A new norm sets the scene but risks continue to play out in the background

A cold wind sweeps through the streets of Boeung Trabek on an early January morning as buyers and traders engage in commerce under bright blue skies.

From a distance, the scene of the market complex where local wares entice shoppers is colourful and vibrant.

Just before it lies its former extension, now occupied by an abandoned massive mixed development project that looms above the market din.

The $250 million Sino Plaza, once prophesied as the largest integrated complex in Phnom Penh largely due to its extensive onsite facilities, was so promising that it was to be built by one of the biggest contractors in the world by revenue, China State Engineering Co Ltd.

It would feature a 43-storey office block, two 42-storey condo towers, and a 36-storey building that would house a five-star hotel, shopping complex and cinema.

Today, it languishes in quiet discomfort within a bustling ambience. Its half-finished minarets poke holes in the sky, with scaffolding and blue tarpaulins still attached to the upper portions of the grey structure.

“There has been no activity for more than two years. I don’t know why it stopped,” said a man who has taken advantage of the complex’s five-foot-way, just inches from a rope that runs the length of the ground floor to keep people out.

He earns a negligible income pumping motorcycle tyres with air, a job he has been doing for the past year. “Only the cleaner and security guard are here most times,” he said, sitting back down in his lazy chair shaded by an umbrella.

But the project is far from over, apparently. According to cashier Sopheap, employed by the project developer China-based Cambodian Natural Lucky Real Estate Investment Co Ltd, her manager, Zhang Sun Li, will return from China in April to submit a revised design plan to the government.

“There was a problem with the design. I don’t exactly know what it is but the company was about to hand in a new design when Covid-19 hit. Many of our managers who went back to China for the Chinese New Year last year are still not back yet,” she told The Post via telephone.

Asked if the company had run into money troubles, she apologetically said she has no knowledge of it although she joined two years ago when the construction was “in the midst of stopping”.

“Despite that, we have been receiving our salaries every month,” Sopheap said.

The lack of activity at development sites are raising questions in terms of their viability in the face of Covid-19.

One of them is Shanghai-listed Guangzhou Yuetai Group Co Ltd’s wholly-owned subsidiary Yuetai Cambodia International Investment Co Ltd, whose projects, Yuetai The Garden Residence and Phnom Penh Harbour, reduced activity in the past year.

“Of course we are not bankrupt,” a staff member retorted, when asked.

“Yes, we won’t say that our finances are fully secure but daily operations are smooth. In fact, my Cambodian colleagues and I get our salaries on time,” said the staff member, who declined to be named as he is not authorised to speak to the media.

However, he explained that many Chinese developers are struggling with financing due to the slow outflow of money from China while Cambodian banks are wary when reviewing financing applications for projects.

“It is the same in China. Many developers there are also facing funding problems,” he said.

He attributed the talk of bankruptcy to people not knowing the real situation of the company just because construction was not robust.

That said, the group has had to re-jig its plan by speeding up one part of its Phase Four development of 600 condominium units and shophouses within the multi-million dollar Phnom Penh Harbour project located on the Riverside, to cater to domestic demand.

It is a strategic marketing move after the fall in foreign demand, as tourist numbers plunged on the back of Covid-19, he said, adding that other developers were employing similar tactics.

Priced between $100,000 and $1 million for three-storey shophouses, and $30,000 and $50,000 for condominium units, sales which began in June 2020 have been encouraging and helped recoup some of the group’s lost earnings.

Source: CBRE data, Fourth Quarter 2020 Report

It is learnt that construction was to begin with Phase Two condominiums that were going for $100,000 to $200,000 in early 2020, as the economy was strong at that time.

“We could not sell like that as the situation was bad to offer units at that price. Hence, the construction of the [lower priced] units which we will be handed over by the end of the year,” said the staff member.

The shophouses which are 90 per cent complete will be ready by the end of this January. “We are committed to meeting our pledge to our customers and Cambodia.”

Capital outflow curbed

Chinese real estate developers have been impacted like all developers this year, but because their target audiences have traditionally been focused in their home markets, the lack of international travel, combined with geo-political factors and the slowdown in the Chinese economy, means that fewer Chinese buyers are in the Cambodian market right now, said CBRE Cambodia managing director James Hodge.

An affiliate of US-based CBRE Group Inc, the Cambodian unit has noted that some Chinese developers have pivoted towards the domestic market and as such, are growing their local sales teams and putting more resources into marketing.

For others, the situation has been coupled with disruption to construction supply chains which has slowed their projects, and key personnel impacted by travel disruption.

“It is clear that domestic Chinese issues have also been a factor for some Chinese developers, but in most parts they are not particularly dissimilar to other foreign developers active in the Cambodian market, it is just that they form a larger proportion of the supply and have a number of large scale, prominent projects which are a focus for attention,” Hodge said.

Still, the impact on the finances of overseas developers is stark. More so for some China-based firms which suffered from the constriction of capital outflows by China beginning 2016 and further tightened last year in a move to keep the Chinese yuan within the country to stimulate the economy.

A common characteristic of some real estate developers including Cambodian firms is to fund their own projects through internal financing.

While local firms are able to continue construction even during the peak of the pandemic, foreign-backed projects were hit hard, no thanks to the drop in construction material imports and reduced foreign labour.

This could mean lower investments from Chinese firms in the real estate and construction sector, which up to the first quarter of 2020 constituted half of the total Chinese foreign direct investment (FDI)in Cambodia.

Simon Griffiths, managing director of The Mall Company, believed that investor and investment project characteristics will change.

“FDI inflow from China will be tightened and it is already happening and is apparent, so it will have a big impact on the real estate sector. Also, the FDI sources that do arrive may be from companies with more extensive experience, having the effect of improving the quality of investment projects in the Kingdom,” he said.

He recalled that the current scenario was similar to the first wave of investment in real estate from South Korea prior to the global financial crises in 2008.

“This first wave of investment was followed by stronger regulations in South Korea to regulate the FDI outflow. The real estate sector remained steady, but it slowed down after the tightening of regulations then stayed put and rebounded quickly after the global financial crises abated.

“That will happen with this situation much as it did before,” Griffiths said.

Cambodian Investment Management Co Ltd CEO Anthony Galliano believed that in three years, the current recessionary period will be “forgotten anxious memories” and Chinese investment would rebound strongly.

Although, he reckoned that everyone is probably in for a “pretty rough time for a good deal of this year”.

“I expect the vision for Sihanoukville as a major gambling hub in Southeast Asia would be eventually realised,” he said, adding that the present landscape of unfinished and empty buildings to “unfortunately” persist throughout the year.

Galliano viewed the current lull as an aberration and foresees a return of Chinese nationals as investors and residents, as well as a boom in tourism, primarily to what should be a mostly completed Sihanoukville sometime next year.

“The dip should be temporary as China’s investment blueprint for Cambodia, whether infrastructure, special economic zones or commercial and residential developments, is [likely to] remain intact, given the strategic importance of the relationship between them,” he said.

“Keep a watchful eye”

Accordingly, the real estate sector and construction is one of the strongest economic segments in Cambodia, if not the strongest. Last May, the World Bank revealed that this segment was the largest engine of growth in years leading up to 2019.

It contributed more than one third of gross domestic product (GDP) growth.

But construction investment, CBRE said, fell 25 per cent year-on-year to $7 billion from January to November in 2020, which the World Bank had previously cautioned could have an indirect effect on the financial and banking sector.

Source: CBRE data, Fourth Quarter 2020 Report

“The tapering of capital inflows is triggering the easing of real estate market prices, likely ending the construction boom. With the current large outstanding credit to the construction, real estate, and mortgage sector, non-performing loans (NPLs) are expected to rise,” the international financial institution said in its economic update in May.

The share of outstanding bank credit, excluding microfinance and shadow banking credits, financing to the combined construction, real estate, and mortgage businesses rose 31.1 per cent to a record $7.7 billion or 28.6 per cent of GDP in 2019.

In that same year, International Transaction Reporting System data showed FDI inflow to the real estate sector alone in Cambodia stood at $437.3 million, some 59 per cent of that from China, Singapore (15.2 per cent) and other countries (26 per cent), said National Bank of Cambodia (NBC).

In its 2019 Annual Supervision Report on the performance of banks and financial institutions, NBC noted that the sector was prone to risks and found that it had “grown rapidly and highly exposed” to the banking system.

As of December 31, 2019, credit growth to real estate sector was at 37.9 per cent in the banking sector and 12.3 per cent in the microfinance sector.

Looking at market share, real estate credit owned 24.8 per cent of the total credit portfolio in the banking system, of which banks made up 97 per cent and the remainder by microfinance institutions.

Credits to real estate sector consisted of real estate activities, construction and owner-occupied housing, whereby real estate activities were at the highest demand compared to the rest.

“These credits expanded at respective rates of 41.7 per cent, 43.3 per cent and 27.6 per cent for owner-occupied housing, real estate activities and construction,” NBC stated.

But this is a given, Galliano indicated, seeing that Cambodia is a “darling” investment destination due to its consistent strong growth in Asia. “Investments have poured into the real estate sector at a frantic, if not sustainable pace.”

Although overseas developer projects are not financed by the local banking sector directly, the end buyer market to some extent tapped local banks through home loans, which now comprise 50 per cent of consumer loans.

The industry has been touting consistent sales and relatively stable pricing, prevailing during difficult economic times but low occupancy is an unfolding challenge and risk for investment properties.

“[Therefore] a watchful eye on unfinished developments [where buyers who are largely financing the projects through presales] and large scale developments that the financial sector is partially financing through end-buyer home loans, especially those where buyers anticipate repayment of home loans through rental cash flows [is needed],” he said.

He also pointed out the potential drop in asset prices as another risk, following the ebb and flow of Chinese investment as a result of the online gambling ban, Covid-19 and the exodus of Chinese nationals.

Similarly, economist Dr Chheng Kimlong warned that particular attention should be paid to the reliance on foreign capital inflow through commercial banks that are generally associated with credit crunch situations and high NPLs by real estate developers.

Though he did not elaborate, Kimlong said unlike other countries of similar size and development level, the real estate sector growth in Cambodia has been bolstered by domestic capital.

Separately, concerns also surround funds provided by developers to buyers which is unregulated by the NBC. As it falls within the ambit of the Ministry of Economy and Finance, the NBC has limited data on this sector’s comings and goings.

Unnerving, the lack of transparency has often irked the central bank which has termed it under shadow banking activities.

It is yet to be seen how the newly-established Non-Bank Financial Services Authority controls and manages non-banking regulators such as insurance, private pensions, securities, social security, project-bidding management, accounting and auditing, real estate and mortgages.

In March 2020, as Covid-19 pummeled the economy, the central bank instituted monetary measures including a debt restructuring policy that will last till June this year which has so far helped to keep NPL low, coming in at an overall 2.42 per cent as of September last year, Credit Bureau of Cambodia (CBC) stated.

From the debt restructuring activity, mortgages emerged as the third largest portion at $457.9 million, after small business loans ($2.5 billion) and personal finance ($594.4 million).

CBC data also showed that out of the three products – personal loan, credit card and mortgage, NPL on credit card was the highest at 5.21 per cent whereas mortgage was the lowest at 1.5 per cent in that period.

A looming bubble burst?

But this does not indemnify the financing risks in the real estate sector. Worse still, warnings of a property bubble due to a surge in land prices and a sudden cooling as well as disproportionate supply to demand, all of which is effected by the pandemic, might cause it to burst.

A quick check on CBRE’s statistics showed that nearly 41,400 square metres of office space was added in the last quarter of 2020, total condominium units grew 3.75 per cent quarter-on-quarter to 25,914 units while serviced apartments inched up 112 units to 2,951 units in that period.

Source: CBRE data, Fourth Quarter 2020 Report

By the end of this year, some 13,016 condominium units will likely make it into the market, pushing supply up by 17.6 per cent, although prices are expected to be lower by an average of seven per cent.

According to Hodge, the real estate market has been growing at a rapid pace for quite some time. With significant increases in supply, difficulties emerge in the market as there becomes an overhang of space and prices have to adjust in order to stimulate demand.

The effect of Covid-19 has accelerated the market cycle for some sectors, pushing them into a downward trajectory at a faster pace than if the pandemic had not affected consumer and business confidence.

He contends that prices were moderating for much of 2020, but he would not call it a “bursting of a bubble”.

“It is a market correction and this is a normal part of the real estate market cycle. It is difficult for many developers and investors, [however] many of the fundamentals in the market remain robust – particularly the apparent level of liquidity in the banking sector,” Hodge said.

Questions to Ministry of Land Management and Urban Planning spokesman Seng Lot were ignored.

Moving on, CBRE’s Hodge said the current market cycle has brought about a few trends, not least a reduction in the demand for space from foreign investors.

Some of these might return when travel gets back to normal but for now, developers have to review, revise and re-strategise their projects in order to continue to dispose of units.

As for growth, a broad-based recovery this year seems unlikely, he said, but expects improvement in certain sectors, particularly in the residential and hospitality sectors once travel becomes easier.

“The recovery in economic growth can help the office and retail sectors, but both are forecast to be subject to major increases in supply of various formats, which will temper any recovery somewhat,” he added.

For The Mall’s Griffith, Cambodia is no exception to the takings from 2020 which has taught nations to be reliant on themselves, diversify and strengthen their own local economies.

While margins may not be as lucrative or developments not as glamorous, the emerging middle-class is an under represented demographic in real estate. As such, the affordable housing, borey projects and affordable condominiums are good investments.

“There will also be many great opportunities for cash investors including distressed assets that need to be sold or liquidated quickly. Cash buyers can pick up assets at prices that were not possible pre-pandemic,” he said.