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Silence of the cranes

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Development in Phnom Penh soldiers on, albeit at a slower pace due to lower imports of building materials. Heng Chivoan

Silence of the cranes

The whirring of cranes on construction sites on Monivong and Hun Sen boulevards have quietened down a little, and at times totally disrupted in the past month, since Covid-19 engulfed China.

Over at the expansive courtyard of $2 billion R&F City, the only completed zone of the project, which houses its sales gallery in a large reception, human activity was minimal too.

Work at its construction site that surrounded the courtyard ploughed on silently as a handful of workers shuffled in and out of openings in the scaffoldings.

But the scene rendered no insight into a busy, dusty building site.

“Construction activity has reduced between 10 per cent and 20 per cent since early January,” said a Chinese staff who was seen measuring the pavement outside R&F City on Hun Sen Boulevard.

The dip in their workflow is allegedly related to the low quantities of construction materials and equipment imports, as well as the absence of Chinese workers, who are subject to travel restrictions imposed by China after the Chinese New Year celebration – near the height of the Covid-19 outbreak.

“Some of the construction materials are from Hubei province [the Covid-19 epicentre] where Wuhan is located. Therefore, we are facing difficulties importing them,” said another staff.

However, Hong Kong-listed private developer R&F Group from Guangzhou has determined to handover the first phase of its project, featuring 10 condominium towers by the end of 2020. Phase two has another 10 buildings.

The seasoned developer, with properties in China, Australia, UK and Malaysia, has already sold nearly 90 per cent of eight buildings in R&F City to 60 per cent of Chinese nationals since the construction began in 2017.

To meet its deadline, the group shifted Cambodians from its other project to double up the workforce.

The drop in construction materials import due to supply chain disruption since the start of the year is showing negative signs on the sector. It might hit the revenue and cash flow of construction companies.

For starters, analysts say that Chinese building materials delivery for early and mid-stage real-estate projects might be delayed.

“[But] those which are towards the end of the construction process may be able to complete with existing materials,” said James Hodge, the director of real-estate and investment unit, CBRE Cambodia.

Public infrastructure projects such as highways, airports and bridges where Chinese parties, whether state-owned or private, are involved as part of the Belt and Road Initiative are expected to experience slower activities.

But companies’ financials will remain steady, according to a note by Moody’s Investors Service Inc in February.

Chinese state-owned entities would be able to withstand a short-term disruption because of adequate liquidity and strong support from the Chinese government.

However, it warned that there could be a stronger impact if the disruption is prolonged and more restrictive measures are instituted, inhibiting movement of labour and raw materials.

The lower than expected downside risk on the construction sector in Cambodia was definitely not anticipated even on the face of the protracted US-China trade war.

This comes beside the potential risk of the partial suspension of the Everything But Arms scheme in August.

The crippling effect of the outbreak in China which severely disrupted production within the country can literally be felt around Asia.

More so with emerging economies like Cambodia relying heavily on Chinese trade and exports.

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Data shows that construction is an economic powerhouse for Cambodia based on its approval of $44.6 billion worth of projects from 2000 to May 2019.

The sector contributed 11 per cent to the Kingdom’s gross domestic product (GDP) in 2019, a figure that has been trending upwards over the decade.

In 2019, the government green-lighted nearly 4,500 projects valued at $9.3 billion. It was an increase of 55 per cent from 2018. Two-thirds of that comprised residential projects, followed by commercial, factories and hotels.

Import of building materials and equipment such as cement and steel rose at a cost of $1.5 billion in tandem with the growth of approvals and made up for the shortfall in the construction sector. A lot of the material comes from China.

In 2019, China represented 43 per cent of the foreign direct investment (FDI) inflows. Paling in comparison were South Korea (11 per cent), Vietnam (seven per cent), and Singapore and Japan (six per cent).

Economist Chheng Kimlong said data which he compiled till mid-February this year, showed that two-way trade between China and Cambodia has surpassed $6 billion, whereas accumulated FDI stocks have reached over $15 billion.

“The slowdown of Chinese investment is affecting the growth prospect of the Cambodian economy. First and foremost is the investment projects in real estate and construction sectors by Chinese investors,” he said.

Cambodia’s appetite for development and growth is strong as it plans to achieve higher-middle-income status by 2030, but that just means it will be subjected to external headwinds.

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Over at Hun Sen Boulevard, said to be the Kingdom’s first highway, foreign and local developers vie to make their mark on the vast landscape.

Up to three years ago, the area was a lake, known as Boeung Tumpun, where 2,500ha of it was covered in vegetation.

Now, only a fraction of the lake remains as tonnes of sand is dumped into the water every day to create more landmass for development in the city’s expanding girth.

The site has become a darling hotspot for greenfield developers such as Chip Mong Group Co Ltd, Peng Huoth Group Holding Co Ltd and Maritime Development Group Co Ltd, to exhibit their architectural might, unimpeded by space and land prices.

But with the uncertainty involving the impact of Covid-19, economic sectors remain vulnerable. But by how much? That is a matter of guesswork.

As data on the sectors’ year-to-date performance is limited, deductions are surmised from official decisions such as the temporary halting of some $400 million worth of public infrastructure projects to free up funds to fight a possible coronavirus outbreak.

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On Tuesday, Prime Minister Hun Sen said $800 million to $2 billion would be allocated for economic impacts from Covid-19 lasting between six months to a year.

Seeing that construction is a major component of economic growth, a slowdown in activity could reduce the overall GDP figures, Hodge pointed out.

“The impact may well continue and we will see lower volumes of materials reaching construction sites. The primary impact of Covid-19 is a delay in the delivery of construction materials to sites,” Hodge said.

However, like the garment and footwear industries that just received a lifeline through urgent shipments of raw materials from China, it is possible that the construction industry may similarly receive an injection of supplies to sustain it.

But for now, the slowdown impacts developers because they have to service their construction loans for longer, and a longer delay deepens the impact on them.

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Guangzhou-based R&F Group’s $2 billion project aims to meet its year-end deadline despite headwinds. Hean Rangsey

For Chinese companies, Moody’s expects that the short-term disruption from the outbreak would raise debt to earnings before interest, taxes, depreciation and amortisation for the 12 months ending June 2020 before returning to current levels over the next 12 to 18 months, supported by strong order backlog.

In Cambodia, Hodge made a similar assumption that at present, the delay appeared to be manageable at a month to six weeks. “But developers will keep a close eye on further developments,” he said.

Association of Banks in Cambodia president In Channy believes the construction sector would remain resilient through this period.

Perhaps, he said, it will only face a short-term downward pressure in the first and second quarters of this year. But that is all.

The Acleda Bank Plc president staked his confidence in Prime Minister Hun Sen’s leadership, suggesting that the tentative China-Cambodia Free Trade Agreement would increase Chinese FDIs into the country.

“In that sense, Cambodia would be able to recover the shortfalls incurred in the first half of the year,” he said.

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