The construction and real estate industry is huge and growing at a breakneck speed, as towering cranes and high-rise buildings emerge across Phnom Penh. With a flood of foreign investment over the course of the last two years, the World Bank has announced that construction is Cambodia’s most dynamic engine of growth with a contribution to GDP growth in 2014 at 2 per cent – outpacing garment and agriculture for the first time.

And recent numbers of new residential developments announced reflect this. According to CBRE’s unreleased third quarter Condominium Report, eight new projects have been launched in Q3, compared to four in the previous quarter.

“As of 2018, the number of condominium units in Phnom Penh would increase to almost 20,000 units, an increase of 915 per cent compared to the number in 2015,” the report read, adding that one third of the units would consist of high-end properties, with almost half of the total units being mid-range. CBRE’s last report stated 10,000 units at a 435 per cent increase.

A CBRE breakdown for average condominium prices per square metre for mass-market, mid-range and high-end units are $1,500, $2,250 and $2,900 respectively.

While the report acknowledged that a large amount of condominium purchases will rely on foreign nationals drawn in by high guaranteed rental returns that range from 6 to 10 per cent – also buoyed by the strong US dollar amidst a slide of regional currencies – a significant change is that “roughly 40 per cent of condominium owners are Cambodian”.

Highlighting the recent surge in local investment jumping on the property bandwagon, the report nevertheless states Cambodian buyers hope to “speculate or rent out”, rather than to live in units.

With the unmitigated growth of supply, issues of demand have long been on the minds of property and financial experts. And the question of the success of these new developments cannot be ignored in the face of uncertainty when a potentially untenable boom outpaces economic growth.

“Demand is coming from across the Asia-Pacific region with new interest being registered day to day,” said Simon Griffiths, associate director at CBRE Cambodia. “However, the rate of growth exposes challenges which some developers have and will overcome while others face difficulties.”

While the report states that luxury developments like Bodaiju Residences and The Peak have been the most successful at snatching up local dollars, with 60 per cent and 50 per cent sold to Cambodians respectively, Saraboth Ea, managing director of Maxem Property, said that local investors should be cautious in expecting returns.

“These luxury units are more like investment vehicles for wealthy locals and long-term foreign residents, [who hope] of reselling them in two to three years at a significant gain,” he said.

“In the short to medium term, there will be an oversupply of these units and we suggest people reduce their investment in these types of units until we have a clearer picture of the market in 2018.”

While the report said that developments such as De Castle Royal have achieved a resale value upwards of 60 per cent of the off-plan sale price and The Peak registering 20 per cent, it is difficult to see these resale value hikes as a sustainable trend, considering the future supply.

“These gains highlight the returns made by those who made early investment decisions while generous off-plan early or ‘early bird’ discounts were available,” said Griffiths. “As the market saturates, these ‘early bird’ gains will diminish, but still exist and savvy investors will be able to make such gains.”

Ross Wheble, country manager for Knight Frank Cambodia, explained that these high returns are dependent on location, being in some of the most enviable neighbourhoods of the capital. De Castle Royal, initially launched in 2008, has benefited from a compounded annual growth rate of 7 per cent.

“Whilst it is anticipated that the increase in supply will place downwards pressure on price growth, developments in prime locations will continue to outperform the market as a whole,” he said.

Nevertheless, the idea that a large percentage of Cambodian buyers are jumping into property as a sustainable investment can be misconstrued, as sales revolve primarily among a small pool of buyers, explained Grant Knuckey, CEO of ANZ Royal.

“One should be careful of treating that 40 per cent number at face value. It doesn’t necessarily suggest a large number of individual local investors,” he said, adding that he was aware of just one or two local investors buying a large number of units off-plan.

In terms of returns, “they are betting on either a high long-term rental yield or capital gain on sale”, he said. “In either case, they may end up disappointed. There are insufficient tenants at these sorts of rental levels to soak this upcoming supply up.”

Therein lies the biggest challenge for Phnom Penh’s condominium market: banking on demand from a renter market that does not currently exist.

Likewise, a secondary investor market to sell the condominiums on doesn’t exist yet either.

To make sure that these high-rise developments don’t remain empty, “[it] would require a completely new group of investors to emerge,” said Knuckey.

“The high-end market is really another five years away in terms of locals being able to afford these units for actual residential living,” said Ea.

Ea argues that developers need to focus on a sustainable balance in the market that is not propped up by foreign or local wealth, and rather one that focuses on the slow but emerging mass market.

“Ideally, the right balance here would be about 40 per cent focused on the mass market, 40 per cent on the middle market, and 20 per cent on the high end,” he said. “But the way we see it now, 20 per cent mass, 45 per cent middle and 35 per cent high end.”

Supply and demand based on real homebuyers remains tilted towards the speculative high end, and “this will lead to a lot of empty condos in the future,” he said.

While according to Wheble, Knight Frank data show that condominium sales are already slowing, suggesting that prices have peaked, he contends that the socio-demographic landscape in Phnom Penh is changing “and we anticipate increased demand from Cambodian purchasers over the medium term”.

“We cannot say the mass market yet but astute developers are acutely aware of the rising affluent middle class and as the luxury-end of the market becomes overcrowded, increased attention is being paid to this important demographic,” said Griffiths.

Whether medium-term demand will take off, or the construction sector will continue to bet on high-end luxury units that attract an arguably small amount of wealthy Cambodian investors, remains to be seen. As 20,000 units come online in the next two to three years, one potential outcome is that prices could fall dramatically, filling units as profits diminish.

“A possible medium-term outcome is that we are indirectly seeing a wave of what will become ‘affordable inner-city housing’ being developed. That isn’t the intent of course, but precedent from other markets shows that high-end apartment developments can end up years later as somewhat lower-cost housing when supply goes too far. That is speculative, but then so is a lot of this condo development,” said Knuckey.