For better or worse Cambodia is experiencing a "property cycle", perhaps its first in modern times

http://www.phnompenhpost.com/index.php/Prime-Location/The-property-year-in-review.html
The property year in review
Written by Anthony Galliano
Wednesday, 31 December 2008



"The forecast calls for pain", if I can use a quote from blues artist
Robert Cray, which probably best describes expectations for the
property market in 2009. For better or worse Cambodia is experiencing
a "property cycle", perhaps its first in modern times.

A property cycle is defined as a logical sequence of recurrent events
reflected in factors such as fluctuating prices, vacancies, rentals
and demand in the property market. It means that property prices can't
rise indefinitely for the simple reason that at some point they become
unaffordable. Wages can't rise as fast as property prices when prices
are rising in a frenzy, so there is a point when most of the
population can't buy property, and prices have to fall, which they are
now doing.

So how did we arrive at this point in the property cycle? A brief
review of the events of 2008 will offer insight.


--------------------------------------------------------------------------------

Upon reflection it is thought that the property market grew too fast
and the planned capacity may have been overly optimistic.

--------------------------------------------------------------------------------

In 2006, global financial markets and the economic environment were
robust and emerging markets were enjoying strong developed market
demand for goods and services, capital flows and foreign direct
investment.Cambodia's core industries of garments, tourism and
agriculture were benefiting from the boom. Given the global rise in
property prices, interest and investment in Cambodian property
accelerated. It is estimated that property prices rose 60 percent in
2006, 80 percent in 2007 and 30 percent from January to May 2008.

International property developers planned dramatic changes to Phnom
Penh through large-scale developments such as the International
Finance Complex, Camko City, Gold Tower 42 and Grand Phnom Penh
International City.

With the absence of domestic capital markets and very limited access
to international capital markets, asset investment options in Cambodia
were limited to cash, businesses and property. The yield on cash was
sub-five percent and could not match the price appreciation seen in
property, so the latter became the asset of choice among those able to
afford it. The banking market introduced mortgages allowing
creditworthy Cambodians to borrow to purchase property, some business
owners funneled profits back into the property market, and some even
borrowed against the assets and cash flow of their businesses to buy
property.

Banks significantly increased lending to property investors and raised
interest rates to attract deposits to fund loan growth. Combined with
dramatically increased foreign investment in real estate and large
scale developments, this meant the property market was running on all
cylinders.

Although the overheated and highly speculative US property market was
already well into a correction, the consequences really came home to
roost in 2008. Exposure to sub-prime mortgages, consumer household
debt, home equity loans and credit derivatives caused an unprecedented
burden on the financial system, which led to notable failures such as
Bear Stearns and Lehman Brothers and a government bailout of the
banking and auto industries.

Financial institutions worldwide required government bailouts,
unemployment rose, consumer spending ground to a halt, countries
entered recessions, emerging-market currencies experienced severe
drops, market liquidity dried up, banks stopped lending and foreign
direct investment was severely curtailed and, in some cases, delayed.

Most property markets across the world began to experience drops, and
it is estimated these hit Cambodia in May of 2008.

Misplaced optimism
Upon reflection, it is thought that the property market grew too fast
and the planned capacity may have been overly optimistic. Cambodia,
with its population of 14 million and per capita national income of
$600, is materially smaller than Vietnam and Thailand, both of which
have large populations and more mature economies.

The demand for and affordability of all the large-scale developments
in aggregate may not have been realistic. Planned reductions in scope
and longer development periods will benefit the property market in
Cambodia as less supply enters the market.

Sentiment has soured and confidence is deteriorating. With broader
access to the media and internet, Cambodians are more aware of world
events, and the global financial crisis is dominating everyday news.
It is estimated that property transaction volumes have declined as
much as 95 percent, liquidity has become extremely tight, and the
ratio of sellers to buyers has become significantly high.

A true reflection of market prices may only return with liquidity.
Cambodian banks are less inclined to lend on property transactions and
are more focused on managing exposure to the sector. Some pundits are
calling for a decline of 30 percent in property prices in 2009.

Property prices will, of course, recover and Cambodia will not
experience the same degree of problems as the rest of the world: Only
a very small portion of property owners actually have borrowed, the
World Bank expects the economy to grow 4.9 percent in 2009, a large
majority of property investors are under no urgent need to sell, and
there is no material imbalance of supply and demand for residential
dwellings. Confidence, liquidity and prices will eventually come
back. However, things are likely to get worse before they get better.
___________________________________________________
Anthony Galliano is head of corporate and institutional
banking, ANZ Royal Cambodia. Should you wish to
contact Anthony, please send an
email to gallianoa@xxxxxxx
.

Relevant Pages