After the Boom, Cambodia’s Real Estate Sector Sees Red

The heady years of the Kingdom’s real estate sector are now over as it struggles with low demand and limited financing, forcing some projects to either sell up, partner up or halt altogether, CBRE Cambodia’s data for the first quarter of 2023 showed. On the flipside, it’s time to shop as a buyer’s market opens up
An apartment in Phnom Penh, December 25, 2022. Kiripost/Siv Channa
An apartment in Phnom Penh, December 25, 2022. Kiripost/Siv Channa
“The sugar rush experienced over the past 10 years or so has finally caught up with us,” Lawrence Lennon, managing director of CBRE Cambodia, commented early last month as he noted the funding challenges that were upon the real estate sector.

Looking at the rising cost of finance, he said, local banks in Cambodia are not the only ones that have been tapped to finance projects and mortgages by developers and buyers, but also international banks, particularly for project financing.

Lennon, who made these observations during the firm’s market insights for the first quarter of 2023, pointed out that some real estate players in Cambodia have international financing from Bangkok, Taiwan and other offshore lending locations.

“So, as the cost of finance goes up, it will be passed on to the domestic context. If you are a developer or lender, it is important that you are working to manage these costs and your property as effectively and efficiently as possible,” he advised.

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To be sure, implications of the rising cost of funding in line with the US Federal Reserve’s 11 interest rate hikes since March last year, which has brought the rate to 5.25 percent, are becoming apparent in the real estate sector.

This is compounded by the reduced flow in foreign currencies as key exports contract, along with lesser foreign direct investment (FDI) in the sector.

Back in 2019, three-quarters of FDI in Cambodia originated from China, with a large portion of that going towards the construction and real estate sectors, the World Bank said, adding that the sectors remained buoyant for some time.

Although China has reopened, creating some opportunities for Cambodia in the near to mid-term, Lennon said the Chinese economy is still in a state of recovery from the pandemic and challenges in the real estate sector.

The real estate segment, he noted, represented 30 percent of the Chinese gross domestic product. “So, while they are facing these challenges, they don't have the surplus to be spending and investing on FDI in Cambodia.”

However, he observed that Cambodia’s economic growth outlook is still positive, with recovery stemming from tourism, and some from the service sector and infrastructure development sector.

Aggressive competition

Last month, CBRE shared data from the first quarter indicating a slowdown in project launches across the board.

In the landed property or “borey” and condominium segments, where the former has historically recorded an average of 20 launches every quarter in the last three to four years, the slowdown is palpable.

In the first quarter of 2023, only two condominium projects were launched and five others were completed, whereas the borey segment registered four new projects and seven completions in the period.

“While the number of launches compared to condos is higher, it is noted that this is probably the slowest quarter in the past five years,” said deputy managing director of CBRE Cambodia, Kinkesa Kim.

She attributed the situation to “heated competition and aggressive expansion” in the borey market in the last three years. The expansion was also driven by the entry of international players in the market previously dominated by local developers.

The condominium segment saw 3,900 units completed in the first quarter from five projects that were supposed to be completed in 2022 but brought over to 2023.

The remaining year will see another 5,600 units completed. With these supplies - completions and upcoming ones - this year, the market would register an addition of 10,000 units, bringing the accumulated supply to 58,000 at the end of 2023.

Similarly, CBRE expects about 60 new borey projects to be completed this year, with around 140,000 landed property units coming online.

“This would bring the total to more than 430 projects completed by the end of 2023, which is quite a large amount of supply in terms of the growing population in Phnom Penh,” Kinkesa said.

It is not all rosy either in the retail and office segments, where additional supply is weighing down on achieved rental and occupancy rates, though tenants have enjoyed the spoils of the downturn.

The supply, which is not commensurate with the overall demand, has been lagging in the last few quarters, stemming from a less than desirable economic recovery.

‘More difficulties’

The slowdown in demand and global economy, and supply surplus circle back to funding issues on the back of higher interest rates where several developers are said to be feeling financing pressure in continuing their projects.

In the office development segment, Daluch Chin, senior manager of CBRE Cambodia, noted that “many on-hold office projects” have been “put up for sale or head lease” due to the rise in cost of capital and cash flow issues.

The borey segment has given rise to a trend where developers are seeking partners or joint ventures to co-develop certain projects or new phases.

This is a result of the constraints in obtaining new loans as “banks are more alert and cautious” about their exposure in the real estate market, Kinkesa said.

Another trend resulting from the banks’ cautious stance on the sector could lead to increased challenges in the sale of landed properties late this year.

Previously, it was understood that banks were comfortable loaning to borey developers and buyers, seeing that the collateral used for the loan was attached to land, which had retained or increased in value over time.

But this has not been the case as seen in the last quarter due to the slowdown in demand, particularly for primary sales in the borey market, and the issues banks are facing as a result of the interest rate hike which has pushed up the cost of financing. 

“Now obtaining loans or mortgages for the borey market is facing a challenge, not dissimilar to other segments and especially with condos. So we expect to see more difficulties coming in the year with regards to the sale of borey,” Kinkesa said.

In addition to lower prices and discounts, more favourable and easier payment terms have come into play, which has allowed buyers to pay less every month or pay lower upfront fees to acquire the units. But this has impacted developers’ cash flow.

“With the lower payment they are collecting, they are now aligning their cashflow with payments to their contractor to follow the sum received from buyers.

“As a result, we see the handover timeframe for borey units has been extended to 36 months from 24 months or roughly three years in most projects,” she explained.

Risks monitored

Exposure to the real estate sector has been constantly flagged. Last December, S&P Global stated that rapid credit expansion and dependence on real estate remain “important risks” to the banking system.

According to the National Bank of Cambodia’s (NBC) 2022 banking supervision report, credit to real estate activities, construction and owner-occupied housing rose 23.2 percent year-on-year.

The real estate sector represented 32.9 percent of the total credit in the banking system, with owner-occupied housing or mortgage accounting for 14.2 percent, close to half of the market share. Real estate activities and construction held 9.3 percent and 9.4 percent of the loan stock, respectively.

Questions to NBC regarding the real estate risks and measures to mitigate them were unanswered.

However, Raymond Sia, chairman of the Association of Banks in Cambodia (ABC), who acknowledged the impact of rising funding costs on liquidity and loan interest rates, said every bank “would have internal guidelines and policies on mitigating the risks”.

He said the guidelines and policies are periodically reviewed and changed to reflect current times and economic conditions.

“Having said this, we need to be mindful that in any emerging market, like Cambodia, the real estate sector plays an important role and contributes to the overall development and growth of the economy.

“There are obviously risks, which need to be carefully monitored and managed, and banks will also ensure loan pricing would need to commensurate with its risk profile,” he said last month.

Pulling the trigger

Meanwhile, the upside of the slowdown has presented well-heeled consumers the opportunity to bag properties at discounted prices, making it a buyer’s market.

Reflecting on that, CBRE managing director Lennon remarked that one ought to “buy when there is blood in the streets”. “It is a strong statement but fundamentally now is the time.”

For instance, average quoting price for single villas, twin villas and shophouses has marginally decreased in the first quarter of 2023 (Q1’23) from the previous quarter.

The discounts in comparison to average quoting prices back in 2020 are, however, significant. Single villas have shed about 90 percent of its asking price to just over $1,000 per square metre from between $2,000 and $2,500 per square metre to less, while average unit prices for twin villas have lost about 40 percent to around $1,000 per square in that time.

Link houses pared losses, rising seven percent in Q1’23 from the fourth quarter of 2022, thanks to the lower ticket price and that the majority of demand and population in Phnom Penh are able to afford them, CBRE’s Kinkesa said.

Similarly, land where prices have come down since mid-2022, as well as income generating assets such as buildings and hotels that are up and running with good occupancy, are good investment options.

“We understand that because of the nature of the business or developers in Cambodia, they tend to have multiple assets and are willing to sell some of their assets to rescue the cash flow of another.

“If you have identified good income generating assets with good occupancy, good location and at a discounted price, this is a good opportunity,” Kinkesa said.

Looking ahead, Lennon commented that 2023 is the “most challenging and probably the most competitive” Phnom Penh’s real estate market has “potentially ever been”.

“We are certainly reaching the tail-end of what has been a 10 to 15 year cycle. So you must not, and we cannot emphasise this anymore, be using the 2019 playbook. The market has changed immeasurably. It is a different market,” he said.

He urged developers to carry out feasibility studies and market investigations before launching a new project, as well as talk with banks on access to finance and seek out attractive payment terms.

“These are all going to be the most critical areas you can decide on and understand. Cash is king, so hold on to it and wait for the right opportunity to pull the trigger,” Lennon added.

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