As development sweeps across the capital in all shapes and sizes, Erin Hale explores whether the Cambodian property bubble is on the brink of bursting. Photography by Lucas Veuve.

When shopping for a new home, Sunnary Chhim had one priority: safety. She wanted to live in a house where she didn’t have to worry about thieves breaking in while she was gone – a constant concern even in Phnom Penh’s plushest neighbourhoods.

“Before I lived in Prek Eng I felt if I want to go somewhere I have to ask my friend to come and take care of my house,” she says, referring to the suburb in southeast Phnom Penh.

Chhim’s mother also worried about being left home alone all day with her grandchildren while the adults went to work. It just didn’t feel safe. So Chhim and her family decided to look at Phnom Penh’s booming construction scene, and settled on Borey Peng Huoth, a gated community not far from Prek Eng.

Her mother invested in a $23,000 villa with an attached small property, buying it from its previous owner, while Chhim and her husband settled on a new link house – similar to a Western townhouse – at $11,000 that is still under construction.

For now, Chhim lives in her mother’s house with her husband, children, brother and sister, and already likes the difference from her old neighbourhood. “They have a security guard 24 hours a day and the [entry] has gates and a light. It’s safe,” she says. “My neighbours feel the same. If they want to go to the provinces or overseas they just lock up and go.”

This desire for safety is mirrored by many Cambodians, who are buying up houses in Phnom Penh’s growing collection of borey developments – known as gated communities in other countries. From the inside, they could be anywhere in the world from California to suburban Shanghai, with pristine roads and driveways, manicured lawns and range of quaint identikit homes.

Boreys are rife in outer districts of the city, such as Russei Keo, Toul Kork and Sen Sok, where land is more affordable and space more plentiful. A drive out of the capital reveals skeletons of sprawling developments, adding to the borey boom.

This sits in stark contrast to the residential trend that is taking off in central Phnom Penh: large luxury condos complexes.

These apartments are predominantly targeted at foreign buyers and a small percentage of wealthy Cambodians, who can afford to pay more than $2,000 a square metre.

Together, the rapid construction of boreys and condos has fuelled a real estate boom across the capital during the last few years. However, things may be about to change as thousands of units near completion between now and 2018.

With the sector already starting to cool and fears that the property bubble is about to burst, developers are starting to take more risks as they try to keep the good times rolling.

Mortgage Misery

Chhim and her mother bought their houses upfront in cash with help from relatives. This meant Chhim received a discount, as well as peace of mind as she owns it outright and doesn’t have to worry about the high interest rates of bank mortgages or payment plans.

Customers like Chhim are on the decline, claims Seiha Hoem, director of research at VTrust Appraisal. The borey market is saturated with customers who can pay outright for a house – or in some cases two or three – so developers are starting to target less affluent customers with enticing finance options.

A promotion on Borey Peng Houth’s website, for example, offers new homes with no deposit, which can be paid off in installments across 30 years like a regular mortgage. These loans are also much easier to secure than mortgages because developers are not required to perform credit checks or other due diligence on customers.

While it makes it easier for property to receive financing, a considerable amount of risk is being built into the system to sell more units which is causing concern among many

industry experts.

Many customers may also be unaware that while they are paying off their home, loopholes can mean they don’t have the same legal protection as if they had bought outright or with a mortgage.

Finance is also coupled with high interest rates, with developers charging up to 12 percent. The cheapest rates about eight percent. 

If a buyer defaults on a housing payment to a developer, they can lose their home fairly quickly, says Sothany Chun, CEO of First Finance Cambodia, a mortgage broker that works primarily with low- and middle-income buyers.

For homeowners with a mortgage, “in the case of default and foreclosure is required, only the court can order the sale of the property if the client does not want to sell – from this the client is well protected,” she says. “However, when a client buys a house with finance from the developer, no transfer of ownership is made until the client fully pays for the property. This imposes high risk for the client as the property can be taken at any time if the payment is in default.”

Both Hoem and Chun voice concerns about the long-term impact of developers not looking for qualified buyers. As most of Phnom Penh’s large borey projects near completion in the next two years – VTrust says 80 percent of 101,000 planned units are already complete – developers may try even harder to attract customers, further fuelling the borey bubble.

With mortgages and other forms of finance on the rise, the National Bank of Cambodia has started to pay attention to housing sales, says Hoem, which may mean more regulation down the road.

“They are studying the possibility of a bubble or crash in the future, but they have yet to implant any measures,” he says. “Because it’s growing fast, it’s easy to collapse too.”

With her house nearing completion in February, Chhim says she is considering selling it to make a small profit and reinvest in another property. This “secondary market” of boreys sold by owners and not developers is still going strong, according to Hoem, and will continue to drive sales.

Condo Conundrum

Boreys stand in direct contrast to Phnom Penh’s condo glut – a largely speculative market that has taken over the central districts of the city with seemingly endless construction, dust and noise.

While this might convince a newcomer that the market is thriving, completed towers remain suspiciously dark at night with many apartments seemingly uninhabited.

As thousands of units look set to complete this year, it is feared the capital’s condo market is heading towards a slowdown. About 3,000 condos were on the market in 2016, with supply expected to jump to 24,533 units by 2020, according to a report by Knight Frank on Phnom Penh’s market.

In 2017 alone, 9,000 condos are expected to open, says Grant Fitzgerald, country director at IPS Cambodia, although he acknowledges there may be delays.

The first wave of condos were snapped up in cash by wealthy Cambodian buyers and foreigners, primarily as investment properties to either flip or rent out, but that market has dried up, says Fitzgerald.

“The high end of the borey market has been saturated, and it’s the same here. The Khmers who can afford these high-end condos, they’ve bought one, and then they’ve bought another. They’ve got about four or five, and that’s their limit. They’re not going to keep buying. They’re going to wait at least until they see some sort of rate of return.”

Local developers, however, are finding themselves in much the same situation as boreys, with ultra-rich clients unwilling to buy more condos meaning they must target middle-class buyers. This leads to more lucrative offers and creative financing, says Ross Wheble, country manager at Knight Frank Cambodia. “As the market has softened over the past year, developers have focused on targeting the domestic market by offering more attractive payment schemes, such as zero down payment and tying up with banks to offer competitive financing packages.”

Condos that are selling well are those built by regional developers from Taiwan, Singapore, China, Japan and South Korea, says Fitzgerald. They primarily market in their home countries, where buyers snap up apartments as investment properties.

They include Daisy*, a Chinese national who has lived in Phnom Penh for several years with her family. She has three condos: one she lives in and another two under construction at Chinese-backed One Park development and Cambodian-built Olympia City. With a family on a foreign salary, Phnom Penh offers bargain-basement prices compared to China.

“I think Cambodia is similar to China’s real estate market in the 1980s,” she says. “Here in Cambodia just started developing.”

Many foreign buyers feel the same; owning an apartment is too good an offer to pass up, even if it’s in a neighbouring country. Daisy, however, has the advantage of living in Cambodia and understanding its economy – but buyers who come directly from overseas and fail to do their research may find themselves facing a nasty shock in the next few years if they expect a high return on their investment.

Renters’ Market

Consider Cambodia’s economic makeup: only three percent of the country is regarded as “upper class”, according to Knight Frank, while the middle class is relatively small at 20 percent of the population.

There is not a large domestic market for expensive properties because there are a limited number of people to buy them. Foreigners may also fail to appreciate a more subtle cultural point – many Cambodian families still prefer to live together in houses not cramped in  small apartments.

Many local customers are also turned off by the upkeep and security fees of a condominium. Chhim, for example, says while she likes many of the condos on offer, a selling point for boreys is their low fee structure. This trend will likely change in the future, but in the near future Cambodians will represent a small percentage of the condo market.

Most owners instead have to turn to foreigners who can afford to pay upwards of $1,000 a month in rent. Prices, however, are predicted to drop as the supply explodes from now until 2020 as thousands of new condos are slated for completion.

“It will be great for people looking to rent, there will be a lot of options and it will be cheaper. Condos that don’t adjust their prices will stay empty,” says Fitzgerald. “If you look at 20,000 units coming online, there’s not going to be 20,000 new expats looking to rent these things. There might be 3,000 or 4,000.”

Phnom Penh’s real estate market is heading for a shakeup as the period of mass-speculation ends with the completion of apartments and boreys that are move-in ready. As a frontier market, it can be difficult to predict how the economy will fare in the next few years.

Phnom Penh residents are likely aware that 2017 and 2018 bring two major events – provincial and national elections – which makes owners less likely to sell as prices can become more uncertain during election season, warns Fitzgerald. “During the last election, people sat on their hands for six months before and six months after, they watched they waited for things to return to normal,” he says. “You can already see prices are starting to flatten, which is partly due to the market and because people are starting to think about the election.”

That shouldn’t deter buyers, Fitzgerald adds, provided thorough research is carried out into the many challenges and caveats of Phnom Penh’s market. “Do your research, talk to someone who knows the market,” he advises.

“Talk about the pros and cons of each development, pros and cons of each area. It can help you make the right decision, and take away a lot of the risk involved.”