Monthly Archives: November 2013

There is no doubt Phnom Penh is going through a construction boom with new restaurants, offices, serviced apartments, shopping centers, hotels, hospitals and schools being built all over the city. However, one of the key sectors undergoing significant change is condominium development.

Bangkok experienced a condominium boom in the 1990s, which changed the skyline of the city and also changed the living habits of the city’s inhabitants. Is the same going to happen in Phnom Penh?

Phnom Penh is certainly a much smaller city and a long way behind Bangkok, but the signs are there that Phnom Penh is following the same trend.

Is the supply of condominiums growing? The short answer is: yes!

The supply of condominiums slowed almost to a halt during the global finan- cial crisis and with landmark develop- ments such as Gold Tower 42 and Camko City locked in court battles, confidence in the condominium market remained low throughout the crisis years. However, with signs of economic recovery, consumer confidence began to return and in 2012, the largest completed condominium development, Rose Garden Condo (or Rose Condo) opened its doors. Within 6 months, more than 90 percent of the units at the four towers had been sold.

This success story provided developers, investors and potential buyers with increased confidence and condominium developments are once again underway all around Phnom Penh.

The success of Rose Condo needs to be treated carefully though. Many of the sales were not to buyers who intended to occupy the property themselves (own- er-occupiers), but to local investors seeking opportunities to make investments at attractive rates. This type of buyer cannot sustain a growing condominium market in the long term and unless condominiums are purchased by owner-occupiers, effectively middle class Cambodians, the number of successful condo development will be limited to foreigners living in Cambodia, foreign investors and local investors.

With many new developments set to come online at the end of 2013, 2014 and on through to 2016, CBRE researched a total of 18 condominium projects (com- pleted as well as under construction) in Phnom Penh with the main developers currently being De Castle and Canadia Group.

In 2014 three new condominium projects will be completed and in the following two years a further four developments will be coming online.

High-Quality Condominiums – Missing Supply

Developers have now started to under- stand the different market segments existing in relation to the condomini- um market and the lack in supply of high-quality condominiums.

De Castle Royal is set to be the first high-quality, luxury condominium devel- opment completed in Phnom Penh and the new supply of high-quality condos will cater to local and foreign potential buyers who demand standards and quality which so far have not existed in Phnom Penh. This segment of the market is also likely to attract owner-occupiers as well as foreign owners, who are more accustomed to this style of living.

Other condominium developments around Phnom Penh include De Castle Royal, Galaxy Condos, Bali Resort, HK Condos, Olympia  City D.I. Riviera, Rose Garden and I240.

Booyoung Town is not mentioned in the list above but is well worthy of note in any discussion about condominiums. The project on Russian Boulevard, which recently broke ground, has said that con- dos will make up 85 percent of the devel- opment.  This would over time introduce a supply of thousands of condominiums onto the market that will likely be targeted at all market segments: luxury, mid and low range.

Overall

The success of the condominium market as a whole will be heavily dependent on the urban expansion of Phnom Penh, the accessibility of competitive financing and a cultural shift from living on the ground, towards owner-occupiers relocating to condominium developments within the city. Whether individual developments are successful or not, there is one thing we can be sure of, condominiums are here to stay and will have an ever-increasing presence in Phnom Penh in the years to come.

Q3 2013 CBRE Global Research and Consulting

LUXURY HOME PRICES RECORD FURTHER INCREASES BUT RENTS WEAKEN AMID FLAT LEASING DEMAND

Overall luxury residential prices in ten major markets in Asia tracked by CBRE Research increased by 1.4% q-o-q in Q3 2013. In Beijing average asking prices surged by 8.6% q-o-q despite repeated government measures to curb property prices. Prices in Shanghai, Guangzhou, and Shenzhen also recorded steady price growth thanks mainly to upgrading demand.

Overall luxury residential rents declined by -0.4% q-o-q. In Shanghai the end of the peak expatriate leasing season saw several landlords adjust asking rents downward, causing average rents of luxury apartments to decline by -1.3% q-o-q.

Authorities will continue to closely monitor price movements in residential property markets, particularly in locations where cooling measures are already in place. Tightening policies are not expected to be loosened in the near term as governments remain determined to steer the market away from overheating.

In China the possibility of property taxes being extended into new regions is likely to result in increased demand from buyers keen to purchase before new measures come into force, a trend that will result in further upward pressure on prices. Prices in Southeast Asia – with the exception to rise.

CONSTRUCTION COSTS REMAIN STABLE WHILE PHNOM PENH CONSTRUCION APPROVALS FLUCTUATE QUARTERLY

Construction costs year on year have increased on average by 1.36% compared to Cambodia’s inflation rate projected at 3.5% for 2012. The minimal increase and costs remaining broadly stable can be attributed to the competitive market conditions and labour cost remaining the same year on year. General labourers on average receive US$5 per day which is the same rate as in 2011.

The major driver affecting the stability of construction costs are material costs. Most material prices have remained the same year on year except for steel decreasing. Global steel prices have fallen from US$778/ton in December 2011 to US$721/ton in December 2012. This has not heavily affected the construction costs as the majority of construction in Cambodia consists of concrete framed structures. Although imports of steel in November 2012 rose by 47.8% month on month to US$9.3 million.

Standard office and shopping centre construction costs are quoted without finishes. Grade A offices include high specification such as raised floors, centralised air conditioning and high speed lifts. Cambodia will not have Grade A office space until the completion of Vattanac Capital.

Although 5* hotels and resort hotels saw an increase year on year, 3* hotels were the only building type to see construction costs decrease due to inferior materials and simple designs.

Industrial factory units as expected have the cheapest construction cost with most units in Cambodia being used by garment manufacturers, requiring only a low quality build specification.

Compared to regional construction costs Cambodia has approximately 10% higher costs than neighbouring Thailand and Vietnam. Even though labour costs are significantly lower the low supply of construction materials manufactured domestically has created a dependence on imported materials resulting in higher costs.

The construction sector is one of the main benefactors of the Cambodian economy. In 2011 the country attracted a total investment of US$1.7 billion for a total of 2,129 individual projects. The sector was heavily affected by the Global Financial Crisis and in 2012 decreased by 25.5% but due to Cambodia’s resilience the sector has rebounded well. The sector is projected to grow by 9.9% from 2012 to 2015.

Construction approvals made by The Ministry of Land Management, Urban Planning and Construction (MLMUPC) have seen large fluctuations in recent years. The first three quarters of 2012 saw construction approvals reaching US$541.3 million in Phnom Penh. That is already higher than the yearly total for the last three years since 2009. Approvals have still not reached the levels of pre Global Financial Crisis  of 2008 where projects approved in Phnom Penh reached US$1117 million.  Although a number of the projects approved in 2008 are unlikely to have continued due to the market demise.

The value of the construction projects has been steadily increasing each year. This gives clear indications that the market dynamics are starting to shift with strong growth in the property market returning.

The construction sector is set to experience continued growth with a number of large scale projects breaking ground in 2013. Obtaining construction approvals for large scale projects can be time consuming –  with the average request and then approval taking one year. Total building permit fees are in the region of US$6,000 to US$7,000.

General labourers wages are likely to increase in line with inflation due to the young demographics of the country providing a high level of supply. With a limited amount of vocational training on offer the current supply of skilled workers is not meeting the increased demand of the growing construction sector.  Skilled worker wages are likely to increase at a faster rate due to the current lack of supply. This will potentially lead to an increase in construction costs.

While the price for steel has fallen in recent months, the demand for materials remains high in the region, particularly China. This high level of demand from other markets will mean construction material prices are unlikely to decrease in the short or mid term.

Material costs are only set to decrease if there is an increased supply of domestically manufactured construction materials but this is not likely to change in the coming months.

The outlook for the industry is positive, but construction materials will remain subject to international forces while the supply of skilled labour will increase overall construction costs and could detrimentally affect development phases.

CAMBODIA’s TOURISM SECTOR GROWS IN STRENGTH WITH TOURIST AND BUSINESS ARRIVALS INCREASING

Siem Reap

The market outlook for the hotel industry in Siem Reap is positive with strong growth recorded in 2012 and already during 2012 – 2013 ‘peak’ (2012 – 2013) season, with some hotels recording their highest occupancy rates since 2007.

With tourism figures reaching record highs already in 2013, international hotels and operators are experiencing as much as a 20% growth in occupancy rates based on the same period of the 2011 – 2012 peak season.

With a growth in the number of visitors to Siem Reap, rack rates have remained firm and due to the lack of additional supply, this is likely to remain, with the potential for rack rates to increase in the near future.

The opening of the new Park Hyatt will add an additional supply of 109 keys to the hotel sector which will bring a new international operator to the market strengthening the international hotel operator offering in Siem Reap.

A key factor for the hotel industry in Siem Reap is global marketing and accessibility. The vast majority of tourists staying in Siem Reap are either part of a package holiday or have booked through travel and tour operators, with this characteristic being markedly true for the Asian Market.  As such, international hotel operators with increased exposure and presence with travel and tour operators have been able to directly convert the increased number of tourists into higher occupancy rates.  Local/foreign owned 4* – 5* hotels, with no international operator, have suffered from a lack of international exposure and have struggled to directly translate increased tourist numbers into higher occupancy rates.

Phnom Penh

The Phnom Penh luxury hotel market has significantly benefited from the presence of the ASEAN summits, one in April and one in November. These both brought in over a 1,000 delegates and international press arriving into Phnom Penh.

The average occupancy for luxury hotels in Phnom Penh stood at 60% at the end of 2012. In 2011 the average occupancy in all levels of hotels in Cambodia stood at 66.15%. It would be expected that higher priced luxury hotels would experience a lower occupancy. The 6.15% difference does not reflect the norm and indicates the positive year achieved by the luxury hotels in Phnom Penh.

The room rates have generally increased in the market, especially for suites and the more exclusive properties. This again can be attributed to ASEAN activities and the corresponding business activity. The current REVPAR (Revenue per Available Room) in the four and five star hotel market in Phnom Penh ranges from US$25 up to US$100.

Supply is set to increase in the next few years with the completion of the Sohka Hotel and Naga 2. During 2012 supply only increased with Naga World completing an additional 220 keys. Sohka is set to launch 500 rooms onto the market and Naga 2 is set to launch over 1000 increasing current luxury hotel supply by 70%.

With supply increasing and the market becoming more competitive it is expected that a number of established luxury hotels will undertake major refurbishment works in the near future.

Tourism Statistics

Tourism accounted for 9.7% of Cambodia’s GDP in 2012 a rise of 5.5% from 2011. Investment in the sector has increased by 16.7% Y-o-Y. Total foreign arrivals increased by 24.8%  Y-o-Y with business arrivals seeing the greatest increase at 47%.

Tourists from the U.S. and France—both of which have strong historical ties with Cambodia —accounted for approximately 8 percent of total visitors in 2012. Europe as a whole saw an increase of arrivals by 11.4%. Asia and the Pacific accounted for the majority of arrivals at 76.25%.

Compared to the figures from 2011, the numbers of arrivals by air despite increasing have seen a reduction in its percentage share of total arrivals. In 2011 50.9% of arrivals came by air while in the same period in 2012 47.4% arrived by air, this can be put down to the increase in visitors from neighbouring countries, predominantly Lao and Thailand.

As in previous years Siem Reap International Airport has the highest share of arrivals with 27.6%, while 19.8% of arrivals came through Phnom Penh.  According to the Cambodian Government approximately US$80 million will be invested to expand the international terminal in Phnom Penh and US$100 million will be used to upgrade Siem Reap International Airport.