Real Estate Firm Warns of Market Risks From Pandemic, Oversupply

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Buildings in Phnom Penh, on February 17, 2021. (Michael Dickison/VOD)
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Though the country has so far weathered the pandemic without massive viral outbreaks, the risks are piling up on Cambodia’s real estate market after years of rapid growth and high profit, according to an international property research and sales firm.

In its annual forecast for the country’s real estate market, released on Wednesday, CBRE Cambodia pointed out several factors indicating a high level of supply and competition this year.

Construction investment reached a record $11.4 billion in 2019, a nearly 100 percent increase from 2018 investment. But investment in 2020 dropped to $7.7 billion. CBRE found 279 projects in various stages of construction in Phnom Penh in the fourth quarter last year, down from 405 projects in the same period in 2019.

CBRE Cambodia managing director James Hodge noted that some of the projects under construction had started as far back as 2011, while several projects that started between 2015 and 2019 had suspended construction as of the fourth quarter of last year.

Hodge noted that while land and landed property prices were relatively stable, the real estate market faces a “challenging situation” this year as consumers seek lower rents while a significant number of new retail, condominium and office units are set to come online in 2021.

Condo supply is projected to increase from around 25,000 units last year to nearly 40,000 units this year. Both condo rental prices and average yield, or annual return on initial investment, fell in 2020 across price ranges.

“Demand for occupiers is the key point, and it’s starting to bite a bit more than it was,” Hodge said.

The average borey sale price is also expected to dip slightly this year after reaching $1,100 per square meter between 2019 and 2020, though domestic interest in boreys has still been strong. 

Hodge said that at the moment, buyers appeared to be seeking smaller and lower-cost housing, and competition was strong particularly in sales of mid-range condominium units.

“In terms of condominiums, most of the market was targeted to foreign buyers until the beginning of last year, and they’ve really pivoted; they’ve changed pricing structure; they’ve changed payment terms; if they were early enough in development, maybe changed size of the unit, fittings and fixtures,” he said. “They’ve done a lot to boost domestic purchasing power.”

However, even the average “affordable” condominium unit price was six times Cambodia’s average estimated annual salary, and average borey prices were between 11.7 and 26 times the annual estimated salary, according to CBRE data. Hodge added that the banking sector had reacted to the buyers’ market, offering loans for some 60 to 95 percent of the value of a unit.

Meanwhile, Hodge said developers were paying brokers “insane” fees, around 15 percent of the cost of a sold unit compared to a general rate of between 8 and 12 percent, indicating a competitive market to sell to local customers.

“It’s likely unsustainable to be paying [that much] to Cambodian agencies to sell to Cambodian buyers,” he said.

Hodge also issued a warning about guaranteed rate of return schemes, a popular offering where buyers who won’t be living in the unit pay more upfront in return for receiving a guaranteed rental income. The scheme has allowed developers to get more cash in hand, Hodge explained, but they could struggle to secure renters while the country is in a period of oversupply.

With 20 retail projects set to come online this year, Hodge suggested there might be delays in some openings, as the retail sector globally has been shocked by the economic slowdown and few regional brands had entered the country since 2017 and 2018.

He also suggested office developers should hold onto their tenants, as more than 100,000 square meters of strata-title offices, or titles above ground, are expected to be added to the market this year.

In an informal survey taken live at the presentation, more than half of the 78 industry respondents said oversupply was the biggest concern.

The firm advised the industry against panicking, but CBRE Cambodia chair Marc Townsend warned that “things will get worse before they get better,” via a pre-recorded message, as he could not attend due to Covid-19 travel restrictions.

Hodge too noted that the largest risk to the sector hedges on the virus itself; if Covid-19 is to spread in Cambodia as rapidly as it did in Myanmar or Indonesia, the shocks to the industry would be immediate and therefore it would throw their projections “out the window.”

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