 5.64% in Q3, 6.55% in Q2 and 3.21% in Q1, according to CBRE Cambodia.  When adjusted for inflation, prices fell 10.32%.

On a quarterly basis, high-end condo prices plunged 9.23% (-10.26% inflation-adjusted) in Q2 2021.

But 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. The World Bank has recommended that the Cambodian government should closely monitor the construction boom and develop policies to reduce speculative activity.

From 2011 to 2019, the Cambodian economy expanded by an average of 7.2% per year, fuelled by strong tourism, garments manufacturing, and agriculture.

However, Cambodia's economy shrank by 3.5% in 2020 after it was heavily impacted by the COVID-19 crisis. The economy is projected to remain weak this year, with the National Bank of Cambodia recently downgrading its 2021 economic forecast to 2.5%, sharply down from its initial estimate of a 4.1% growth, reflecting the pandemic's impact on the key economic sectors of Cambodia's trading partners and ongoing production chain disruptions. The EU's decision last year to remove the country's Everything But Arms (EBA) duty-free privileges on one-fifth of Cambodia's exports was another blow.

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.

Cambodia house price change graph
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.


Analysis of Cambodia Residential Property Market »

Rental Yields

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%.

Read Rental Yields »

Taxes and Costs

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%.

Read Taxes and Costs »

Buying Guide

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.

Read Buying Guide »

Landlord and Tenant

Cambodia's rental system is pro-landlord

cambodia residential luxury housesCambodia'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.

Read Landlord and Tenant »

ECONOMIC GROWTH

Economy remains weak, more Cambodians fall back into poverty

Cambodia’s economy shrank by 3.5% in 2020 according to the IMF – the country’s worst performance in recent history.

The IMF has forecast that the Cambodian economy will return to growth this year, with GDP growth of 4.2%, while the World Bank projects a 4% expansion. However recently, the National Bank of Cambodia downgraded its 2021 economic forecast to 2.5%, down from its initial estimate of a 4.1% growth, reflecting the pandemic’s impact.

“Our estimates are that Cambodia could grow at about four per cent, assuming that they’re able to be successful in getting these new variants under control,” said World Bank regional vice-president for East Asia and Pacific Victoria Kwakwa. “Now, on the downside, it could be as low as just one per cent, particularly if they’re not able to get a good handle on the pandemic.”

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$1,530 in 2019, but declined slightly to US$1,490 last year due to the pandemic. The country’s poverty rate has fallen from 47.8% in 2007 to 12.9% in 2018. However poverty has increased recently, with more than 710,000 households receiving cash transfers in January 2021 while only 560,000 households were eligible last year. This means that at least 150,000 households or 500,000 Cambodians are now considered as newly poor. The UNDP predicted that the poverty rate increased back to 17.6% last year.

Unemployment is expected to surge. 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 unemployment rate rose to 4.8% in 2020, according to UNDP, from just less than 1% in the past decade.

Colombia gdp inflation
Inflation remains manageable at 2.7% in July 2021, down from 3% in the previous month. Inflation averaged 3.1% in the past decade.

Garments exports recovering, despite 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. The garments sector is the country’s largest foreign exchange earner. It consists of about 1,100 factories and branches, employing around 800,000 workers. However in 2020, garments exports fell by 10.24% to US$7.42 billion, after the sector received a double blow from the pandemic and the EU’s withdrawal of the country’s preferential trade access due to serious and systematic concerns related to human rights.

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. Then in February 2020, EU announced that it would officially suspend the country’s duty-free access for 40 products, effective August 12, 2020. The new tariffs 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 Kem Sokha, 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. Around 40% of the country’s garment exports go to the EU.

Because of this, some of the country’s garment exports was diverted to the U.S., China and other countries. Cambodia has recently strengthened its bilateral trade agreements with several countries, including China and Russia.

In addition, the newly established Regional Comprehensive Economic Partnership (RCEP) is expected to bolster Cambodia’s exports to the region. RCEP, signed November 2020, is a free trade agreement between ten member states of the ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and its six FTA partners (Australia, China, India, Japan, New Zealand, and Korea). Cambodia is also forging an FTA with the Eurasian Economic Union (EAEU), comprising of five member states – Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia.

Cambodia gdp per capita
“With trade pacts bilaterally and multilaterally, Cambodia is expected to receive more investment, which will boost both exports of finished products and imports of raw materials to feed the production chains,” said Lim Heng of Cambodia Chamber of Commerce.

In the first eight months of 2021, the value of garments exports from Cambodia rose by 3.3% y-o-y to US$5.02 billion, according to the Ministry of Commerce. Apparel product exports accounted for 45% of the country’s total exports of US$11.09 billion during the period.
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