With high hopes for Southeast Asia’s economy due to rapid growth in the region, developers are keeping up a supply of office projects in Cambodia. However, the commercial real estate market’s shaky fundamentals and basic infrastructure could still keep investors away.

According to a recent research by Knight Frank, office stock in Cambodia’s capital city, Phnom Penh, is predicted to skyrocket 64% by 2018. This forecast involves an unprecedented revival of interest from both foreign and domestic Cambodia property developers ahead of an economic integration plan by The Association of Southeast Asian Nations, or ASEAN.

Going by the name of ASEAN Economic Community (AEC), the project is due around the end of this year and aims to launch a single market for goods, services, capital, and labor across the bloc’s 10 member countries, which Cambodia is a member of. The hope revolves around the assumption that companies and investors will decide to take advantage of the increased ease of logistics to enter the region’s frontier markets.

According to research, several commercial projects are due for completion over the next two years, key notable projects include a 20-story office building called Exchange Square by Hongkong Land in 2017 and an 11-storey unit called the Emerald Tower by this year’s end.

 

How Will the AEC Affect Cambodia’s Property Market?

International businesses are a crucial segment of office occupiers in Cambodia. Knight Frank further elaborated that about half of Phnon Penh’s office occupiers are international businesses from China, Japan, Malaysia, Singapore, and South Korea, and this makes the AEC an essential element to future demand.

This is indeed the reality as confidence is high among experts like Moody’s Investors Service that the ambitious AEC economic integration plan will benefit Cambodia, directly translating into more international companies entering the country’s real estate market.

However, not all is optimistic. While Cambodia’s residential property market has far better prospects, a few factors that could dim the commercial market’s bright future include high vacancy rates, rising land prices, and political tensions.

Office vacancy rates stood at 47.2% in the last half of 2014 and 44% in the first six months of this year, Knight Frank said. In fact, another worrisome statistic is that The Vattanac Capital tower, Phnom Penh’s sole Grade A office building launched last year, only has an occupancy rate of 25%.

Grade A is the highest rating given to buildings with central locations and outstanding visual design. Ross Wheble, Cambodia country manager at Knight Frank, gives a possible explanation that could clarify why the occupancy rates were this low.

“Regulations relating to taxes and labor permits, have been enforced more strictly since the beginning of 2015, and have added to the cost of doing business in Cambodia. The [monthly] minimum wage also saw a 28 percent increase from $100 to $128 at the end of 2014.”

 

Rising Land Prices, Instability, Difficult to Do Business

Already quite pricey, commercial real estate prices in central Phnom Penh neighborhoods like Chomkar Mon and Tuol Kok rose as much as 31 and 22% year-on-year in the first half of 2015, according to the report from The Phnom Penh Post citing a study by local real estate firm World Trust Estate.

Moreover, the ease of doing business in the Cambodia property market remains a heatedly debated topic.

According to the World Bank’s 2015 Doing Business Report, Cambodia ranked 100th out of 189 economies in terms of the ease of registering property. Foreigners are constitutionally forbidden to own land, but they can take out long and short term leases, and can own individual apartment units, according to a recent U.S. government investment profile on Cambodia.

Another ruling source of uneasiness would be the continuous political friction between the ruling Cambodian People’s Party and the opposing Cambodian National Rescue Party.

A peace deal struck last year between the two groups seems to be in danger following last month’s indictment of opposition members by a court and rising disagreement on how to best handle a border dispute with Vietnam.

Political instability is potentially an important factor hindering the development of Cambodia’s property market. Moody’s flagged political turmoil as a major risk to the country’s overall economic health by undermining consumer and investors’ confidence.

 

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