Phnom Penh’s condominium glut.

Lalaine C. Delmendo | September 29, 2020

Phnom Penh’s condominium prices continue to slide, amidst an increasing supply glut, coupled with plummeting demand due to the COVID-19 pandemic.

Cambodia annual house price change graph

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).

Tourist arrivals grind to a halt

In Q2 2020, there were only 27,600 international tourist arrivals in Cambodia, about 98% fall from 1.46 million tourists in the same quarter last year, based on figures from the Ministry of Tourism (MOT). In the first half of this year, international tourists fell by almost 65% y-o-y to 1.18 million.

Last year, arrivals reached a high of 6.61 million, bringing around US$4.92 billion revenues.

China accounted for 23.3% of total tourist arrivals during the first half of 2020, followed by Vietnam (15.2%), Thailand (13.6%), United States (4.5%), Korea (4.4%), the United Kingdom (3.7%), France (3.5%), and Japan (3.4%).

Slowdown in construction activity is likely temporary

The lack of completions in Q2 2020 was in sharp contrast to Q1 2020, when supply grew 15.8% q-o-q, due to the completion of 5 projects with 2,843 new units, bringing total condo supply to 20,851 units.

About 53.5% of the newly completed condo units this year was in the high-end segment, 35.7% in the mid-range and 10.8% in the affordable segment. Daun Penh district had the biggest share of newly completed condo supply at 43.5%.

There were 3 new launches in Q2 2020, which included Leedon Heights, Le Condé BKK1, and Grand Condo 7. These added to the 8 projects launched in Q1.

“Whilst some projects are moving towards practical completion, most completions expected for 2020 are now forecast for the end of the year in Q4,” said CBRE Research.

Since the start of 2020, about 68% of high-rise condominium projects were suspended while the rest experienced delays, said Cambodia Valuers and Estate Agents Association president Chrek Soknim.

Attractive rental yields, but rents are falling, and vacancy rates are high.

Cambodia has very attractive gross rental yields. Apartments can still attain annual rental yields ranging from 6% to 8%, according to Independent Property Services (IPS) Cambodia.

“The average rental yield in Phnom Penh is currently 6% to 7%, and slightly higher at 7.5% for higher-end properties,” said Malay Nop of real estate firm IPS Cambodia. “It was 10% to 12% from 2014 to 2016. This is still considered attractive to foreign investors.”

However low rental demand, particularly from foreigners and expats, has led to high vacancy rates, currently at about 30% to 50%, said CBRE Cambodia Managing Director Ann Sothida.

Condominium rents in Phnom Penh have been declining in recent months, mainly due to falling demand caused by coronavirus-related lockdowns and travel restrictions coupled with an increasing supply glut.

During Q2 2020, rents across both mid-range and high-end condominium units in Phnom Penh dropped 5.71% and 7.25%, respectively, according to CBRE Research.

“The effective increased supply of stock and reduction in demand has helped to drive down rental rates in the sector further,” said CBRE Research.

As of Q2 2020:

  • One-bedroom condominiums have monthly rents ranging from US$ 650 to US$ 1,450 for high-end condos, and from US$ 400 to US$ 650 for mid-range condos.
  • Two-bedroom condos can be rented from US$ 1,200 to US$ 2,350 per month for high-end, and from US$ 850 to US$ 1,250 per month for mid-range.
  • Three-bedroom condos have monthly rents from US$ 2,100 to US$ 2,800 for high-end, and from US$ 1,250 to US$ 1,650 for mid-range.

“Whilst there has been a negative correction across almost the entirety of the condominium market, the Covid-19 pandemic is far from over,” said CBRE Research. “It is likely rents will remain under pressure until travel restrictions ease, and this impact will be compounded by the forecast supply growth.”

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.

Cambodia prime condo prices

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.

The majority of foreign homebuyers in Cambodia, especially in Phnom Penh, come from China, Hong Kong, Malaysia, and Singapore. Phnom Penh is home to almost half of expats residing in the country.

Mortgage market growing rapidly

Mortgages and housing loans were introduced to the real estate sector only in 2008. The size of the mortgage market rose from 1% of GDP in 2010 to more than 11% of GDP in 2019.

As of June 2020, total outstanding mortgages (owner-occupied housing only) stood at KHR 13.71 trillion (US$ 3.34 billion), up by 35% from the same period last year, according to the National Bank of Cambodia (NBC), the country’s central bank.

Cambodia mortgages owner occupied housing only

The continuous rise in mortgages can be partly attributed to declining borrowing rates. In June 2020, the weighted average lending rate on KHR-denominated term loans outstanding was 10.44%, down from 11.69% a year earlier. For loans denominated in USD, the lending rate was also down to 9.44% from 9.71% in June 2019, according to the NBC.

Housing market cycle - in an “up” phase

Cambodia’s housing market enjoyed unprecedented price rises from 2004 to 2007, with property prices rising by about 25% to 40% annually. Land price increases were at first confined to Phnom Penh, Siem Reap and Sihanoukville, but the boom spread right across Cambodia. Other hot spots were the border areas with Vietnam and Thailand and, to a lesser extent, Laos.

Residential land prices in Phnom Penh soared to KHR6.25 million (US$1,600) per sq. m. in 2007, from KHR2.34 million (US$600) per sq. m. in 2006. The government is aggressively pro-development, and squatters and other eyesores are simply cleared away, by a government which is in league with wealthy developers.

In mid-2008, the bubble burst. The global economic and financial crisis had adversely affected South Korea, one of the country’s biggest investors. Investments in real estate developments dropped from US$3.19 billion in 2008, to US$1.99 billion in 2009, and finally to just US$840 million in 2010, according to the Ministry of Land Management, Urban Planning and Construction. By end-2010, land values in Phnom Penh, the capital, were about 40% to 50% down on their peak values in mid-2008.

The market started to recover in 2011, buoyed by strong economic growth and by the new foreign ownership law. In Phnom Penh, the average condo sales price more than doubled from 2012 to 2019, from US$1,460 to US$3,184 per sq. m.

Economic contraction, rising unemployment

Cambodia’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 gdp inflation

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 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. 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 Rong Chhun 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.

Cambodia gdp per capita

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.


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