Last Tuesday, March 24, The Asian Development Bank (ADB) published their annual outlook report on Asia’s economy. Cambodian credit growth in 2014 reached 31.3 per cent which, following the trend of 2013 is supposed to be driven by credit for real estate projects by more than ten per cent – a figure some economists find alarming.

As reported by the Post yesterday, representatives of ADB and the private sector reminded that such high credit growth in the Cambodian real estate market could lead to a bubble, and they asked for more credit regulation and supervision.

Does this mean Cambodia could already be in a dangerous credit cycle? Post Property dug deeper and spoke to Stephen Higgins, banking expert and managing partner of corporate investment and advisory firm Mekong Strategic Partners to learn about the status quo of credit for property in Cambodia.

Should ADB’s suggestion to introduce more regulation and increase supervision alert property investors in Cambodia?

The ADB’s call for greater regulatory supervision is not unreasonable, and might simply take the form of the National Bank of Cambodia (NBC) more closely monitoring banks’ property exposures. In fact it wouldn’t surprise if the NBC was already taking a closer look at that.

I don’t think it should be a major concern for property investors though, as good quality projects should still be able to get funding, and the current boom in prices isn’t really being funded by local bank debt anyway. 

Is credit for real estate too easily accessible in Cambodia?

Compared to most countries, you couldn’t say that real estate credit is too easily accessible. Banks generally only lend about 50 per cent against the value of the property, although they are starting to go a little higher for residential mortgages. 

Are there participants in the property market who should not gain access to credit?

For the most part I think you can rely on the banks making sensible decisions about not giving people credit that really shouldn’t be getting it. If a customer can’t pay, it takes a long time working through the court system for a bank to get their money back, so they want to avoid that. 

What do you believe essentially drives the property boom in Cambodia?

There’s no single factor that’s driving it, rather a range of things like having a very high growth economy, offshore investors coming in, plenty of wealthy Cambodian’s who have made a lot of money from property in the past that keep playing in it.

Is there a danger if credit growth happens mostly in one sector such as in real estate?

Commercial property busts are the single biggest cause of banks getting in to trouble, so you wouldn’t want to see too much lending to that sector. In the past, the NBC has been fairly vigilant on that. 

What would be the ‘ideal’ mixture for sustainable credit and economic growth?

I’m not sure there is an ideal mixture, but in general you want to see more lending for manufacturing and services, and less for real estate. But you don’t want real estate to be zero either. Cambodia needs to build its housing stock, more offices, and more factories, and some level of debt funding is essential for that. 

What are the regulatory measures against a credit fuelled bubble and how do they work? 

Around seven years ago the NBC imposed a cap on property lending for a while, limiting real estate exposure to 15 per cent of a bank’s portfolio. It was a sensible measure at the time, and they could always implement something like that again. It would force banks to ration their credit for good quality real estate projects only, which would be a good thing. 

What adverse effects could regulation have on the property market in Cambodia?

If regulations were implemented that were too harsh, you could drive a crash in the property market, but I expect the NBC would be very sensible and pragmatic about the approach they take. However taking a little bit of heat out the of the market wouldn’t be a bad thing. 

What signs preface a property driven credit bubble?

I think we are a long way from a property driven credit bubble. While the credit to GDP ratio is around 55 per cent, at the same stage of development Vietnam was nearly 90 per cent, and China was 123 per cent, so in comparison Cambodia is not that high. I think annual credit growth of 30 per cent or more is probably a bit high, but 15 to 20 per cent would be fairly reasonable for Cambodia given the level of GDP growth here.