Sunday, November 29, 2009

Cambodian Property Ownership for Foreigners

Let me add my two cents to this subject. Many others commented on this already and my opinion won’t differ much. As opposed to journalists, writing about this I am involved to a certain extent in the real estate business in Cambodia so my experience is not as an observer but as a minor player.

The proposed law would make a difference if Cambodia allowed foreigners to buy and own land outright. As an example, the U. S. is one country allowing unlimited land ownership for foreigners. This had even reached such extremes in the 1980 that the Japanese owned huge tracts in New York City, Rockefeller Center among them, and elsewhere that some called for legal restrictions. But these liberal ownership laws are still a very positive aspect of the real estate industry there. Many foreigners own property in states like Florida, California, and along the Eastern seaboard. I personally know a few that even bought real estate in such states as Idaho and Montana. Citizens of a EU country usually don’t have much of a problem buying real property in another EU country; it’s a different story for non-EU citizens.

The Cambodian law now being proposed is for psychological purposes only; to signal to foreign investors that Cambodia is becoming more liberal and, to put it bluntly, is definitely very much interested in their money. But how many condos are there in Cambodia? Camko City, the Golden Tower, the DeCastle projects, and various others account for most of them. A rough estimate puts them around 2,000 to 2,500 units. That is a gross market value of around $500 million. Most of it is foreign capital to begin with, which will be repatriated and most likely not used for further investment in Cambodia. So the impact on the economy will be virtually nil. The benefit for the construction sector was reaped in the past and won’t do much good for or in the future.

The average Cambodian buyer doesn’t have enough money to fork over about $100,000 for a one-bedroom apartment, or $500,000 for a four-bedroom apartment, not to mention that they don’t even like to live in a high-rise and around 70% live in rural areas to begin with. The traditional Cambodian players who speculated in the past and made some money shy away from further speculation under the motto, ‘Once burned….” So where does that leave the market? Exactly where it is now. Dead. I have no doubt that the developers will be able to sell their units eventually, some with deep discounts, but overall it won’t lead to a major recovery of the real estate market. The new law may be one factor contributing to restoring some confidence, but it is just too small a step to influence the economy. A law that would allow foreign ownership of land, however, would certainly change the landscape considerably. This could be done in a controlled way, e. g. putting a limit on the lot size for villas or houses, or the permitted use of the land, like for agriculture only, etc., etc. I am sure many mid-market investors could be lured to come to Cambodia and start something here. As one expert said, ‘People like to own the land free and clear, a long leasehold is nothing compared to that.’ Back in the early 1980s the Dominican Republic in the Caribbean was discovered by the European tourism industry. In the wake of the tourism development, other developers followed and the country saw a considerable influx of European farmers. I am not saying that this is a sure-fire formula for Cambodia, but in order to accelerate the development of the country this could be one tool in the box. Katherine the Great of Russia used it to great success. She invited German farmers to cultivate the Volga region in the 18th century.

Another option for foreign private would-be owners of land in Cambodia is, of course, marriage to a Cambodian national. Since I am one of those I can only advise those men (that’s what they mostly are, aren’t they?) that if you only do it for the purpose of acquiring land, think twice of the potential future consequences. After all, the marriage might not last. So you better stay away from buying if you are not sure. But if you are sure about your relationship and you have been married for a few years already, then there may be no problems in buying property and titling it in your wife’s name. Although you have no right to the land itself, you are still a 50% owner under the community property laws in Cambodia. Married couples own all assets jointly and in case of divorce the property is distributed on a 50/50 basis, in other words, the foreigner would be entitled to half the value of the land they bought together and would have to be cashed out, if the property can be sold, and that’s a big if, at least at the present time. You would still lose 50% if you came up with the entire purchase price, but this is no different in the West then, is it? You also might want to conclude a marriage contract that stipulates that the proceeds from the sale of the real estate property would go to you and a certain compensation to the divorced wife. How it would hold up in court, though, is another question altogether.

Even in this scenario foreigners should again think twice before buying a condo for upwards of a $100,000. They could buy land, say 10 x 20 m for around $20,000 and build a four-bedroom, four-bathroom house on it for $40,000 (2 floors – 160 - 180 m2 living space). For that they would get more privacy and better living conditions than in a condo. Where can they find this land? In Phnom Penh Thmey. If anyone is interested, they can contact me by email.

9 comments:

Anonymous said...

KJE,

If you were a foreigner who wished to purchase a property let's say a house in Cambodia, would you consider to buy one since there is no law allowing a foreigner to own a property ? If YES why, or NO why not ?

KJE said...

Principally, yes but with an 'if'. I know many foreigners who bought land or houses with the help of a Khmer national - choosing not use the marriage option. The title is in the Khmer's name only. Sometimes they get a little money for that, sometimes they don't as they are friends of the respective foreigner. The big question is trust. No one can decide that for somebody else. Another option is to form a corporation, in which the Khmer holds 51% and the foreigner 49%. But the bylaws stipulate that the foreigner has more voting rights, so in effect it becomes he is the owner. However, at the time of sale of the property this might turn into a problem, if the Khmer partner disputes the distribution of the proceeds. So it must be an ironclad contract. The corporation, however, costs $700 to register, and a franchise tax of between $600 and $1200 p. a. needs to be paid, depending on the type of business.

In case of doubt I would not buy. You can still stick to condos. The law will be passed next week. Other than that, rental is the thing. They are quite reasonable now.

KJE said...

Strike 'it becomes' in the sentence '.....so in effect.....'.

mark said...

It does seem as if the law was made specifically for the Korean and other foreign property developers so that they could raise the money to build their grand mini cities. You are right in pointing out that the money will just skip out of the country and have little effect on the economy. The end result could be some large and incongruous developments putting a strain on Phnom Penh's infrastructure that might in turn make these properties unlivable.

Anonymous said...

I just saw a korean family putting their house for sale and making preparations to go home. Now the downturn is really starting to bite.
What incentives would the koreans have to invest in real estate in cambodia? The free ride is over.

KJE said...

Yes, correct, the Koreans have a lot of problems, not only in Cambodia but at home as well. But don't be misled by superficial events. The market is showing some tender signs of activity. Wait for another report soon.

Central Bunk said...

What is the Oxford's Dictionary definition of 'Tender Signs of Activity'? I've read many of your posts and have come to the conclusion that you don't jump into things based on msm hype. What signs do you see that lead you to believe that activity is starting to perk up?
cheers,
Joe
Toronto, Canada

KJE said...

Joe,
I will explain in a soon-to-follow post on the subject.

rajni sharma said...
This comment has been removed by the author.

Visitors