PHNOM PENH — The pandemic brought an end to a years-long real estate and construction boom in Cambodia and the market’s ongoing recovery is being undermined by global financial challenges.

As borrowing costs rise, the heavily indebted real estate sector is at risk of financing problems, government officials and the World Bank have warned lately, though some local real estate firms played down such concerns.

Vongsey Vissoth, permanent secretary of state at the Ministry of Economy and Finance, said higher cost of borrowing and oversupply were making the sector unprofitable, while financing problems were looming.

“Our problem is that real estate and construction can have a credit crunch, a lack of [access to] credit,” he said at a public forum on January 25. Some 80 percent of property developers “depend on [credit from] the banking system and the cash flow from buyers… We must jointly solve this problem, it’s not merely about one individual [company].”

“We don’t have the option to let this sector collapse because it’s a huge economic pillar,” he said, explaining that construction and real estate represent some 10 percent of Cambodian GDP. That is similar in size to the garment or tourism sector; the rice-growing sector represents about 7 percent of GDP.

Prior to the pandemic, Cambodia’s strong economic growth and an influx of mostly Chinese foreign direct investment and rising tourist visitors spurred a construction boom, which filled the low-slung skylines of the capital Phnom Penh and the beach town of Sihanoukville with new high-rise condominiums and office towers.

In recent years, some large projects under construction were suspended and property prices have declined. A significant share of real estate remains empty, especially in the condominium market. The latter were mostly developed by Chinese and other Asian investors who were looking to sell condominiums to nationals from their own countries, but this demand has fallen.

The post-pandemic recovery has been weak due to a slow rebound in Chinese investment and tourist visitors to Cambodia, while tightening conditions in global financial markets due to rising interest rates have curtailed credit for property developers.

‘The weak will close their doors’

Some local firms retain a more positive outlook and said concerns of a market collapse were overblown, though they do foresee that some companies will go under.

“We are not completely recovered…We suffered from the crises for three years, so we have been seriously ill…We are still having a lot of issues although we are better than last year,” Kim Heang, CEO of Khmer Real Estate, told VOA Khmer. He said that while market prices and sales volumes were still far below the peak of 2018-2019, they had risen lately above the levels of 2020-2022, adding that Chinese visitors were also returning to Cambodia.

“On the macro scale, I don’t worry… But there will be more companies collapsing,” he said. “It’s a chance for strong companies to grow and it’s normal for the weak to close their doors.”

Kim Heang said Cambodia’s real estate slowdown was caused by global financial circumstances that were inflicting pain on real estate markets across Asia, some of which were worse off in terms of price drops and financing problems. China’s domestic property market has faced a severe slump since 2022.

Cambodia’s Ministry of Finance and Economy in January 2023 forecast construction and real estate to grow at 1.1 percent and 1.2 percent, respectively. Overall GDP growth is expected at 5.6 percent, up from 5.2 percent the year prior.

Warnings of a market correction and threat to macro-financial stability

The World Bank warned in a December 2022 country report that if construction and real estate firms fail to repay their loans on time due to the market slowdown, it risks causing spillover effects in Cambodia’s banking sector and wider economy.

“A real estate market correction may have started, which is likely to increase [non-performing loans] in this segment. High credit growth and concentration of domestic credit in the construction and real estate sector remain a key risk to Cambodia’s macro-financial stability,” the report said. (A real estate market correction is generally defined as a prolonged period of falling property prices.)

The World Bank warned that the troubled sector’s credit is massive, with loans for construction, real estate, and mortgage activities representing about 40 percent of credit growth in the Cambodian banking sector and valued at a total of $14.5 billion in mid-2022, or 48% of GDP. It noted that while construction activity had stalled, property speculation was still increasing.

“Disruptions in the commercial real estate market could in turn potentially threaten financial stability through the connectedness of the sector with the financial system and the broader macroeconomy. Continued vigilance is warranted on the part of financial supervisors to mitigate such risks,” the report said.

The World Bank also said it is unlikely that the construction and real estate sector would regain its status as Cambodia’s main economic engine in the near future, as the market boom created excess supply and was driven partly by external demand and investment from China that is unlikely to recover to its former strength.

Sihanoukville’s ghost towers

Three years ago, a real estate bubble burst in the beach resort and deep-sea port of Sihanoukville when a casino industry came to a sudden halt due to Chinese government pressure on the Cambodian government.

The casinos had drawn a staggering $5.8 billion in Chinese investment in real estate, according to the World Bank, transforming Sihanoukville from a sleepy backpackers’ town to a site of numerous high-rise hotels, casinos, condos and shopping malls aimed at Chinese visitors.

Some 1,155 buildings remain unfinished these days, while the government has been forced to pay for recovery of basic public infrastructure that was destroyed during the boom, according to a 2022 Financial Times report.

Permanent Secretary Vongsey Vissoth said Sihanoukville’s real estate market served as a warning for would-be market speculators in the capital.

“The buildings stuck in Sihanoukville… are seen as a deficiency of the market. It’s a distortion. The investment has been made but there is no market demand. [We] just keep investing, so the buildings are left empty. This is called an investment without a specific management framework,” he said.

Ky Sereyvath, an economist at the Royal Academy of Cambodia, said it was unlikely that the real estate market in Phnom Penh would implode like in Sihanoukville, as that was driven specifically by Chinese tourist visitors and online gambling businesses.

He said the Cambodian government should take steps to revive Sihanoukville’s real estate market and tourism sector, such as by brokering comprise agreement between parties over stalled construction projects or providing tax exemptions for investors.

Ky Sereyvath said direct flights from China to Sihanoukville were recently resumed and offered opportunities to reinvigorate the property market, adding that property owners should lower rents to attract Chinese visitors.