Phnom Penh is being heralded by many as SE Asia’s latest property hotspot. The real estate market appears to be growing exponentially, but can the country’s fledgling market economy sustain such rapid expansion?

For three decades Cambodia has struggled to recover from the legacy of the genocidal Khmer Rouge regime. The country has only recently achieved a moderate level of political stability, but with double-digit growth and rapidly rising land and real estate prices, international investors are already heralding Cambodia as Southeast Asia’s latest property hotspot. Major new residential developments are sprouting up across the capital, and the country is increasingly the target of private equity funds, but this new inflow of capital has so far been of little benefit to Cambodia’s poverty-ridden population. As deprived communities are evicted from their homes to make way for new high-rise developments, it remains to be seen whether there will be a genuine demand for luxury apartments and penthouses in Phnom Penh, or whether the city’s construction boom is being fuelled more by speculation and the lure of short-term profit.

Following Japanese occupation in World War II, Cambodia gained full independence from France in 1953. In April 1975, after a five-year struggle, Communist Khmer Rouge forces captured Phnom Penh, marking the beginning of Pol Pot’s brutal reign during which at least 1.5 million Cambodians died from forced hardships, starvation or execution. The December 1978 Vietnamese invasion drove the Khmer Rouge into the countryside, and touched off almost 13 years of civil war. The 1991 Paris Peace Accords finally paved the way for UN-sponsored elections in 1993 and allowed the formation of a coalition government, led by Hun Sen’s Cambodian People’s Party (CPP). A new round of elections in 1997 forced Prime Minister Hun Sen to share power, but he subsequently staged a coup, and has ruled the country ever since, making him one of Southeast Asia’s longest serving leaders. Elections in 2003 were relatively peaceful, but it took one year of negotiations between contending parties before a coalition government was formed under the stewardship of Hun Sen.
With a ubiquitous presence across the country and a tight grip on every level of government, at the time of writing Hun Sen and his CPP are widely expected to maintain power in the latest round of general elections scheduled for July 27. Hun Sen has notoriously undermined political opponents during his 23 year rule, but he has also steered the impoverished country out of the ashes of civil war and overseen a growing economy by promoting trade and tourism. Since 2000 the economy has grown at an average rate of 9.5 percent, driven largely by an expansion in the garment sector and tourism. Despite pressure on US led exports in the wake of the sub-prime crisis and ensuing slowdown, coupled with the negative impact of higher energy and commodity prices, the IMF is forecasting that economic growth will remain at about seven percent at least until the end of 2009.

The rapid expansion of the economy has prompted an upsurge in interest from overseas developers and investors in Cambodia’s burgeoning real estate and construction sectors. In this context land and property prices are spiraling. According to Bonna Realty, a leading real estate agency in Phnom Penh, the price of prime land in the capital doubled last year to US$3000 per square metre, compared to less than US$500 in 2000. House prices have appreciated in a similar fashion. A small family home on the outskirts of the capital that could be bought for as little as US$600 10 years ago will now be worth in the region of US$35000. The rush to profit from these substantial price increases is on, as shanty towns and old villas are razed to make way for Cambodia’s first skyscrapers and major new “satellite city” residential developments. Much of the early investment in real estate and construction has come from South Korea, the leading investor in Cambodia since resumption of diplomatic ties between the two countries in 1997. The 42 storey Gold Tower, set to be Cambodia’s first ever skyscraper at three times the height of the country’s current tallest building, is being financed by Korea’s DaeHan Real Estate Investment Trust and built by compatriots Yonwoo. A director at Yonwoo in Seoul, who asked not to be named, says his company began exploring real estate development opportunities in emerging economies three years ago, when Korea’s domestic construction market began cooling. “In view of a number of wealthy Cambodians and a growing number of foreign investors arriving in Cambodia, we are confident Gold Tower 42 will be a success” he says.

GS Engineering & Construction Corp., South Korea’s third largest builder, in January also announced plans for a 52-storey skyscraper, as well as a mixed-use project near the Russian embassy comprising 280 serviced apartments and several floors of apartment blocks on top, plus shopping facilities and an international school. GS spokesman Choi Byoung Geun says, “Cambodia really needs this kind of class A facility. By the time the project is built, the demand will be there”.

A Korean developer is also behind Camko City, a suburban development situated to the northwest of Phnom Penh worth US$2 billion. The project is currently in its early stages, and the first phase of development is scheduled to be completed by the end of next year. At least five multi-million dollar new urban centres, or “satellite cities”, are planned for the fringes of the capital. Under the city’s master development plan, these projects will help manage population growth by shifting growth patterns away from the city centre. According to reports in the Phnom Penh Post, officials see these satellite cities as an answer to overcrowding and traffic congestion and a means to increase commercial development beyond downtown areas.

“I think if everything goes smoothly as planned, all of the satellite city projects will break ground by 2009” said Phnom Penh deputy governor Pa Socheat Vong. “To my knowledge, the satellite city projects are moving ahead on schedule, and I don’t see any of them as likely to fail”.

It is not just Korean developers that have their sights locked on Cambodia, in recent months the country has emerged as a prime target for international private equity, with three major funds looking to pour upwards of US$450 million into the Kingdom’s economy. Douglas Clayton, a managing partner of Leopard Capital, that aims to raise US$100 million for its Cambodia fund, says the country can offer a safe haven from the global credit crunch due thanks to its un-leveraged economy and bountiful natural resources.

“Cambodia offers the best reward to risk profile in the region now, as competition is still low and the country has such vast potential”, he said.

Leopard Cambodia launched in April this year after raising around 10 percent of its targeted $100 million. It is currently looking for investments of between US$5 million and US$15 million, and its first project is a tourism property development in Siem Reap.

At the start of June Leopard was joined by the US$250 million Frontier Investment and Development Partners fund, which has already met with strong interest from investors according to CFA Marvin Yeo.

“Cambodia has untapped oil and gas reserves, large amounts of fertile agricultural land, low labour costs, a stable democratic political system and a dollarized economy with no capital controls where companies can be 100 percent foreign owned”, he said.

A third major new fund, Cambodia Emerald Limited Partnership is looking to raise US$100 million in the agri-business, tourism and real estate sectors. The fund closed its seed round of financing in late April when two investors, whose identity has not been disclosed, came on board with an unspecified amount of capital. The company is now operational and actively looking for projects to invest in.

Further proof that Cambodia’s real estate sector is on the up comes from the fact that both CB Richard Ellis (CBRE) and Knight Frank have recently established offices in the capital. In April CBRE opened a temporary office to sound out the market, with personnel working under its CB Richard Ellis Vietnam banner. Managing Director of Cambodian operations Edward Hopkins says, “CB Richard Ellis is carefully evaluating the market with a view to market entrance. We don’t have a company here yet, but we are writing business and we have the right to assign those contracts back over to the Cambodian company when and if it’s operational.”

The business already manages the Colonial Mansion serviced apartments in Phnom Penh, and has other projects underway. Hopkins explains that with instability and lack of security no longer an obstacle, the company believes economic development can now flourish. “Cambodia is now acceptable – the Cambodian People’s Party has done a very good job in this department” said Hopkins.

CBRE was closely followed into the market by Knight Frank, another leading real estate consultancy. Knight Frank’s Phnom Penh office opened in May, and will be run by Eric Ooi, who is also head of Knight Frank’s Malaysian office. According to Nick Thomlinson, senior partner at Knight Frank, the office hopes to achieve a turnover of about US$6 million within three years.

Foreigners are not permitted to own property on a freehold basis in Cambodia, but regulations do allow for 99 year leases. However, analysts say that the Kingdom needs to improve its lease registry system to more effectively safeguard investments. “Relying on a lease in a country where the rule of law is not yet fully developed and the court system is notoriously corrupt is a deterrent for foreign investment in the real estate sector”, says Matthew Rendall, a partner at the law firm Sciaroni & Associates.

Cambodian investment law was amended back in 2005 to allow foreign ownership of permanent fixtures, but this change in the law was never ratified, and now seems to have been side-lined. Prime Minister Hun Sen recently stated that non-Khmer nationals will never be allowed to own land outright. Such a move could, Hun Sen argued, pave the way for Thai and Vietnamese nationals to buy up land along the borders and thereby threaten Cambodia’s territorial integrity.

Currently, rather than using the poorly regulated lease system to acquire property, many foreigners have chosen to work with Khmer partners to invest in real estate. This option however entails a not insignificant degree of trust. According to one European resident who bought a property in Phnom Penh last year, the key to buying in Cambodia is “having very good friends”.

“My agreement was made with a handshake and a look in the eyes. The decision was now or never, either you do it or you spend a life time running behind prices. I am aware I might lose the land from one day to the next, I depend entirely on my Cambodian business partner but I have no doubt that he will keep his word”.

Perhaps more worrying for would-be investors in Cambodia is the country’s current level of inflation. The dramatic rises in land and property prices have been compounded by the soaring price of fuel and commodities. Since the beginning of the year fuel is up 30 percent, and rice 50 percent.

Already in January, inflation stood at 18 percent, but since then the government has stopped publishing CPI data. San Sithan, Director General of the National Institute of Statistics, was recently quoted as saying that publication of the CPI has been halted to avert the possibility of “disorder and turmoil”.

In Vietnam, whose real estate sector witnessed similarly dramatic rises to those seen in Cambodia, inflation is currently running at 27 percent, prompting strikes earlier this year by factory workers demanding higher wages. As Vietnamese monetary policy is tightened in an effort to combat inflation, bank loans for both developers and prospective buyers have dried up, forcing a number of real estate projects to be shelved and putting downward pressure on property prices. There are now fears there will be a slowdown across all sectors of the economy. For the moment the Cambodian real estate sector continues to expand, but the parallels with Vietnam are ominous and investors will be monitoring the situation carefully.

Investing in Cambodian real estate is not therefore without risk. High inflation and regulatory hurdles are certainly a cause for concern, but it is worth noting that property prices remain reasonable when compared to neighboring Vietnam. If the July 27 elections pass off without violence as expected, the country will have taken another step towards consolidating political stability, although granting another term to a leader who has been in power for 23 years is not the best sign of a healthy democracy. The path to recovery has been long for Cambodia, but the country is finally lying to rest the ghosts of its turbulent past. The challenge now is to ensure that growth is sustainable, by enabling its benefits to reach the population at large, and not just the privileged 10 percent of Cambodians who currently own 90 percent of the country’s assets.