Down but not out: Phnom Penh’s housing market
In the first of a two-part series, Antonio Graceffo writes that while real estate prices may drop further, the Cambodian capital will offer good value in the long-term view
Many Cambodia observers equate the dramatic increase in apartment prices in Phnom Penh to a housing bubble. That term may not apply, however, since most of the houses and condos sold in the city are not purchased with loans.
The assumption behind “bubble” is that prices are inflated, and that if you buy a condo, you’re unlikely to be able to sell it for the same, or a higher price, later. People also see a recent decrease in house prices as a sign that prices will plummet at some point in the near future. But while real estate prices may drop further in the near future, the largest purchasers of these condos are Chinese and the fundamentals driving Chinese to buy will remain in place, rewarding long term-investors.
The recent flood of condos to the market, followed by a spike in demand and prices, may seem like the prelude to a bubble, but it is important to keep in mind that foreigners have only been permitted to purchase condos in Cambodia since 2010, so many of the initial purchases were the result of pent-up demand. With this initial demand fulfilled, the slowdown in condo purchases may just be a return to sustainable levels of demand.
Since the beginning of 2016, prices for new units have dropped approximately 35%. Additionally, only 13% of completed condo units were sold, compared to 37% for 2015. Some experts attribute the slow demand to oversupply, with 3,621 new units expected to be completed and released on to the market this year. But there are several issues to be considered here. First off, scheduled completion dates frequently are not met, and the number of expected new units may not materialize until much further in the future, giving the market time to accommodate them. Investors are somewhat wary of purchasing units which are still under construction because they worry that the units will not be completed on time. Another issue contributing to sluggish demand is fear of political turmoil occurring during the upcoming 2017 commune elections and 2018 national elections.
Ups and downs in real estate markets around the world are simply par for the course. If the Phnom Penh housing market should tumble, it wouldn’t be the first time. There was a 40% housing drop between 2009 and 2010, and it wasn’t until 2014 that the market recovered. Once that happened, it gained more than it lost, once again rewarding investors with a longer investment horizon.
One indicator which does suggest that the current market is in a bubble is that house prices have increased at a rate much higher than the increase in rents. This means that the return on investment has dropped. Rents tend to be an indicator of average income and are generally not subject to the same types of balloons and bubbles as housing prices. They have to remain within a reasonable range or citizens cannot pay them. Since the rents people in Cambodia can afford are not in line with the price of the houses, this suggests that house prices have outpaced the general economy.
Irrespective of current and near-term factors, however, many experts are suggesting Phnom Penh condos are a good investment for those willing to take a long-term view. Approaching the real estate market the same way some investors see stock prices, if the fundamentals of the underlying company are good, the stock is a good investment, regardless of short-term fluctuations.
Taking a longer view of Cambodian property investment, one could look at the country’s underlying fundamentals — which include a robust GDP growth rate of between 6% and 7%, as well as the fact that 70% of the country’s population is under the age of 34. This means that Cambodia, unlike most Western or developed countries, has a large supply of young talent and labor available to work and innovate, helping the country develop.
Cambodia, in general, should be a good investment for the long term, and as more Khmers move up and out of poverty and more and more businesses and jobs become concentrated in the cities, eventually there will be local demand for condos. Meanwhile, the fundamentals that drive Chinese demand for condos will remain in place.
Antonio Graceffo (@brooklynmonk) is the author of seven books about China and Southeast Asia. He works as a lecturer at Shanghai University and holds a PhD from Shanghai University of Sport, as well as a China-MBA from Shanghai Jiaotong University.