Rich benefit from land price rises

Sok Chan

Experts predict 7 to 10 percent annual increases for 10 years

Land prices in Phnom Penh are rising year-on-year

The price of real estate and, in particular, land has surged dramatically in the last five years because of the development of the country.

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However, the rich rather than the lower-and-middle income earners will benefit most, according to observers.

Land prices have increased between 10 and 100 percent and even more depending on location.

This growth is not reflected in the fundamentals of the economy, but from people’s and investors’ psychology and expectations.

Experts in this sector forecast that land prices will rise from 7 percent to 10 percent per year in the next 10 years. Land prices in Cambodia are still low compared with neighbouring countries in Asia.

The Global Property Guide shows that the land price on average in Cambodia’s cities is $2,900 per square metre. In Thailand it is $3,900. In India it is $10, 900 and in China it is $11,800. In Hong Kong it is a whopping $28,500 per square metre.

Poor Cambodians

There is concern that many poor Cambodians could be pushed out of the housing market, says Chou Ngeth, a senior economic consultant at Emergent Market Consulting (EMC).

He adds that so-called affordable housing in Cambodia is beyond the means of ordinary folk, especially construction workers, because the price is at least $25,000 per unit.

“This crisis happened in Hong Kong. Therefore, Cambodia should prepare its policies carefully,” Chou adds.

A key real estate report in the second half of 2018 shows that land prices in Phnom Penh’s prime locations was $3,500 to $9,500 per square metre while it was $2,500 to $4,000 in less flashy parts of the city. Five of Phnom Penh’s districts have the highest land prices. They are Toul Kork, Chamkarmorn, 7 Makara, Daun Penh and Beoung Keng Kang (BKK).

However, the land price was as little as $30 rising to $3,500 per square metre on popular roads and $20 to $2,000 per square metre on less favourable ones such as Dangkor, Russey Keo, Sen Sok, Chroy Changvar, Prek Pneov, Posenchey, Chbar Ampeou and Meanchey.

Newly wedded couples

If the land price does grow rapidly it will affect lower and middle income families, especially newly wedded couples who dream to own their own home and live independently from their parents.

With prices rising, they won’t be able to afford to buy, says Po Eav Kong, general manager of Asia Real Estate.

“Land prices will increase dramatically but people’s income is falling. Gross domestic product growth will benefit the group with the biggest share. Thus, the rich will still gain the benefit from it, while ordinary workers will receive less, diminishing their ability to save money to buy land to build a house,” Po says.

“Some workers’ salaries increase from 3 to 10 per cent per year. However, the real estate sector, especially land prices, increased from 10 to 20 per cent per year, so they cannot catch up with the market,” he adds.

From 2015 to 2030, the demand for new houses is estimated to be 1.1 million homes. The demand in Phnom Penh alone amounts to some 800,000 homes. Based on this figure, Cambodia would need to build 50,000 units per year to meet the demand because of rapid urbanisation, according to the Land Management, Urban Planning and Construction Ministry.

Improving lives

Lower and middle-income earners mostly work in the informal economy sector and some formal economy sectors such as construction and garment workers.

The government adopted its new affordable housing policy in 2017 in an attempt to improve the lives of low and middle-income Cambodians by encouraging developers to focus on low-cost housing projects.

The government will also invest in infrastructure around areas where affordable housing projects are being built. Po says the government will give special income, property and value-added tax rates among other benefits to people who will live there.

To gain access to the incentives, projects must include at least 100 low-cost housing units priced between $15,000 and $30,000. Moreover, the projects must be located within a 20-kilometre radius of Phnom Penh’s periphery and must contain green spaces.

Developers must also cooperate with financial institutions to create credit schemes with low-interest rates to increase the projects’ affordability.

“If we look into the current affordable housing offer, they are not affordable for people on low-incomes. Their prices range from $25,000 and their monthly instalments may start from $300,” says Chou from EMC.

He adds that for households with an income of $500 a month or less (mainly garment and construction workers, who represent a large portion of the low-income segment), this is unaffordable.

Therefore, there should be homes priced below $20,000 with monthly instalments less than $200.

Po, however, says the affordable housing market for lower-middle-income earners is mainly focused on civil servants, who benefit the most.

Location of developments

He adds that the locations for the development of affordable houses are far from places of employment. They tend to be about 15km to 20km from the centre.

“If an ‘affordable’ house costs from $25,000 to $30,000 and the salary of lower-middle-income earners is from $400 to $500, it is difficult for them to meet the payments,” Po adds.

“If the government offers an incentive toward the payment, other expenses or it subsidises the interest rate for the lower-middle-income earners, they can meet the cost of affordable houses. However, if those projects charge high-interest rates the system will not work well,” says Po.

“The interest rate in Cambodia is not low compared with the income that people earn. They have $400 to $500 per month, but the interest rate is 7 to 8 percent a year, which is high.

“It is higher than some other countries where the interest rate is three to four percent,” he adds.

Vongsy Sam, director of the Central PPP Centre of the Cambodian Ministry of Economy and Finance, says the rapid growth of land prices will not only affect the lower-middle-income earners, but have wider implications.

“It is not only about affordable houses: It is a challenge for all sectors,” Sam adds.

“It is difficult to set a ceiling price for real estate because Cambodia adheres to the free market. Unless there are special measures from the government we cannot prevent the public from selling land at a certain price, which limits their freedom,” says Sam.

Instalments, interest

Sam agrees so-called affordable houses are beyond the reach of some informal workers such as those with jobs in construction and garment-making.

The lower and middle-income earners can buy them for $30,000 if they receive a loan from the bank and if they live as one family, so their total household income could be more than $400 to $500 a month.

“Under these conditions, they can afford a house if the interest rate is around 10 per cent.

“Therefore, at $30,000 per unit, they will have to pay around $160 a month, in both instalments and interest over 20 years,” according to Sam. He adds $30,000 is the highest price for an “affordable” house.

Generally, in a country experiencing a real estate boom, people will often rent, even in developed countries.

In the future, housing developers should consider building homes just for the rental market.

To encourage more affordable houses, the government should incentivise developers to facilitate access to basic infrastructure such as water, roads, drainage and electricity, says Chou.

He adds that applying tax exemptions for developers who build such projects for at least five years would be a good start.

Significant impact

These two basic policies could potentially attract developers to consider the needs of low-income people.

He says that by doing this, many small-plot project developers will transform themselves into housing developers.

And, in the future, if it is a lucrative business, the government may want to impose taxes on them to generate more revenue.

“Of course, it will have a significant impact on the ability of the poor to access affordable housing.

“That’s how I recommend the government should incentivise private sector investment,” Chou adds.

He says affordable housing doesn’t need to be concentrated in areas with a high population density.

The movement of labour follows garment factories and they have been spreading to provinces.

This may create lower land prices, according to Chou.

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