Real estate jitters prompt government and industry meet

Real estate jitters prompt government and industry meet

The Ministry of Economy and Finance (MEF) has stepped up its communication with the Kingdom’s real estate executives in the wake of growing concern around excess supply of condominiums and sluggish demand, when compared to 2015

Recent research on Phnom Penh’s condo market by Century 21 Cambodia found that in the first six months of 2016, 13,790 off-plan condo units were launched, jumping 52 per cent compared to the previous corresponding period.

By the end of 2016, about 3,621 new condo units are slated for completion and will be released to buyers, totalling 7,093 units including the existing releases.

The growing condo supply isn’t expected to slow down any time soon, with the report anticipating available condos to reach 37,570 in 2020.

The report noted that the largest volume ever of new condominium unit launches in 2016 had posed a hard time for primary demand to absorb the supply where only 13 per cent of the total units launched were transacted. This compares unfavourably to 2015, when 37 per cent of the total new units launched were transacted.

“A low transaction-to-stock ratio in the first six months of 2016 was due to an enormous supply currently outstripping the demand,” the report stated.

“Given the fast growing rate of new condominium launches lately, though current absorption rate takes tens of months, the existing huge supply of condos and other types of housing does not yet match the current ‘hidden’ housing demand,” the report added.

Mey Vann, director general of the Department of Financial Industry at the MEF, told Post Property over the phone last weekend that a meeting, held at the end of June did consist of discussions regarding commerce and checking on real estate development approaches, with a focus on managing supply, demand and foreign investment.

Vann added that while the ministry had regularly held such meetings, the government is now conducting those more frequently due to the flurry of activity occurring in the real estate market which calls for more attention.

When supply exceeds demand, developers must set up new market strategies. “We are trying to be a partner of the private sector because it’s an important sector for our economy,” he said.

Sam Yang, chief executive of Eastland Development, who also joined the recent meeting, said the ministry has shown their concern over condo oversupply in Cambodia.

However, he insisted there was no need to be too worried.

“The ministry should not be worried about the condo market. Instead, they should help developers to finish their projects in time,” Yang said.

But reality tells a different story, with some condo projects that have been announced to commence stalling construction.

Little activity has been seen at The Bay condo project despite previous indications that construction had started, while construction at the Sky Villa, a luxury twin-condo set to be built just southeast of the Olympic Stadium by the end of 2017 appears to have slowed down.

Chrek Soknim, CEO of Century 21 Mekong, said there are other condo projects in Phnom Penh that remain idle; however, he would not disclose details.

Michael Nhim, former manager of The Bay condo project in the Chroy Chongvar area, said three or five years down the road this much amount of condo supply will not be excessive.

He said the medium-term risk is the commune council election and the national election in 2017 and 2018 respectively. These elections, according to Nhim, can put investors and purchasers in a wait-and-see mode until the political situation is clear.

Nhim continued, “Some really did delay their construction, but they are not giving up because after the election in 2018, the market will be bigger than 2015.” He added, “The locals will adapt to condo lifestyle which will lead to a bigger market.”

When asked if investors should delay or continue their construction, Nhim said, “If I were an investor who has invested more than $100 million, I will delay the construction until after the election in 2018. However, if my investment is less than $100 million with a foreign market, I will continue to construct.”

Sear Rithy, CEO of WorldBridge Group and WorldBridge Land which is investing in The Bridge and The Peak condo developments, said there are no problems with the timeframe for its condo projects.

He said condo residents “need luxury, and convenience, and developers must supply that.”

However, he cautioned that every developer must do extensive due diligence.

“Will they be able to sell their condos? Does this condo provide necessary services to ensure a convenient lifestyle to its residents? If you are just following the trend, you should save your money instead,” Rithy said.

He continued, “For those who possess land with a foreign partner to construct, ‘don’t be too happy too soon’ because if the project is not successfully sold, they can just leave you.”

Rithy said, first and foremost, sufficient capital is mandatory in property development, also stressing on the importance of location. He admitted that projects located far from prime areas might now fail.

“Projects that are done carelessly will be stuck in the future. You should be careful,” Rithy cautioned.

Thida Ann, associate director of CBRE Cambodia, said that while the condo market in Phnom Penh is changing direction, there is no cause for alarm.

“The condo situation is not stuck. It’s just hard to sell. If you want to sell, you have to provide a special price,” she said.

“Investors should not be worried about this situation if their project has good value.”

Asked how the government should tackle the condo supply demand imbalance, Ann explained that everything is related to the Kingdom’s laws.

Ann noted that the Cambodian government has been encouraging foreign investment, which allows some projects to be placed up for sale before its construction so that they can finance their construction through sales. This can lead to some projects becoming “stuck”, she said.

In comparison, the Australian government requires an investor to finish at least 70 per cent of their construction before they have to the rights to put a development project up for sale.

She added, “Encouraging investment by allowing projects to be up for sale before its construction is a risk for the people.”

“The government should tighten the laws concerning this issue. Projects should not be up for sale before its construction.”

Meanwhile, economists seem to be erring on the side of caution when it comes to Phnom Penh’s rapidly growing property sector.

Mey Kalyan, senior advisor to the Supreme National Economic Council, said general credit in Cambodia had increased around 30 per cent, adding that this could lead to concerns regarding risk, especially in real estate.

“Credit is like fat in our body. We need the fat to function, but we also don’t need too much of it,” he continued.

Stephen Higgins, managing partner at Mekong Strategic Partners and former ANZ Royal CEO, told Post Property that demand will not be able to keep up with condo supply in the next few years.

“A lot of those condos are going to sit vacant or unsold, which ultimately will put downward pressure on rents and prices,” he said.

According to Higgins, property developers had banked on a large amount of foreign purchasing activity.

“The developers were hoping to sell to foreign buyers, and for a while that worked,” he said, noting further: “It seems now foreign buyers are realising that maybe it isn’t such a good investment, and they’re staying away.

“What the government should be concerned about though is ensuring there isn’t a large stock of unfinished buildings, the likes of which blighted Bangkok’s skyline for many years. They could do this by requiring the developers to post large completion bonds for example.”

phnompenh post