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Wave of Chinese money headed for Cambodia's residential real estate market

In 1965, a construction team dispatched from Beijing built Mao Tse Toung Boulevard in the center of Phnom Penh, capital of Cambodia, as a symbol of friendship between the two countries. Half a century later, Chinese groups are among the dominant foreign investors in Cambodia, according to data from the two governments.

Historically, Chinese investors have been primarily engaged in large-scale infrastructure projects, including the country's biggest sugar mill and the Russei Chrum Krom River hydropower dam. They also operate Cambodia's biggest special economic zone and are planning to spend more than US$2 billion to create another for agricultural processing in the Kampong Speu province.

In recent years, however, Chinese money has shifted its focus to residential real estate in Cambodia, market observers told S&P Global Market Intelligence.

"The majority of foreign developers in the Cambodia market are Singaporean and Taiwanese, while most of the contractors and material suppliers are Chinese. In terms of developing their own property projects, Chinese companies are kind of late in the game, but are quickly catching up," said Hojune Lee, an investment advisor at Phnom Penh-based property consultancy Cambodia Chinese Information Network.

A large number of Chinese property developers in 2016 have ventured into Cambodia, primarily into Sihanoukville, a premier beach town located along the country's southern coast, according to Lee.

Such developers include Guangdong-based Yonghe Construction Group, which is building the La Tree condominium project jointly with Taiwan's Dayu Real Estate, and Shenzhen-based Hong Lien Group, which is developing the 1,344-unit Royal Bayview luxury residence that is scheduled for completion in 2018. Additionally, China CYTS Industrial Development, backed by Chinese state-owned Communist Youth League Central State Holding Co., was recently granted the development rights for a large land parcel in the area, according to Lee.

"With a lot more projects coming online, Sihanoukville's landscape is expected change drastically in 2017 and 2018," said Lee.

Appealing prospects

As growth in the mainland Chinese housing market slows, Chinese developers are increasingly looking to diversify their operations abroad. While the large industry players continue to invest in developed markets like the U.S. and Australia, some minor ones are turning towards emerging markets closer to home.

Once a poor country struggling with poverty and civil war, Cambodia is now one of the fastest growing economies in Asia, driven by garment manufacturing, tourism, agriculture and construction. The Asian Development Bank forecasts GDP growth in Cambodia at 7.0% in 2016 and 7.1% in 2017, outperforming the average for Southeast Asian countries by about 2.5 percentage points. Inbound tourist arrivals to the country totaled nearly 4.8 million in 2015, more than quadruple the number recorded in 2004.

"Cambodia has just started developing, and we see a lot of potential in it," Min Li, general manager of the Cambodian branch of Chinese developer Prince Real Estate, said in an interview.

Prince Real Estate ventured into Cambodia in 2014 and is building a luxury condominium project, a commercial complex in Phnom Penh, and a large-scale resort village in Sihanoukville. "The local real estate market is like that in China in the 1990s, when asset prices began to quickly rise," Li said. "Developers and investors are rushing into this market. We don't want to miss the chance."

Residential land prices in Phnom Penh surged to about US$3,500 per square meter at year-end 2015 from about US$1,500 per square meter in 2010, while commercial land prices jumped to US$5,500 per square meter from US$3,000 per square meter during the same period, according to data provided by Cambodian Valuers and Estate Agents Association.

Prince Real Estate set an average selling price of US$2,500 per square meter for its Prince Central Plaza condominium project in the Cambodian capital, which features about 1,770 units ranging from 23 square meters to 175 square meters. It expects investment returns for buyers to be about 12% to 15% per year, based on projected rental yield and property appreciation. More than 1,000 units in the project have been pre-sold ahead of its scheduled completion in 2018.

Demand is coming largely from foreign buyers from China, Taiwan and Hong Kong, who are betting on investment returns that can be rarely achieved in the developed markets that wealthy Chinese have traditionally targeted, according to Li. "As Cambodia's economy and trade grows, there is an increasing number of expatriates and investors come to work and live in Phnom Penh. … Five years ago, you could rent a very nice one-bedroom unit in central locations for US$400 per month. Right now, that can only get you a standard one-bedroom somewhere in the suburbs," he said.

Real estate gold rush

Hoping to make a fortune in the property market, more Chinese investors are expected to pump money into Cambodia's residential real estate market, according to Victor Yi, an executive at Regis Asia, a Shenzhen-based property agency that serves Chinese buyers chasing overseas real estate opportunities.

"People looking at the Southeast Asia market normally want to buy into Singapore and Malaysia. These [past] two years, we are having a lot more clients interested in Cambodia," Yi said.

The agency organizes several property shopping tours to Cambodia every month. Each delegation usually comprises five to 10 Chinese families and will stay for three or four days. One client, who used to be focused only on Singapore, spent more than US$2 million last year on 10 condominium units in Cambodia, according to Yi.

"One reason why many cash-rich Chinese investors like Cambodia is that the U.S. dollar is the country's de facto currency and there is no scrutiny on inbound foreign capital," Yi said. "It is an ideal destination for them to convert their wealth into dollar-denominated assets."

However, compared to China's massive investment in Cambodia's infrastructure projects, Chinese investment in the country's residential real estate market is still in its infancy, according to Cambodia Chinese Information Network's Lee.

"Chinese money targeting Cambodian real estate only trickled in this year and is expected to take off in 2017," he said. "The real boom is likely to happen in 2018."