Foreign ownership law helping Cambodia's property recovery
April 26, 2011
Cambodia’s property market is still somewhat depressed. However, the new foreign ownership law is undoubtedly helping the property market recover.
The number of property transactions increased threefold in 2010 thanks to the new law, according to Sung Bonna, President of National Valuers Association of Cambodia (NVAC).
Foreigners are now allowed to own apartments and condominium units, but not land, and therefore not the first floor of buildings, under the new foreign ownership law approved by King Norodom Sihamoni in May 2010. In 2010, tax revenues from property-related transactions soared 60% to KHR76.21 billion (US$19.5 million), from KHR47.7 billion (US$12.2 million) in 2009. This is still far below the level of transactions seen in 2007 and 2008 - but it is a real recovery.
“We have already sold 80% of our project, and 60% is foreign-owned,” said Un Mouy of Two Town Co., the developer of Bal Resort. ’Thanks to the new law our project sales are better and better.’
The Camko City megaproject is also benefitting. “We have sold better since the National Assembly approved the foreign ownership law, and we strongly hope that we will get more and more foreigners to buy our condos this year (2011),” said Kheng Ser of World City, the developer of Camko City. About 70% of Cambodia’s upper-end real estate market relies on foreign investors.
In 2005, the Cambodian government had amended the investment law to allow foreign ownership of buildings. However, the law was never implemented and the idea floundered, since the country was then experiencing one of Asia’s biggest property booms.
Land ownership is against the Constitution and is still out of the question.. However land can 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.
Struggling construction sector
Due to the crisis, Cambodia’s biggest residential developments have been badly hit:
- In August 2010, Posco Engineering & Construction stopped work on the three-tower Star River complex, due to weak demand.
- In September 2010, the construction of the US$300 million Gold Tower 42, was also halted, after Seoul-based Hanil Engineering & Construction went into financial restructuring. The 42-storey building in the heart of Phnom Penh is twice as high as the city’s current tallest building
- The developers of the US$500 million Grand Phnom Penh International City, a 4,000 residential villas and apartment complex unveiled in 2006, have admitted that they are suffering from financing problems and low demand.
- The Diamond Island City, unveiled in 2006 to include condominium units and villas, hospital, restaurants, and shopping centres, was downsized due to the global crisis.
- Camko City, a 120-hectare satellite city which initially included 6,000 residential units at a projected cost of US$2 billion, has also been delayed and downsized due to the global crisis. World City Co. Ltd., a South Korean company, is the megaproject’s developer.
In 2010, there were a total of 2,149 construction projects approved, down by 3.6% from 2,230 approved projects in 2009, according to the Ministry of Land Management, Urban Planning and Construction.
Property prices still falling
Residential land prices fell 11.4%, across the country in 2010, to KHR6.1 million (US$1,550) per sq. m., according to the National Valuers Association of Cambodia (NVAC). This follows a 40% drop in land values in 2009.
House prices dropped by around 10% in 2010, according to Seng Sopheak of CPL Cambodia Properties Ltd.
The boom before the bust
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.
Cambodia also experienced a construction boom, particularly in Phnom Penh, fuelled by foreign investment. 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.
The value of construction projects skyrocketed to more than US$3.2 billion in 2007, from US$500 million in 2003, according to a United Nations Development Programme (UNDP) study. Average project costs increased to US$1.65 million in 2007, from just US$157,000 in 2003.
A downturn started in July 2007 after the government announced new investment guidelines for developers.
Then in mid-2008, the bubble burst. The global economic and financial crisis had adversely affected South Korea, the country’s biggest investor. As a result, South Korean investors either pulled their investments or delayed their projects in the country.
Investments in real estate developments in the country have continuously 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.
Rents falling, yields high
Apartment rents rose by about 25% to 35% from 2005 to mid-2008, according to NVAC. However, rents started to fall during the second half of 2008.
In the second quarter of 2010, average monthly rents across all grades fell by up to 25% q-o-q, according to Keuk Narin of Bonna Realty Group.
- The average monthly rent for a one-bedroom class-A units were KHR1.56 million (US$400) to KHR3.91 million (US$1,000) in Q2 2010, down by up to 23% from KHR1.95 million (US$500) to KHR5.1 million (US$1,300) from the previous quarter.
- Two-bedroom apartments rent for KHR4.7 million (US$1,200) to KHR5.86 million (US$1,500) per month in Q2 2010, down by up to 42% from the same quarter last year.
- The average monthly rent for a three-bedroom class-A apartments located in central Phnom Penh was KHR8.6 million (US$2,200) to KHR9 million (US$2,300) in Q2 2010, down by up to 22% from the previous quarter.
Rents for residential apartments are expected to continue to drop in 2011 due to weak demand and increased supply of apartments, according to local real estate experts.
Small-scale luxury apartments, which are usually between four and six-storey buildings, are widespread across Phnom Penh, particularly in Keng Kang 1 and Toul Kork. Some of the most popular apartments in the capital are the Pasteur Villa, City Palace Apartments and Grand Residence.
Gross rental yields on apartments located in Phnom Penh are now very attractive. First floor apartments are the most attractive, with rental returns of around 11%, according to Global Property Guide research of May 2010. Second floor Phnom Penh apartments are also attractive, with gross returns of around 7.7%.
Nonexistent mortgage market
Cambodia’s mortgage market is still very small. Mortgages and housing loans were introduced to the real estate sector only in 2008. The total amount of outstanding mortgage loans was KHR455.3 billion (US$116.5 million) in November 2010, or only 1% of GDP, according to the central bank, the National Bank of Cambodia (NBC).
Nevertheless the banking sector could face serious risks during the next two years if the collapse of property prices continues, the Economist Intelligence Unit (EIU) has warned.
From January to November 2010, the average interest rate on loans denominated in US dollars was 16.3%, according to the NBC. The Riel loan rate was far higher, averaging 22.8%.
GDP growth of 7% forecast
GDP growth in 2011 is forecast to be 7% (Ministry of Economy and Finance) despite the weak construction sector. Cambodia’s rapid economic growth is being driven by strong garment exports, agriculture, and rapidly rising tourism. Tourist arrivals rose 16% in 2010 to 2.5 million. Cambodia’s annual GDP growth from 2003 to 2007 roared along at 10.6%, then slowed to 6.7% in 2008. There was a 2% GDP contraction in 2009 due to the global crisis, but in 2010 GDP growth recovered to 4.8%, with inflation at 4%.
The Cambodian economy is heavily dollarized; the Riel (KHR) and the US dollar (USD) can be used interchangeably. However, the government has a long-term goal of reducing its reliance on the greenback, which accounts for more than 90% of all currency in circulation, according to the Asian Development Bank (ADB).
Cambodia is still dependent on foreign assistance, which accounts for about half of the government’s budget.
What next for Cambodia’s real estate market? “The market has already hit the bottom – it will stabilize this year,” said NVAC President Sung Bonna. “I hope that it will start to increase again for the next two years, but it is not likely to be a boom like in 2007 and mid-2008.”
- Cambodia’s land prices are rising amidst strong economic growth - February 23, 2014
- Foreign ownership law helping Cambodia's property recovery - April 26, 2011