With the real-estate boom entering its fourth year banks and developers are eager to expand credit to the sector, though regulators say they are monitoring lending for real estate for signs of a bubble and are taking preemptive measure to minimize risks that could affect the overall economy.
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Real estate has emerged to become one of four main pillars supporting the country’s growth, accounting now for more than 10 per cent of gross domestic product (GDP).
Real-estate-related lending grew by 53 percent year on year in the second quarter of this year, following a 10 to 20 percent rise in real-estate prices in 2014, according to the International Monetary Fund (IMF) Article IV Consultation report on Cambodia released on Monday.
Construction and real estate-related lending constitute about 19 percent of total credit, and grew 44 percent by the second quarter of this year, the report said. Residential real estate prices in prime locations have increased by more than 30 percent and commercial prices by over 20 percent year on year as of December last year. Loan-to-value ratios rose 70 to 80 percent, the report said.
IMF Urges Closer Scrutiny
“The growing exposure to real estate, higher capital requirements and risk weights linked to real estate, as well as sectoral concentration limits are possible policy measures. Better monitoring of developments in the real-estate sector is warranted, including by enhancing data collection on real-estate sales and prices as well as construction activity. Limits on loan-to-value ratios could be imposed once sufficient progress is made on improving data availability,” the IMF report recommended.
“Real-estate developers are also reportedly offering loans to buyers and are financed by foreign funding, while not being subject to stringent regulatory and supervisory oversight. Credit is increasingly being channeled to the real-estate sector, which is exhibiting pockets of vulnerability,” the report added.
The IMF’s report recommended some measures should be considered to limit banks’ growing exposure to the booming real-estate market and to ensure sound underwriting standards.
The National Bank of Cambodia (NBC) could increase the risk weights associated with real-estate lending. Although price-based limits are preferable to quantitative limits to minimize distortions, sectoral concentration limits can be useful in reducing credit supply and building banks’ resilience by diversifying loan portfolios, the report said.
“Other measures that could be considered include sectoral loan-to-value (LTV) limits and debt to income ratio (DTI). These can address the demand for credit and complement capital tools especially when a real-estate boom accompanies a broader credit boom. However, without official housing prices and real-estate-related data, the priority is to accelerate improvements in data availability and data quality for successful implementation,” it added.
“Banks Not at Risk”
Chea Serey, a director general at the NBC, told Khmer Times previously that it is monitoring and collecting data to ensure clarity of valuations on investment flows in the sector. She said that current loans to the sector remain small.
“Of course, loans for real estate and construction are growing very fast. However, if we compare this to the total loan portfolio, it is still relatively small,” Ms. Serey said.
“Within the sector, what we want to check is whether the credit had been given to developers or buyers. And, we have observed that there are a lot of condos being built everywhere. What we need to establish is whether they are financed here or with money from abroad,” she said.
“If they received loans abroad, even if the projects are unsuccessfully the risk is low as it is external [to the Cambodian banking system], although as a secondary effect it may affect investment confidence. If they take loans domestically and a project fails, there will be a problem. But, presently, we don’t have enough data to ascertain that. That’s why, we recently joined with the National Institute of Statistics to conduct a survey on FDI [foreign direct investment] and we expect the results in 2016,” Ms. Serey explained.
Factors Driving Growth
Kim Heang, president of the Cambodia Valuers and Estate Agents Association, told Khmer Times that the sector’s swift expansion does not make him afraid that it is fragile. Growth is in line with an expanding middle-class, rising incomes and a growing population, Mr. Heang said. These trends, as well as Cambodia’s location are the factors attracting investment, he said.
Cambodia is one of the few countries in Asia where GDP has expanded 7 to 8 percent a year over the last decade, Mr. Heang noted, saying this is fuelling the growth of the real-estate sector.
Other factors include demographics (70 percent of Cambodia’s population is under 25), Cambodia’s location in ASEAN as well as its safety from natural disasters, such as earthquakes and typhoons, which hit other countries in the region, he said. The legal and tax frameworks for investors, as well as the welcoming mindset at the heart of Cambodian culture, also encourage foreign direct investment, Mr. Heang said.
“Many developers and real-estate agents hope that the rise of the middle class will increase demand for residences, while the condo and apartment market is likely to see more demand following the implementation of the ASEAN Economic Community,” he explained, referring to the regional economic integration that will begin at the end of this year.
Foreign investment into real estate in Cambodia is mainly from China, Taiwan, Singapore, Korea and Japan, Mr. Heang said, adding that property investors in those countries may not be able to find a better place to invest than Cambodia. He also said that real-estate expansion was also cyclical, with expansions lasting 10 years. “Most people still remember the crisis in 2008,” he said, referring to the impact that the global financial crisis had on Cambodia’s property market.
Economist Srey Chanthy has warned that the current boom will lead to a bubble. “The real-estate and construction sector has grown very fast. It seems to me that supply is in excess of demand. It is a bubble, but I don’t know when it will bust. This is something to worry about,” he said.
“If you have time, spend a day hanging around in Phnom Penh and the suburban areas. You will find that there are a lot of real-estate projects going on, many buildings, apartments/condos and they have low occupancy rates, some are even empty,” he said.
“Most project owners, apartment and condo investors, buyers and customers borrow from banks. If they cannot pay, the bust will occur and prices will drop. The AEC won’t help much to raise the price further, as prices are already expensive. They have to tighten the belt. It is like being on board a flight that is flying beyond its speed and altitude limits,” Mr. Chanthy explained.
Stephen Higgins, managing partner at research firm Mekong Strategic, agreed. “It’s a bubble, particularly in the apartment market, with many buildings having very high vacancy rates, yet there’s a lot more supply coming online,” he said.
“It’s not the job of the NBC to manage the real estate sector. In terms of the bank sector, I think they are taking a sensible and pragmatic approach,” he added.
Mr. Heang does not reject the ideal that the sector faces a bubble, but he believes that the regional economic integration that will begin at the end of this year will spur growth in the real-estate sector.
Cambodia will have between 18,000 and 20,000 new condo units by 2018, which he described as an oversupply. Most domestic buyers still prefer individual houses or townhouses, he said.
Mr. Heang said demand for condos should be viewed regionally due to the AEC. There are more than 600 million people in ASEAN and if Cambodia can tap that market for condo sales then selling 18,000 to 20,000 condo units will not be difficult. If the AEC does not drive up demand for condos in Cambodia then there will be a bubble in that segment of the real-estate market, he added.
Demand for houses in gated communities, called Borei in Cambodia, detached houses and townhouses will remain robust because of domestic demand, Mr. Heang said. What is needed is more low-income housing because developers are targeting mid and high income buyers, he added.
Mr. Chanthy is not optimistic that the AEC will bring enough demand to absorb the high-end condominiums being built.
“Cambodia is not the best in ASEAN, even with the AEC,” he said. “That expectation [of demand for condos by buyers in the region] can be over-optimistic. Even though the Cambodian middle class is growing, they don’t have enough purchasing power and borrowing is expensive,” he added. “Borrowing dollars will also be more expensive when the US Fed increases interest rates soon.”
Mr. Higgins agreed. “I don’t think the AEC will have a major near-term impact on the Cambodian economy, and in turn is unlikely to make much of a difference to the property market.”