Back in 2007 and 2008, Phnom Penh was positively abuzz with the sound of drills, hammers and cranes. Construction sites were found all over the city and it seemed that every day new projects were being announced in the media—a skyscraper here, a retail development there.
But then came the global financial crisis and beginning in the second half of 2009 and continuing through the next year, the bottom rapidly dropped out of the construction sector, leaving empty lots where projects had been planned or hulking, half-finished structures that were simply been abandoned, such as Gold Tower 42, US$240 million condominium project financed by a South Korean company that was suspended in September 2010. It still stands silent and incomplete on a piece of very prime Phnom Penh real estate.
Some ambitious projects never really got off the ground, such as the planned 52-story, glass-and-steel International Financial Centre, which was set to be completed this year. In addition to the offices, the US$1 billion complex was supposed to feature luxury apartments, an international school and a convention center.
But today, after a long lull, the sound of construction is again competing with the noise of motorbikes and tuktuks. Many projects, long delayed or brand new, are active thanks to the better economic environment, government policy around foreign property ownership and better credit provisions for the construction sector.
Skyscrapers are going up again, and actually will be finished this time. There is the the Vattanac Capital Tower, a 38-story structure worth US$170 million nearing completion, and the 29-story Riviera Tower being built on Diamond Island. Camko City, a satellite city a few kilometers north of the center of Phnom Penh, has also resumed construction although for years its future was in doubt. A new Japanese shopping mall complex is going up where the International Financial Centre was once planned.
In a word, construction has made a comeback. Investment levels, which had plummeted from US$3.1 billion in 2008 to US$840 million in 2010, climbed back to US$1.7 billion in 2011. The outlook for 2012 is even healthier. Investment in the first nine months of the year was US$1.8 billion, up from US$1 billion in 2011.
In addition, imports of construction products such as cement, construction materials and steel also increased by 48 percent, 23 percent and 193 percent respectively in the first eight months of 2012 over same period last year.
But industry experts say Cambodia is not experiencing the kind of boom it did before the 2009 collapse. These days, they say, people are more cautious and wary of speculation, and investors come with solid investment plans that can see projects through. In a word, it’s a more sustainable level of growth than the pre-2009 frenzy.
But there are some worries. Some are concerned that Phnom Penh could lose much of its architectural heritage to new construction. Others worry that the city’s infrastructure is not up to all the new structures, and traffic congestion, already bad, could get even worse.
For Simon Griffiths, property manager at CB Richard Ellis (Cambodia) Co.,Ltd (CBRE), the rebound of the construction sector is a logical follow-up to the recovery of the world economy.
“The construction sector is performing well as one would expect. In an economic cycle one can expect to see a lot of development after an economic downturn,” he said. “Therefore many shrewd developers, who either slowed their developments during the global financial crisis or postponed them, have started again so that in one to three years the built environment will be ready to accommodate new or growing businesses.”
A more stable global economy has helped Cambodia’s economy to return from 0.1 percent growth in 2009 to 6 percent in 2010 and 7.1 percent in 2011. In 2012, the growth rate is expected to be between 6 percent and 7 percent.
“The construction sector is performing well and will be a strongly performing sector over the next five years,” added Griffiths.
The Economic Institute of Cambodia in its July Cambodia Economic Watch predicted the real growth rate of the construction sector would be 8.9 percent in 2012. Some analysts have gone higher, predicting 9.9 percent annually from this year until 2015.
In addition to a more sound global economy, the banking system has played an important role in the building recovery. As of March, loans by commercial banks for construction projects had jumped by almost 51 percent year-on-year to US$357 million.
The number of housing loans also increased, thanks to competitive interest rates, less paperwork required by banks and changing attitudes toward loans. Data from National Bank of Cambodia (NBC) shows total housing loans climbed to US$270 in 2011, an increase of 130 percent over 2010. In the first seven months of this year, the figure had already reached US$320 million, a 17-percent increase over 2011.
The government also played a role, approving projects more quickly and allowing foreigners to own property above the ground floor, said Lao Tipseiha of the Ministry of Land Management.
A DIFFERENT KIND OF GROWTH
But experts are quick to point out that the current situation is not a return to the unsustainable boom of a few years ago, which for Griffiths, is a good thing. He says real-estate booms are only positive in the short term and usually result in a graveyard of half-finished developments—like Gold Tower 42—and wild speculation.
“In the rush to make money, corners were cut and risks were taken,” he said. “A market based on overconfidence fuels a situation which will inevitably at some point fail.”
Today, however, he said projects are being planned more carefully, and buildings put up that respond to an actual need or demand.
Seng Sopheak, properties valuation manager at Cambodia Properties Ltd. (CPL), agreed and added that the recent boom and bust had made customers more serious about their property investments.
“Customers buy a house expecting the price to increase, but they also live there, not like in the past,” he said. “Investors come with a real plan—they aren’t speculators.”
For Noun Rithy, managing director at Bonna Reality Group, a leading real estate firm, while prices are going up, he expects them to do so more slowly. At the height of the boom, prices were going up 50 percent or even 100 percent in six months. “Now prices are rising step by step and are sustainable.”
Property prices in Phnom Penh have only risen between 10 percent and 20 percent compared to last year. In some provinces, they are very stable, rising just between 1 percent and 5 percent.
THE CHARMING CITY?
With several big projects are already underway, the Phnom Penh landscape is set to change. Recently, the government announced the approval of Diamond Island Tower, a 555-meter skyscraper estimated to cost US$900 million.
All the development has led some to wonder if Phnom Penh will lose what makes it special—such as its low-rise character or colonial buildings—and instead of being “the Charming City,” will begin to resemble Bangkok or Ho Chi Minh City in ten or fifteen years. Many experts doubt it. “It’s unlikely,” said Griffiths. “In the years of [Cambodia’s] civil war, Bangkok boomed and has had several property cycles since then which have added to the city’s development.” Besides, he added, the population of Bangkok, including its immediate surrounding areas, is 14 million, almost equal the entire population of Cambodia.
He believes that Cambodia will continue to develop, but more as a boutique location with a wide array of businesses in different sectors, but not on the scale seen in Bangkok and Ho Chi Minh.
“Phnom Penh has the chance to stand apart from the crowd,” he said.
However, the capital is growing, not only in terms of buildings, but people, too. In fact, around 4 percent of villagers in the countryside leave their homes annually in search of opportunities, according to the Cambodian Rural Urban Migration Report Project. Half come to Phnom Penh. While in 1998, 1 in 20 people lived in the capital; today it is 1 in 10. Traffic and parking are everyday headaches.
“Without planning or the infrastructure to support development, the result is gridlocked streets, cars parked on every available scrap of pavement and a lack of parks and greenery,” said Griffiths.
Experts say the government and developers have to work together to address these problems, especially with the lack of parking being built next to the big skyscrapers like Vattanac Tower. Otherwise, “the problem will get more serious,” said Seng Sopheak.
Lao Tipseiha of the Ministry of Land is also concerned. Pleased about the development, he says there’s another side to the coin. But it’s a tough problem to crack, since the only solutions he sees are to enlarge the city’s roads and increase its size.
In addition, he admits that some architecture worth preserving could fall victim to the construction crane, although he says the ministry does have restrictions in place, such as not allowing any tall structures to be built near the Wat Phnom landmark.
But elsewhere, the building is set to continue at a brisk pace. “I think 2012 is going to be a good year for the construction sector,” he said, adding that there are stacks of project applications just waiting for approval.