Cambodian workers look out from a building construction in Phnom Penh on March 29, 2019. Photo: AFP/Tang Chhin Sothy

Has Cambodia’s property bubble finally burst and is a sudden exodus of Chinese nationals to blame?

Cambodian house prices have fallen by as much as 33% in some areas since the government announced last August a ban on mainly Chinese-run online gambling operations.

The ban, implemented at Beijing’s behest to clampdown on online fraud targeting the mainland, prompted an exodus of at least 400,000 Chinese nationals in the succeeding months, according to government immigration statistics.

Local media reports suggest the collapse in prices is most acute in the coastal town of Sihanoukville, the largely unregulated epicenter of China’s gambling-related investments in the country.

Chinese investments drove an almost ten-fold spike in rental, lease and sale prices between 2017 and 2019, buoyed by cash-rich Chinese who often paid well above then-prevailing market rates.   

Because online gambling accounted for the lion’s share of profits in the city’s gaming sector – up to 80%, according to some estimates – the ban has since brought the city to a veritable standstill.

Construction projects in the once-frenzied city have stalled, with many sites lying half-finished, while many roads remain ripped up from all the building.

Workers build a street in Sihanoukville on February 18, 2020. Photo: AFP/Tang Chhin Sothy

Land prices in Sihanoukville have fallen by as much as 30% since the ban was implemented, while rental prices have also slipped. Houses that were fetching $800 per month last year are now getting just $200, according to industry reports.

“The construction sector in Sihanoukville is a bubble. It rose too quickly,” Vongsey Vissoth, permanent secretary of state of the Ministry of Economy and Finance, told local media last month.

“Therefore, when something happens like banning online gaming, it drops quickly.”

Some analysts say the slippage in prices is merely an overdue market correction. Though prices are down, they say, the wider property and construction sectors won’t collapse under the weight of falling prices.

In January, CBRE, a global property advisory group, predicted that Cambodia’s housing market would be “stable” in 2020. But Kim Heang, founder of Khmer Real Estate Co and regional operating principal of KW Cambodia, thinks otherwise.

Property prices in Sihanoukville and Cambodian cities situated on the Thai and Vietnamese borders, “have dropped a lot” in recent months, he said. “It will also affect to the property prices in other provinces, as well as Phnom Penh.”

“The first and second quarter of 2019 was great for the real estate sector in the whole of Cambodia, however, property prices keep dropping from August 2019 til now,” Kim Heang added.

Because Cambodia does not maintain a property price index, a nationwide measure that the central bank aims to introduce by next year, it is difficult to ascertain precisely how much prices have slumped.

Anecdotal evidence, however, suggests property prices have also declined in cities like Kampot, Bavet and even Phnom Penh, though they have clearly fallen fastest in Sihanoukville.

New buildings under construction in Phnom Penh on April 25, 2018. Photo: AFP/Tang Chhin Sothy

Last month, the Federation of Business Associations of Sihanouk Province, a Chinese business group, estimated that the quantity of commercial property leases in Sihanoukville fell by as much as 85% and land sales by 25% since the online gambling ban was enacted.

It recorded an average of 600 house leases and 20 house sales per day before the August ban. Those numbers have since fallen to below 20 and nine per day, the federation said.

Since as early as 2014, experts and analysts have suggested Cambodia’s property sector is a “bubble”, with prices much higher than average national incomes caused by a dependence on foreign investors, buyers and renters.

IPS Cambodia, a realtor, estimates that property prices in Phnom Penh soared by more than 60% between 2010 and 2018. But gross domestic product (GDP) per capita rose by only 91% during the same period, according to World Bank data.

If property prices continue to fall for the rest of 2020 and into 2021, the country’s financial sector will feel the strain.

In May 2019, the World Bank published an economic report that said, “the prolonged expansion of domestic credit growth, which has been largely behind the construction and real estate boom, has overextended the financial sector.”

In 2018, outstanding loans in Cambodia accounted for the first time more than GDP, while domestic credit has risen nine-fold since 2007, faster than in any other country in East Asia, the World Bank report said.

This photo taken on April 17, 2018 shows a showroom of a complex including luxury residence and hotel in Sihanoukville, Cambodia. In the city, construction projects for Chinese people, casinos and hotels are progressing one after another.( The Yomiuri Shimbun )
A show model of a complex including luxury residence and hotel in Sihanoukville, Cambodia. Photo: The Yomiuri Shimbun via AFP

The report added that “the recent surge in FDI inflows,” chiefly from China, “has sustained a prolonged construction boom, while masking the financial sector’s vulnerability after years of rapid lending growth.”

Credit Bureau Cambodia estimates that household loans, of which mortgages account for about half, rose by 30% between June 2018 and June 2019. The World Bank, meanwhile, reckons that two-fifths of Cambodia’s credit growth in recent years owes to loans made to the construction, real estate and mortgage sectors.

As property prices fall, many of loans could soon become non-performing.

Though the central bank argues that fast credit growth in 2019 was “overwhelmingly based on mortgage” increases, many property purchases were not financed through bank mortgages but rather with cash, personal loans or credits given directly by property developers.

Outstanding mortgages were worth US$3.42 billion mark in June 2019, yet there were only 131,376 mortgages outstanding, according to the Credit Bureau.

For years, analysts have warned that more needs to be done to entice borrowers to take mortgages from banks, which are typically safer. 

Cambodia’s banks usually require 30% down payments on mortgages that are backed with checks on borrowers’ creditworthiness.

Cambodian workers are seen at a construction site in Phnom Penh, August 22, 2017. Photo: AFP/Tang Chhin Sothy

Loans offered by other credit providers and developers, however, often do not require a down payment or entail background checks on borrowers, analysts say.  

“Lending by real estate developers remains largely unmonitored and unregulated and official data on real estate prices are absent,” the International Monetary Fund (IMF) warned in December.

“Lending by real estate developers should be monitored and regulated in line with other non-bank credit providers and bank exposures contained,” the IMF said.

There are also concerns about the future profitability of property developers if prices fail to rise at the same skyrocketing rates as in recent years. If prices are now instead on a persistent downward trajectory, many developers will risk going bust. 

Some note that foreign investment, including from China, isn’t drying up in other sectors of the Cambodian economy.

Phan Phalla, undersecretary of state at the Ministry of Economy and Finance, said earlier this month that the construction sector is expected to grow by 14.5% this year, down from 18.4% last year, because of the impact of the online gambling ban.

“All in all, construction will see slow growth this year, but it is not a bad situation,” he reassured participants of a trade fair held in Phnom Penh.