Pivoting to affordable homes where demand is hot
Although the real estate sector remains soft, the affordable housing market and lower mid-range segment is thriving as it meets the needs of Cambodians, who want quality lives as income levels grow
‘This is quite an unusual statistic, globally speaking,” Lawrence Lennon, CBRE Cambodia managing director, said to developers and real estate players as he pointed to Cambodia’s population where Generation Y and Z, or those aged 11 to 40, make up 55 per cent of the total.
On average, the population is 27 years of age, which stands out when compared with its Asian peers, Lennon said, recommending that developers examine how these generations’ lifestyle, current and future spending capacity would evolve in the next five to 10 years.
As such, he prompted, it is important that sector players take the demography into consideration as to where the future market lies, not just for retail but also residential properties.
“This implies that the units are going to need to be smaller, affordable or at the very least on the mid-end of the market. It is where the most likely demand is going to come from over the next few years,” he predicted.
Why the population is young is among questions that institutions and researchers have delved in numerous studies over the past decade.
Among them, some findings claim that Cambodia’s population, of around 15.5 million as of March 2019, has seen impacts emanating from the genocide in the 1970s (which annihilated over two million people).
This was compounded by low fertility rates as well as a shortage adult males, which inadvertently affected the growth rate in the early 1980s, noted a World Bank research titled ‘The Socio-Demographic Legacy of the Khmer Rouge Period in Cambodia’ in 2006.
Today, its young yet comparatively small population has given rise to a demographic dividend, which experts claim should be capitalised to ensure economic growth in the long run.
Meanwhile, gross domestic product per capita (a measure of economic output by citizens) stands over $1,540, as of 2020, almost double that from $786 in 2010, according to the World Bank.
Additionally, gross national income per capita has risen more than four times to $1,254 in 2020 from 2000, the UN Conference on Trade and Development stated.
The expansion reflects a steady growth in people’s earning capacity, indicating a demand for better living conditions, particularly in the capital city where some 800,000 new units are required to meet housing needs by 2030, the government mentioned a few years ago.
Added to that is the level of urbanisation in Cambodia, which is 24 per cent, comparatively smaller than Vietnam and Thailand, at around 40 per cent. More than two-third of the Cambodian population still lives in rural areas.
Typically, as urban populations rise, the need for residential, retail, office and all other segments follows, Lennon said.
“Equally, household income tends to rise in tandem as individuals work evolves to higher paying knowledge [service or technical] industries – further driving these trends. As urbanisation is low … it indicates [that] there is a healthy amount of room to grow,” he added.
Essentially these factors, and the young population in Cambodia have motivated local developers to pay more attention to this market segment.
However, it should be noted that the pivot is also underpinned by incentives such as the removal of 40 per cent stamp duty to developers who build more than 100 affordable units.
Given the nature of affordable homes or low cost housing and the fact that it must be accessible to every strata of the society, particularly lower and middle income groups, units are priced between $25,000 and $30,000.
However, the price range is open to interpretation, with developers calling their units affordable if they charge $40,000 for a two-bedroom unit and $50,000 for a three-bedroom unit.
Whereas mid-range housing could cost between $100,000 to $150,000, Khmer Real Estate Co Ltd CEO Kim Heang shared.
But, residential units including condominiums costing up to $400,000 is considered mid-range by developers, graying the exact definition of the units in the property market.
In the last three years, a few large-scale affordable projects broke into the market, namely Worldbridge Homes Co Ltd (with units costing below $30,000) and Arakawa Co Ltd, in line with the national housing policy aimed at ensuring home entitlements for Cambodians.
By the end of 2020, the Ministry of Land Management, Urban Planning and Construction had approved five projects in the country, which would deliver up of 8,331 landed properties and 7,256 strata units.
Small profit, big benefit
Cambodians start looking to own a home once they have a job or get married and have a family, remarked Arakawa co-founder Ieng Sotheara, whose firm is behind the $70 million Arakawa Residence project in Teuk Thla commune in Sen Sok district.
However, many are not able to afford them as they are out of their reach, hence their entry into this segment, which is to ensure that locals have “good, quality” homes.
“Most of our buyers are small business operators, civil servants or office workers, and parents as a home for their children,” he said, noting that around 2,000 units out of approximately 3,100 units have been sold.
Built by Japanese developer Arakawa, which was allegedly involved in the controversial White City development in the city centre, the affordable housing project features one-bedroom studio and two-bedroom apartment units that are priced between $30,000 and $62,000.
Sotheara said the project was “good as an accommodation” for house buyers because they secure a home at zero interest downpayment by the developer and a bank mortgage at a 30:70 payment ratio option.
For example, he cited, buyers need to “only spend about $200” a month for 36 months (for a $30,000 unit), which is interest-free, as part of the 10 per cent deposit.
“We don’t earn much profit from building affordable units because of the high cost of land, construction material, which must be of good quality, as well as labour cost.
“We want to make sure Cambodians get a good home, which is the reason we are doing this project, because it benefits them,” he said.
Based on CBRE data, shared during its Fearless Forecast event, more than 50 per cent out of 258 projects in the green netting category, meaning those under construction, were in the residential segment last year.
This year, the commercial real estate service and investment firm, predicted the entry of 13,000 units into the market, most of them being affordable housing.
Granted, these categories are currently driving the property sector, but the overzealousness of development in mid-range projects has instead resulted in an oversupply of units, similar to the high-end market, a legacy that stems from pre-Covid days.
Excess stock in the two segments has seen on average, a 10 per cent correction in the price point for asking, Lennon said.
Similarly, the average quoting sales price for landed properties, such as villas, saw a “significant drop”, possibly due to the challenges of being in the “more premium side of the market”.
Owing to that, CBRE forecasts only around 50 project launches in the year.
However, the affordable market segment held sway with “very little changes” over the last few years, Lennon said, seeing that it is strongly supported by domestic buyers.
Heang, of Khmer Real Estate, attested to this, stating that Covid-19 did not dent the pricing because of the steady demand, and hopes to increase the sale price by “three per cent every six months”.
His firm, which began as a real estate agent, valuer and appraiser, and project manager in 2007, diversified into real estate development with the construction of Borey KS Residence, a small-scale 328-unit affordable project, in Kien Svay district, Kandal in 2009.
About 180 units have been completed with the rest expected by the middle of next year.
Unlike other developers, he does not offer financing to buyers but directs them to partner banks which it has signed memorandum of understanding with, to secure 80 to 90 per cent loans from the total purchase price.
In the meantime, plans are underway for the development of Borey Vimean Samnang, featuring 445 “luxurious” villas in Win Win Boulevard, near Chroy Changvar in Phnom Penh.
Although he contended that it was difficult to estimate the growth rate for the affordable segment in the near to mid-term, Heang said Phnom Penh was home to around three million people and it welcomes around 200,000 newcomers every year.
“… almost 70 per cent of the population or around 12 million are under the age of 43, so the demand for homes is strong, especially for those in Phnom Penh and surrounding areas,” he added.
In that regard, he opined that “houses for lower income earners, also known as house for young people” has the highest demand in the current market and the future.
That being said, he does not expect a shift in the trend to affordable housing development by foreign players as they are more focussed on high-end projects, given its profitability.
Repurposing excess stock
Looking at the overall real estate sector, CBRE’s Lennon told The Post that it is vital for developers to consider the “market works in cycles” – this cycle is sometimes termed as the “boom-bust cycle” – when exploring which categories to pursue.
In addition, any real estate development has a “lead time”, which is the period it takes to go from “study to launch of development”.
“As such, like with all businesses, timing is key. Careful assessment is needed to consider existing and future supply or demand when formulating an appropriate development strategy, and consideration over the time period needed to deliver said development strategy,” he said.
At present, the condominium market is witnessing a slowdown of launches with just four last year, and a compression of asking prices at the upper to mid-end of the segment, by approximately 10 per cent year-on-year.
Lennon said the shifts reflect the sentiment of developers and how the pandemic has impacted demand.
“For the upper end of the condo market, this demand often comes from overseas buyers, however, many of which cannot travel to Cambodia currently or may have been impacted by the pandemic or even the unfolding developments in China’s property market.
“[Thus] demand is lagging. That said, if carefully considered, and positioned to the market, it’s not to say a project launched in 2022, which takes two to three years to develop, may enter the market with a very different market outlook,” he commented.
On the flip side, the landed property market observed approximately 65 launches in 2021 and prices from all unit types, other than single villas, held up.
“This is a good example of where a major proportion of domestic demand lies for the residential segment, in the lower to mid-end of the market. For developers [who are] able to attain land sites within the suburbs or to the outer suburbs of Phnom Penh, especially at locations with developing infrastructure, there remains profitable opportunities,” he said.
However, he suggested that developers consider “location, positioning, value proposition, design, amenities and competitive payment terms” which will allow projects to differentiate themselves in an increasingly competitive space.
This, falls in line with the current mid range sector which is the “most saturated” segment or “busy segment”, as CBRE associate director Kinkesa Kim put it, noting that some developers have started to shift away from the segment to affordable development.
While Covid-19 disrupted the normal cycle of the real estate sector, it also allowed some “room to breathe” and slowdown as it was “really hot” in 2018 to 2019, particularly in the residential, office and retail segments.
“So, Covid has allowed the market to breathe and absorb some of the existing oversupply as we see now, with opportunities in 2022 [being] the repurposing [of] some of this space into potentially something more [purpose-driven],” she said.
Kinkesa claimed that CBRE has seen a lot of interest from overseas investors as well as local investors who were keen on transforming the space for industrial and logistic use, health or education centres and even cloud kitchens.
“Those of some of the space the developers can consider in 2022 [which is] to make use of the existing stock and approve utilisation of space … some of this user type would go into and enhance the use of the existing stock,” she said, on the outlook for this year.
This article has been edited to clarify the urbanisation level in Cambodia.