Korean investors reach for Cambodian skies
By Geoffrey Cain
PHNOM PENH - Planned to tower 52 stories above this city's low-slung skyline,
the US$1 billion International Finance Complex (IFC) embodies the bold new
ambitions of Cambodian capitalism. If South Korean investors actually complete
all the projects they have announced and launched, the once colonial Phnom Penh
will soon come to resemble a mini version of high-rise Seoul.
Led by property developers, South Korean investors accounted for over 70% of
the $1.5 billion worth of foreign direct investment (FDI) that entered Cambodia
in the first half of this year, nearly three times higher than the $520 million
it received all of last year. South Korean investments have since 2006 dwarfed
Chinese inflows, which have been more critically scrutinized, but only
represented 10% of total FDI in the first half of 2008.
Cambodia has long been one of Southeast Asia's laggard economies, plagued by
its war-torn past and a backward period of communist-led central planning. With
economic opening and market reforms, Cambodia's economy is zipping along
nicely, with gross domestic product surging at 9.5% last year. Nowhere is that
fast growth more noticeable than in the city's fast-changing skyline.
With all the building activity, some are beginning to wonder if the economics
of the building spree compute and how the broader Cambodian economy might be
affected if South Korea goes into financial meltdown, as some analysts have
predicted. South Korean investors are overseeing and building at least eight
major property projects in Phnom Penh, but that number is constantly changing
as new concepts arrive at and leave the drawing boards.
There are clear risks to the high-end developments, which are banking heavily
on the arrival of high spending foreigners once a purported major oil and gas
find on the country's southwestern coast is realized and exploited. The World
Bank once estimated the country's total offshore production potential to be at
around 2 billion barrels, though Chevron, the US energy company managing the
concession, has remained tightlipped about the details and viability of the
fuel find.
Consider, for instance, Gold Tower 42, a $240 million condominium project
financed by South Korea's DaeHan Real Estate Investment Trust and built by
developer Yon Woo. The high rise project is selling units for between $460,000
to $1.5 million and the developer claims 75% of the tower's space has already
been sold, mostly to Chinese and South Koreans. Considering 33% of all
Cambodians earn less than US 50 cents a day, according to government
statistics, the project's pricing is out of reach for nearly all local buyers.
The same is true of the $2 billion Camko City, a satellite city built and owned
by South Korean developer World City Company, which entails an international
university, condominiums, exercise centers and modern shopping for a community
of over 1,000 well-heeled residents. Another South Korean-built
mini-neighborhood, Sun Wah International Finance Center, is also on the drawing
board and promises similar top-notch amenities.
Camko City, like several other South Korean-led developments, has stirred local
controversy and carries big political risks. To make way for the project, the
developers completely filled Pong Peay Lake, once a main outlet for the city's
dysfunctional drainage system, while evicting long-term residents with
compensation at one-tenth of the property's market value, rights groups say.
According to Cambodian land laws, lakes are public property and may be
developed only in a "rational" manner.
Bypassing donors
South Korea's building spree comes just 11 years after the two countries
re-established formal diplomatic ties, which were broken off in 1975 when the
communist Khmer Rouge regime took power. Cambodian Prime Minister Hun Sen has
warmly welcomed Seoul's capital inflows and even presided over the launch of
certain South Korean-led big ticket property projects. The former communist
guerilla-cum-market reform champion was recently reelected to a new five-year
term and has successfully leveraged the country's recent fast economic growth
to his political advantage.
During an inauguration event in May for a new road project, funded by the South
Korea International Cooperation Agency (KOICA), Hun Sen pointed to the South
Korean-built Gold Tower 42 as a sign of coming Cambodian prosperity. He lauded
South Korea for being at the forefront of eight Cambodian business sectors and
said that "diplomatic relations with the Republic of Korea are remarkably
developed".
He attended in person the inauguration earlier this year of South Korean
President Lee Myung-bak and surprised many when he told a local television
reporter that Lee was his former "economic adviser".
South Korean investment signals a shift from Cambodia's traditional reliance on
multilateral development aid funded by the likes of US Agency for International
Development (USAID) and the Japanese International Cooperation Agency (JICA),
towards more private investment-led growth. The South Koreans'
no-strings-attached approach to business is also believed to be favored by Hun
Sen's government, which often found itself at loggerheads over issues of
transparency and corruption with multilateral lenders.
At the same time, there are mounting and apparently unhedged market risks to
the breakneck growth. The building spree in Phnom Penh notably coincides with a
spike in inflation, which rose a dramatic 25% in the first half of 2008,
according to the National Bank of Cambodia. That's driven up substantially the
prices of imported building materials such as glass and steel.
Some analysts believe fast rising property prices, fueled by rapid South Korean
capital inflows, might even be inflating Cambodia's first-ever property market
bubble.
The National Bank of Cambodia recently projected gross domestic product would
slow to 7.2% in 2008, down substantially from last year's 9.5% clip. The report
noted that the construction sector is now the country's biggest urban employer.
Some economic and financial analysts have drawn worrying comparisons to
neighboring Vietnam, where land and property prices skyrocketed in line with
rapid FDI from Taiwan, Singapore and South Korea in 2007, but fell back around
25% in the first half of 2008 due to softening economic conditions and dried-up
finance for buyers. In response, Vietnamese banks have restricted their lending
to property buyers and developers.
South Korean property developers in Phnom Penh have so far defied economic
gravity, with representatives from IFC and Gold Tower 42 claiming that the
impact of inflation on their ventures will be minimal and that construction
would continue on schedule. So far most developers have not increased their
asking prices, despite the fact existing housing prices and rents have
increased five-fold or more since 2005, when the projects were first drawn up.
Scaffolding prices alone have jumped to $1,035 per ton this from $400 in 2007,
property analysts say.
Other analysts say South Korea's mounting economic troubles at home, including
a ballooning short-term debt profile, could soon impact on Cambodian ventures
as credit conditions tighten. It's still unclear how much South Korea's own
softening economy has served as a push factor in outward investments into
Cambodian property.
The South Korean won has depreciated around 10% against the US dollar this year
and foreign capital outflows from Seoul are gathering pace. Some analysts
estimate South Korea became a net borrower as of July, witnessed in the
country's narrowing foreign reserve stock. If the won-dollar depreciation
continues, as some analysts predict, it will create new burdens to South Korean
companies through higher external lending rates.
Add to that mix fast rising prices for building materials and it seems possible
the more ambitious of the South Korean property projects could become
financially unviable before they are completed. To fill all the high end space
now scheduled to be built - assuming it's actually completed - Cambodians will
eventually need to occupy a substantial percentage of many developments, some
property analysts say.
Yet with a national GDP per capita of $1,800, it's not clear yet that locals,
apart perhaps from government-linked elites, can afford the prices South Korean
developers and their financial backers still expect to fetch. There are also
potential cultural barriers: middle class and elite Cambodians' have long
favored to live in stand-alone, colonial-style villas rather than cement and
glass skyscrapers.
While South Korean developers continue to ramp up their building spree, the sky
may yet be the limit to their Cambodian designs.
Geoffrey Cain is based in Phnom Penh and a contributor to the Far Eastern
Economic Review and Integrated Regional Information Networks (IRIN), a United
Nations-run news wire service. He may be reached at geoffrey.cain@gmail.com.
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