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World Bank: Real-estate boom could backfire on economy

Chhut Bunthoeun / Khmer Times Share:
Phnom Penh’s rapid development is evident in its changing skyline. Khmer Times

The World Bank has warned that the significant growth recorded in the construction and real-estate sector, considered one of the country’s economic pillars, could ultimately affect overall growth due to a trinity of unanticipated and now negative factors.

In 2019, the construction and real-estate sector garnered investment worth approximately $11 billion, a 90 percent rise on 2018’s figure of $5.5 billion. But in a statement, the World Bank said that there are now significant downside risks that include a local COVID-19 outbreak, a prolonged decline in tourist arrivals and real- estate market correction.

“These spillovers to the construction and real-estate sector amid financial market turmoil could potentially be detrimental to growth [in Cambodia],” the bank said.

Another major issue, according to the World Bank is Cambodia’s increasing reliance on Chinese investment and high outstanding levels of credit. Van David, Senior Associate at the PLATFORM IMPACT, a Public Private Partnership, pointed to the bursting of the real-estate bubble in the final two quarters last year, with the prohibition of online gambling and  Chinese funding for casinos and real estate.

The Phnom Penh skyline bears witness to the property boom in recent years, but it could spell trouble for the economy. KT/Pann Rachana

Van added that a flurry of condo projects, both old and new, have now been having difficulties finding buyers. “Many local entrepreneurs, borrowing loans from banks to rebuild their properties and then hoping to rent to Chinese tenants, are also scrambling to repay loans as these tenants have now dried up,” he told Khmer Times.

“Add this to the halt of consumerism, job losses and an increase in non-performing loans and the property boom that once fuelled growth could now seriously hinder Cambodia’s economy,” he added.

However, the World Bank has offered some measures to lessen this gloomy outlook. Key to this is cushioning the potential impacts of real estate market correction, through implementing macro-prudential measures such as bank limits in terms of exposure to construction and real-estate sectors and tightening loan-to-value ratios, except for first-time home buyers.

In its Q1 2020 Market View report, real estate firm CBRE Cambodia said as the pandemic has escalated, its socio and economic effects have started to impact Cambodia’s real estate sector.

Condominium prices per square metre, especially in the high-end and mid-range sectors, have begun showing signs of a downward trend by the end of Q1 2020, according to the report. It added that the mid-range market’s price per square metre decreased by 1.5 percent while the high-end market slipped by 0.5 percent. However, the affordable segment of the market increased in price by 0.3 percent.

Among other measures, the government has decided to exempt the 4 percent stamp tax on all residential properties valued at less than $70,000 until January, in a move to encourage business activity in the real estate and construction sector. In addition, the government also wants residential developers to consider the possibility of discounting home prices.

Real estate and construction is considered one of Cambodia’s four main economic pillars, along with garment exports, tourism and agriculture.

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