Following the austere lending metrics in 2020, which left a beleaguered Chinese real estate sector in its wake, last November’s ease up on financing by People’s Bank of China (PBoC) to relieve cash flow problems was likely the eleventh hour panacea the industry needed.
While these measures dubbed the “three arrows” were accompanied, though independently, by the gradual relaxation of the zero-Covid policy earlier this month, analysts believe that the unwinding of its effects would take time.
Why this is relevant to Cambodia stems from China’s major influence on the former’s real estate and construction industry.
Total foreign direct investment (FDI) to the real estate sector peaked at $3.6 billion in the years preceding Covid-19, where half of the approved investments was backed by Chinese investors.
In 2019 alone, FDI financing in the property and real estate development in Cambodia stood around $1.8 billion, representing the largest contributor to gross domestic product growth at 35.7 percent then, the World Bank said.
These investments mirrored the boom in construction and real estate, with luxury condominiums and commercial developments (hotels, retail and office buildings) emerging in prime areas in Phnom Penh and Sihanoukville.
Given the business model of Chinese developers, which is to entice investment by selling the idea of overseas luxury resort-style living in Cambodia to people in mainland China, Hong Kong and Taiwan, the high-end condominium market pre-pandemic was smouldering.
But as economic conditions worsened in China and capital controls were more strictly enforced, which limited the outflow of funds, construction on some Chinese projects stalled midway, many of them in Sihanoukville, while hundreds of condo units were left unsold.
By the end of 2020, foreign investments in the sector shrank to a meagre $142 million.
At the time, a few of the Chinese-owned projects in Cambodia, including Shanghai-listed Guangzhou Yuetai Group Co Ltd and Guangzhou R&F Properties Co Ltd, reduced activities on their sites as imports of construction materials were low while some halted construction altogether.
In Sihanoukville, some 1,000 unfinished buildings, including condominiums, malls and office structures, have been abandoned since 2019 when online gambling was outlawed in Cambodia, and further compounded by the onslaught of the pandemic.
However, this scenario in the real estate sector is likely to feature for some time, economists Bernard Aw and Eve Barrè of Paris-listed credit insurer Compagnie Française d’Assurance pour Le Commerce Extérieur (CoFace) indicated.
This is because capital controls would continue even as Chinese measures implemented to boost lending, notably housing credit, support investment in the sector in China.
“In the current context of capital flow out of China, which have led to downside pressures on the yuan since the start of 2022, the controls are likely to stay in place.
“Consequently, the easing of property financing measures in China would only give limited support to FDI in the real estate sector outside of the country,” Aw and Barrè said.
More than double
Reflecting sluggish demand in the property and real estate market, approved construction permit value contracted by 66 percent in the first three months of 2022, the World Bank stated this June.
“Similarly, approved construction permit area contracted by 67.9 percent year-on-year. During the same period, the volumes of basic construction material (cement and steel) imports mainly used for the construction industry contracted by 37.5 percent,” it added.
With Covid-19, the luxury condo segment has come under pressure, even more so with new supply coming into the market faster than the absorption rate.
Adam Fitzpatrick, country director of IPS Cambodia, opined that the majority of condos are being built for overseas investors, as the local population are not “particularly attracted” to them, whether to live in or as an investment.
He said most of the projects were envisioned during different economic conditions, be it locally, regionally and globally.
By 2025, Knight Frank estimates that the total cumulative supply would “more than double” to 82,532 units, which is an increase of 227 percent over the supply as of June 30, 2022.
“Currently, the existing supply is spread across 105 condominiums in the city whilst a further 78 projects were identified within the future development pipeline,” the London-based real estate agency said.
CBRE Cambodia data from the third quarter this year showed that construction on some 900 units of deferred projects have resumed, although there were zero launches or project completions in the period.
Supply has risen significantly in the condo market over a relatively short and unstable period from slightly over 20,000 units to more than 40,000 units in the market from 2019 to 2022, said Lawrence Lennon, CBRE Cambodia managing director.
Owing to the increase and lower demand, sales prices and rental rates across the segments – high end, mid range and affordable – showed a decline quarter-on-quarter, respectively, as of Sept 30, 2022.
“Like with all real estate segments the driver is a combination of supply and demand. On the supply side, price is driven by key factors such as location, construction quality, who the developer is, et cetera, but importantly also by the supply in the market in relation to demand,” Lennon said.
This product type has traditionally been consumed by international investors looking for properties with either good yielding returns or rising capital values, often coming from places such as South Korea, Japan, and China.
“Over the course of the pandemic as these investors have not been able to fly into Cambodia or have had issues relating to income, they have not been acquiring the same level of stock here in Cambodia,” Lennon said.
Because supply has risen domestically, developers must work hard to attract new buyers through various incentives, discounting price being one of them.
“This is creating some opportunity for investors to take advantage of, particularly from a Cambodian perspective as the average ticket size has been decreasing on average by 10 percent since 2019.
“How long these discounts can last is the key question as interest rates and construction costs rise,” he told Kiripost.
‘Blight on the city’
The issue of over supply in the high-end condo segment has prevailed since 2016, therefore it is nothing new, said Ross Wheble, country head for Knight Frank Cambodia.
This is reflected in the occupancy rates of completed developments and a decline in rents by up to 50 percent.
Although this is a concern for unit owners as rental yields contracted due to lower rental rates, it is a positive trend for Phnom Penh as the cost of living in Cambodia becomes more competitive compared with its neighbours, such as Bangkok and Kuala Lumpur, Wheble said.
So, rents have declined, but Knight Frank does not foresee a significant price correction in the market. “We anticipate there will be a period of stagnation where prices remain flat over the medium-term until local purchasing power catches up with market prices for the higher end condominiums,” he added.
Whether developers would proceed with development the same way as they would before, assuming economic conditions remained the same today is uncertain.
However, the risk of more high-end condo developments is not only about oversupply, said Fitzpatrick of IPS Cambodia, as unsuccessful projects are a “blight on the city”.
“If they don’t get completed, they lay derelict and sit as an unexplained eye sore to those who visit the city.
“If they get completed and are not maintained or managed properly, they often become over-crowded, dilapidated, dangerous and need to be demolished within a short time-frame.
“If they sit empty because the owners are overseas and don’t necessarily care about generating a rental yield, equally they will start to deteriorate,” Fitzpatrick opined.
Residential buildings should be “built to be lived in, not only as an investment”, he stressed. “We need less projects and more quality. Good projects will always appreciate in value over the long-term.”
However, Fitzpatrick is optimistic about a rebound later next year and especially in 2024 as Cambodia is “recovering well” from the economic downturn, though there is caution in the market, which he thinks would pass “relatively soon”.
While the new measures in China were unexpected and happened “very suddenly”, nobody anticipated them and were not poised to react immediately.
As their impact takes effect over the coming months, he expects investors to make decisions to deploy capital in areas that would most likely have a “very positive impact” on the real estate market in Cambodia.
However, he said, Covid-19 is currently “tearing through the general population”, and there is “still a lot of fear” surrounding the virus in China. “That will all take time to correct itself, just as we saw in other parts of the world.”
Meanwhile, Knight Frank’s Wheble noted that the general elections (next one in 2023) have “historically impacted the real estate market” with many market participants adopting a “wait-and-see” stance.
Based on previous outcomes, Wheble feels that the market has always rebounded strongly post-election.
Could China’s latest financing adjustments to help the real estate sector bring some relief to Cambodia’s real estate sector in 2023? Perhaps, but so much.
Aw and Barrè of CoFace said the measures could stop the slowdown seen in China’s property loan growth in the coming months.
Southeast Asia is expected to be “one of the most resilient regions” next year, while recession risks in advanced economies intensify. This could essentially be beneficial for countries in the region, including Cambodia, in attracting investment.
“However, China's uncertain economic outlook affecting both consumer and business confidence, as well as worsening housing prospects in Southeast Asia amid rising interest rates, could constrain investment appetite by Chinese citizens in real estate in neighbouring countries,” the economists said.
Separately, Kevin Coppel, managing director of Knight Frank Asia Pacific, acknowledged that China’s zero-Covid approach had dampened consumer and business confidence.
But, he expects the gradual rollback on the restrictions to boost domestic demand and improve business sentiment.
“While these changes are modest at this stage, they are a positive sign and could indicate further relaxation in 2023, potentially leading to increased cross-border capital flows and growth that exceeds current expectations,” he said.