Cambodia – Supply & Demand Disconnect ?

Asian Property Review talks to Oliver Nicoll, Director of Research, Asia Pacific Investment Partners (APIP) on the current status of the Cambodian property market.
APR: According to an article published in The Economist earlier this year, Chinese money accounted for 70% of total industrial investment in Cambodia between 2011 and 2015. But Western countries still have leverage there. With so much Chinese influence, what happens if there is a Chinese investment pullback due to various reasons? Is Cambodia in danger of letting China control its strategic infrastructure e.g. land, ports, etc?
ON: As is frequently the case, the role of China can cause consternation for governments if there is perceived overexposure. Clearly, Cambodia has been the recipient- and beneficiary- of much investment from Chinese partners, and if there is a slowdown, then notionally a retreat could cause problems for the government in Phnom Penh. Many of the commitments, however, are of strategic importance to Chinese entities, and involve long term, financing obligations that they are unlikely to renege on. As in any country, it is advisable to widen the pool of international partners; however, there have been steps in this direction, and to talk of overdependence neglects the plurality of organisations investing in Cambodia. Influence, is a different question. Provided deals and agreements have been well constituted and protect domestic interests, however, there is little to fear in current arrangements.
APR: How will the recent crackdown on the Opposition and independent media ahead of a general election next year affect property buying sentiment among foreigners?
ON: Investors like to see continuity in political arrangements, and can be put off if there is a perception of movement in an autocratic or anti-liberal direction. Obviously, Mu Sochua, the Opposition leader, has now called for sanctions to be placed on the incumbent Prime Minister. In my view, it may cause a lull in activity until issues are resolved, however, the underlying economic and demographic fundamentals driving the real estate sector remain unaltered. If you look at the political situation in Thailand and its continued popularity in certain sectors, dislocation should not inexorably lead to diminished interest. But in whatever direction it goes, it needs to be managed to sustain investor interest.
APR: Is there an oversupply of residential high-end properties geared towards foreigners?
ON: Let’s be frank, Cambodia is still a frontier market in the imagination of many investors and so, for there to be real market liquidity, typically it is better to entice people with properties at lower, rather than higher, price points. It is reasonable to point to an oversupply in the luxury segment of the market- a familiar story in much of developing Asia. My view is the low and mid-market sectors will perform better in the coming years, as the quantum of new units at the top end is not matched to realistic demand.
APR: With the majority of population still not achieving middle class status, how will the new malls survive?
ON: Most prudent developers in the retail sector in Phnom Penh appreciate that attaining full occupancy in a luxury mall is not something likely to be achieved immediately. The best projects are strategic investments intended to claim the best plots now, ahead of an anticipated expansion in consumer demand over the next decade or more. A relatively recent report by the Economist Intelligence Unit, pointed to median household incomes in Phnom Penh being set to overtake those of Bangkok and Ho Chi Minh City in the future, so it would seem the growth of the consumer class is going to be an increasingly salient story. The answer, in brief, is in the best spirit of property development, much of the retail will be speculative and will require canny asset management both to attract occupiers and keep units in the kind of condition required to retain desirability in the medium term.
APR: Does the local demographics support demand for property over the next 5 years
ON: Estimations of demand based on overall demographics risk being too broad brush and simplistic. Nearly 50% of the Cambodian population are under the age of 25 and there is a pervasive shortage of housing at ‘affordable’ price points. There will certainly be sustained demand, but this does not necessarily follow that delivery will be closely aligned to the source of need. Housing is required, but questions such as mortgage availability and household incomes, will, like anywhere, be the key determinant of performance in the real estate sector.
APR: Cambodia is not yet a sure bet when it comes to the highly speculative real estate game. An example is the suspension of the US$500 million mixed-use real estate project dubbed ‘The Bay’. Do you agree or disagree with this statement and why?
ON: I would tend to agree, but with one caveat. I don’t see Cambodia as much different to other countries at a similar point in their arc of development. Large projects such as ‘The Bay’ can be transformative, but they carry commensurate levels of risk-financing, demand and potential disputes. It takes a brave developer to embark on schemes of this scale in developing countries, and my personal inclination would be to take a more staged approach, without over speculating on a still nascent market.

APR: ‘With 8,000 condo units expected to enter the market by the end of 2017, and an additional 13,000 units coming online next year, the fallout of a construction boom that has been in overdrive for a good five years is starting to show.’ – True or not?
ON: As per my earlier comments on targeting foreigners, the lower and mid-market seems poised for stronger short and mid-term performance. This said, circumstances can change so rapidly, there are likely to be specific developments at the top end that outperform for reasons such as location, specifications and quality of finish that may buck general market trends.

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