Signs of a slowdown in Phnom Penh – Nikkei Asian Review


Residential building slowing, though hotel and mall construction likely to continue growing

Major construction projects can be seen going up around Phnom Penh, including outside Aeon, a Japanese-built mall in the city (Photo: Simon Roughneen)

Major construction projects are going up around Phnom Penh, including here outside Aeon, a Japanese shopping mall (Simon Roughneen)

PHNOM PENH — Not so long ago, the backdrop in any photo of Phnom Penh landmarks such as the Royal Palace or Independence Monument would have been a low-rise panoply of four- and five-storey townhouses.

But in one of Southeast Asia’s more visually transformative building booms, dozens of apartment and office blocks have gone up around the Cambodian capital, sending land prices skyward in tandem with the skyline.

If not quite the cornerstone of the country’s economic growth, Phnom Penh’s construction boom has at least cemented Cambodia’s already rapid GDP (gross domestic product) expansion, which has topped 7% most years for the past two decades.

According to the World Bank, construction contributed a sixth of Cambodia’s 7% economic expansion in 2015. In 2016, property consultancy Knight Frank reported that real estate made up 15% of total foreign direct investment in the two decades from 1994.

The World Bank in April estimated that total FDI (foreign direct investment) in the construction sector over the 2000-2015 period reached $3.5 billion, a significant amount for a country with a GDP of just under $20 billion.

The report noted that construction activity “continued to be vibrant, as investor appetite for residential and commercial property remained strong, witnessed by continual growth in the number and value of construction projects approved in 2016.”

James Hodge, associate director at property consultancy CBRE Cambodia, said the building boom has been driven by “ample supplies of foreign capital, a lack of alternative asset classes for investment purposes and the attractive fundamentals of Cambodia’s frontier economy, which indicate continued growth and development over the long term.”

However there are concerns that the property market peaked last year. CBRE said investment into approved construction projects reached $8.5 billion across 2,636 projects in 2016, an increase of 143% on 2015, which saw $3.5 billion invested in 2,305 projects.

Phnom Penh's skyline has been altered by the number of construction works that have started in the city in recent years (Photo: Simon Roughneen)

Phnom Penh’s skyline has been altered by the number of construction works that have started in the city in recent years (Simon Roughneen)

However signs are emerging that the residential sector’s growth may have hit a wall, with a drop in new projects since the start of the year. The fall-off comes despite the imminent start of construction in Phnom Penh of what will be Southeast Asia’s tallest building, the 133-story, 550m Twin Trade Center.

“Following the large surge in 2016, the total value of approved construction projects fell in the first quarter of 2017, compared to the same period of the previous year, while approved construction projects’ total square meters also dipped, according to the latest data available,” the World Bank noted in its report. “This signals potential moderation in construction activity in the short and medium term.”

Thomas O’Sullivan, CEO of Cambodia-based, agreed that the market is slowing. “There are clearly less project launches over the last 12 months than the period before when it seemed like every second weekend there was a new project launch.”

In large part, the slowdown can be attributed to an oversupply of apartments and condominiums either recently opened or still being built. CBRE Cambodia’s Hodge said the rate of new launches in the condominium sector has reduced noticeably since mid-2016. By his figures, only around 1,000 units were launched each quarter over the last nine months, compared with 3,000-4,000 new units announced in the first two quarters of 2016.

Isolated problem

But O’Sullivan said that fears of oversupply or even a bubble are overblown. “There are a lot of factors pointing to signs of oversupply, but I really do believe this is isolated in the high-end condo market — the main reason for fears of oversupply being the sheer volume of units coming online in the next two to three years.”

Growing tourist numbers mean that more hotels are being built, potentially offsetting the fall in the construction of new apartments. Indeed, tourist numbers have doubled since 2010, hitting 5 million in 2016, according to the tourism ministry — an influx worth more than $3 billion to the country’s economy last year. More visitors will spur construction not only in Phnom Penh, but also in areas popular with tourists such as Sihanoukville and Siem Reap, the gateway city to the temples around Angkor Wat.

Another result of Cambodia’s growing economy is ongoing demand for offices as new businesses are established and companies move from older Khmer-style or French colonial vintage buildings to more modern premises.

Cambodia’s inclusion in China’s Belt and Road initiative will likely see continued Chinese inward investment, including into property and real estate. Chinese entities plowed the most money into Cambodia between 2011 and 2016, at $5.1 billion, according to official Cambodian figures issued in April.

Another sector that is benefitting from the country’s recent economic growth is retail. Phnom Penh does not yet have many huge malls such as those in Bangkok, Jakarta and Manila, where middle-class consumers congregate to shop and socialize.

A report by Knight Frank realtors, based on trends in Cambodian real estate in the second half of 2016, noted that a 196% increase in retail space is expected by 2020, with an additional 270,627 sq. meters across nine properties scheduled to be completed within the next three years.

But the decline in construction, at least in the residential sector, could in turn dent overall economic growth. BMI Research, a financial information company that is part the Fitch Group, said in a recent report that the nascent construction slowdown was already enough to warrant lower growth predictions for Cambodia — 6.5% and 6.2% respectively for 2017 and 2018. This contrasts with forecasts of nearly 7% for this year and next by the International Monetary Fund and the World Bank.

Some will welcome the construction hiatus, even one limited to new residential buildings. In recent years, the boom has sparked clashes over land rights, with residents claiming that they had been forced off their property or had not been consulted or compensated sufficiently.

Perhaps the best-known such development is at Boeung Kak in the heart of Phnom Penh, where a company run by a ruling party senator won a 99-year lease to build a complex called Phnom Penh City Center on one of the city’s lakes, an area popular for its waterfront bars and restaurants, before it the lake was filled with sand after 2011.

Some of the lakeside residents resisted the project, staging several protests in recent years that have led to the imprisonment of some. One such resident is Tep Vanny, who was sentenced in February to two-and-a-half years in jail for protesting at Prime Minister Hun Sen’s house in 2013. Commenting on the case, United Nations special rapporteur on human rights in Cambodia Rhona Smith said: “Cambodian law and international human rights law permit the right to peaceful demonstration and freedom of expression. Care must be taken to ensure any constraints on freedom of expression and freedom to demonstrate is strictly in accordance with the law.”

And in upmarket areas of Phnom Penh such as Boeung Keng Kang 1, better known as BKK1, the proliferation of new condominiums and apartments has in turn led to traffic congestion and gentrification, burdening the Cambodian capital with the kind of urban growth challenges typically seen in bigger cities in neighboring countries.

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