Cambodian Banks Show Caution on Condo Lending

Condominium sales saw a slight decline in 2015, despite the rise of supply in the market and there is speculation that this pattern may seep into 2016. A 2015 CBRE report noted that the number of condos sales decreased last year largely due to investor concerns around uneven supply and demand in the market, and that many local investors prefer villas over condos. See our recent article Villa vs. Condo. condocambodia

In a recent Realestate.com.kh story on the real estate market predictions for 2016, Simon Griffiths, Associate Director at CBRE Cambodia stated confidence in the Phnom Penh real estate market particularly in the condominium market, may remain low within Cambodia due to oversupply and too-rapid growth causing over-saturation, ultimately heightening exposure to risk. [caption id="attachment_81456" align="alignleft" width="205"]

Anthony Galliano[/caption] Anthony Galliano, CEO of Cambodian Investment Management adds that despite speculations of decreased confidence the market is still healthy, "The price acceleration in 2015 made Phnom Penh one of the top performing real estate markets in Asia for both commercial and residential property, and has only encouraged both investors and developers to further participate in market. Although Cambodia has been impacted by the ups and downs of the global real estate market, it hasn’t had enough of a scale-able real estate market of its own to experience cycles, and real estate is very cyclical.” [caption id="attachment_78669" align="alignright" width="255"] Ross Wheble - Country Manager of Knight Frank Cambodia

Ross Wheble[/caption] Ross Wheble, Country Manager of Knight Frank Cambodia predicts that the supply of condominiums will increase by more than six-fold by 2018 which could drive a slowdown in sale rates of condominiums, leaving developers looking for alternative asset types to appeal to investors. It seems that the writing is on the wall with warning signs of a serious oversupply issue by 2018. However, it’s not just investors having these concerns. It seems the banks are too. “Some banks will then tend to take a more conservative view on lending money for condo’s when there is an oversupply as most of these condo’s are purchased for investment purposes, not for owner occupation,” says Joe Phelan, Head of Personal financial Services at Hong Leong Bank Cambodia. [caption id="attachment_81446" align="alignleft" width="300"]

Stephen Higgins, Managing Partner at Mekong Strategic Partners

Stephen Higgins[/caption] “If I was bank, I would be extremely cautious about lending to the condo market at the moment,” adds Stephen Higgins, Managing Partner at Mekong Strategic Partners investment firm, “There appears to be a serious oversupply of apartments emerging, which will only get worse given the current level of construction that we're seeing. That means there is likely to be downward pressure on condo prices in the coming years, and that naturally makes banks cautious." Phelan notes that most banks in Asia know if a customer encounters problems with servicing their loan repayments for their owner-occupier home, they will do everything it takes to rectify the situation. But if something was to go wrong with an investment property venture; this comes with more risk for the lender. “To make matters worse for the bank the oversupply of condo’s just makes it even harder for a bank to sell this property (if it is taken as security) through the legal process as there will be a very limited secondary buyer market out there for condo’s,” explains Phelan, “It could take 3-4 years to sell this property and no bank wants an impaired debt on their books for that long as it will hurt their bottom line too much”. [caption id="attachment_81084" align="alignright" width="300"]

Joe Phelan[/caption] But buyers shouldn’t be alarmed just yet. Phelan adds that if the condo was being purchased for owner occupation in the right location, then most banks would still consider lending money to the customer for the condo just as they would for a landed property. Galliano adds, “The concerns expressed by the government on a potential property bubble on several occasions and the construction sites that litter the skyline may be a prophecy of a peak in prices for now and the downward trajectory of prices to come. Investors may want to sit tight on buying and take advantage of anticipated low rentals as a significant supply of empty apartments will be seeking tenants." [caption id="attachment_80510" align="alignleft" width="225"]

Simon Griffiths[/caption] In response to governmental concerns, banks are adjusting lending overall in Cambodia’s current economic climate so as to avoid a future credit crunch. Banks are taking a conservative approach to counteract rapid credit growth and its associated risks as a preventative measure. This retraction is only a positive for the market in the longer-term adding to its sustainability and healthy growth.