Government Help for the Real Estate Market

This is rather lengthy so please bear with me on this one.

The Phnom Penh Post ran an article headline ‘A Helping Hand’, reporting on a request by the Real Estate Association for propping up their industry.

Let’s look at some of the things Sung Bonna, the owner of the largest real estate agency, and others said and whether or not they make sense.

A spokesman for local real estate agents is asking for a meeting with Prime Minister Hun Sen to make a case for government intervention in the property market in the hope of reversing a decline in sales and investment.

So they think that a simple statement by the Prime Minister will allay the effects of a world-wide recession? Don’t they understand what’s going on outside Cambodia? Do they live in a dreamland?

Sung Bonna, the president of the National Valuers Association of Cambodia, made the public call for a half-day meeting between the prime minister and key industry figures at a meeting of business people Friday night at the Almond Hotel. He warned the country faced bankruptcies and mass layoffs if the government did not take steps to ease investor and buyer concerns.

Now, please Mr. Bunna, what steps exactly do you want the government to take? If there are no buyers the government can’t just snap their fingers and buyers will come to Cambodia in droves to snap up previously overpriced, now discounted real estate?

"We hope the construction and real estate sector will receive a boost if the Cambodian government joins us to discuss possible solutions to the slump in the sector," Sung Bonna said. "If not, the slowdown will only worsen."

Because Bunna Realty is suffering as they can’t broker any deals, the government must step in?

Between 100,000 and 150,000 people were at risk of losing their jobs if the slump continued, Sung Bonna said. Job losses would not only hit realtors and construction workers but spread throughout the sector's value chain, hitting architects, furniture suppliers, lawyers and people in the building materials sector.

Guess what? This whole phenomenon is called economy. There are certain rules and laws that apply – the most fundamental one being the law of supply and demand. This is not a state-run, planned, Communist-style economy, this is called a free market in which market forces determine the actions of it.

The request for a meeting came a day after Sung Bonna called for more government involvement in the sector at last week's 2009 Cambodia Outlook Conference.

So when things turn sour they call for the government, although the majority of the people still don’t pay taxes, and property taxes are negotiable?

Sung Bonna told the conference that strengthening laws on land titles and property was the key to boosting confidence in the sector. "People are scared of Cambodia because we have no laws," he said. "This is a period where we need to compete with neighbouring countries. Any law that will make more headaches for investors we should temporarily withdraw and reconsider."

When business was flying high there was no call for more laws or their enforcement. Now all of a sudden we need them? People came when the market was hot, laws or no laws. The land law is pretty explicit already, isn’t it? And the Ministry for Land Management has been toiling away with LMAP for years now, ensuring that soft titles will be turned into hard titles. Again, a year ago this all was of no concern to the industry. They just kept building and building, buying up land, no matter who owned it, and now what? More laws to help speculators? Hopefully, not in your lifetime, my friend.

He was referring to the controversial housing development prakas temporarily shelved last year following an outcry from developers.
Korean developers in particular said they would be unable to progress with development plans should the rules take effect.However the government has repeatedly pledged it will be pushed through in some form.

The people need protection from shady developers and real estate speculators. The bad apples need to be weeded out. This is why Cambodia needs this regulation. We see what complete de-regulation entails. As a matter of fact, the consequences of de-regulation are now felt in Cambodia, in case anybody should have forgotten this.

At his opening speech at the Cambodia Outlook Conference, Hun Sen acknowledged the extent of the economic problems facing Cambodia as a result of the global economic crisis and called on the private sector to diversify and expand into sectors other than tourism, garments and agriculture. However, he was criticised for not setting out any concrete steps to boost the real estate sector.

"The government has concentrated on tourism, agriculture and the extractive industries but we have received no encouragement," Sung Bonna said.

Quit complaining. The real estate bubble was home-made and now you have to undo the consequences yourself.

Chhean Dara, project manager of the $50 million Happiness City complex on Phnom Penh's Chroy Changvar peninsula, also called for government intervention. He said the company was offering 20 percent discounts on houses and villas to no avail and warned it would be forced to stop construction within three months if no new buyers materialised.
"I think that if the government cannot find any solutions to help turn around the real estate sector downturn, it will slow Cambodia's economic growth," he said.

Now, is that so?

The request for a meeting comes after sales activity in the Cambodian property sector dropped to almost zero after hitting a peak around the middle of last year, buoyed by an influx of foreign investment.

Asking prices had dropped between 30 and 40 percent from the June peak as speculators tried to offload holdings in a market with no buyers, Sung Bonna said.

That’s what you get from over-speculating. But then, you couldn't tell from what people are still asking.

He said a failure to act would not only increase social instability through rising unemployment but that the dual decline in sales and property values would erode government revenues from stamp duties on land transfers and VAT taxes on the sale of apartments, villas and houses.

While this is true, it is still a laughable argument coming from someone who profited handsomely during the good times. Yeah, in the U. S. banks are too big to let them fail, in Cambodia you get social unrest, isn’t that what Mr. Sam Rainsy usually says? Wielding the big stick, eh?

The government charges 10 percent VAT on the sale of properties and four percent transfer tax on the sale of land.

Land Management Minister Im Chhun Lim told the Post last month that the government collected $21.35 million in property transfer taxes in 2007, up from $1.47 million in 2003 due to better revenue collection and improved relations with the larger estate agents.

In a departure from his prepared presentation, Ngy Tayi answered Sung Bonna point-by-point at the conference. While acknowledging Cambodia's legislative framework needed to be strengthened, he reminded the audience that the sector had been hit hard by the global financial crisis, with foreign investors scaling back major developments. Real estate prices had also been badly inflated in recent years and that the market needed a correction, he said.

The government had also worked closely with the sector, he said, in large part through the Inter-Ministerial Task Force it established last year to liaise on policy development.

It had also played a key role in setting up the National Valuers Association, of which Sung Bonna is president, implemented rules governing certification of estate agents and was working through industry concerns over the prakas on housing development accounts in consultation with stakeholders.

The government was also continuing to develop its legal framework, he added, as well as creating standards on valuations and real estate transactions fees, drafting a code of conduct for real estate developers, setting up an institute for professional real estate trading, and establishing a housing development association.

It was also working towards integrating the National Valuers Association of Cambodia into the ASEAN Valuers Association, Ngy Tayi said.

The elaborations of Mr. Ngy Tayi are all correct but neglect to pinpoint the underlying problem. Cambodia was discovered by adventurous developers, mostly South Korean, in or around 2005. It went like this. One came in started a project and was welcomed warmly by both the government and business circles. Word got back to Korea that Cambodia is the place to be and you had what could almost be called hordes of Koreans coming in, all loaded up with bundles of cash, starting new, ambitious projects completely oversized for an impoverished country like Cambodia with a very slim capital base.

Cambodian business people jumped on the band-wagon and started buying and selling real estate like hot cakes. What they overlooked was that they didn’t buy land for projects that would eventually end up in the hands of the average population, but they traded basically among themselves, very similar to what happened in the banking industry in the U. S. (There, unfortunately, it was not only confined to the U. S. but, good marketers that the Americans are, they sold their toxic, worthless, financial products world-wide.)

If I were to estimate the number of major players, and I mean major, not the many bit-players, in the real estate market up to mid-2008, I would put that number at not more than 10,000 people, overseas Khmer included. I had pointed out before in several of my past commentaries that the number of units planned or being built was just beyond any realistic assessment of the market capabilities. This huge number could in no way be absorbed.

All those Korean and domestic developers did not conduct a market research, feasibility study, and proper financial budgeting and planning. They appeared to be more like adventurers than level-headed businessmen. What you see now are the consequences triggered, of course, by the world-wide economic melt-down. But rest assured, this would have happened in any event. A bubble will always burst if you don’t stop blowing into it. But greed, again just like in the U. S. and elsewhere, dictated the action.

A simple look at the demographics of Cambodia would have revealed even to the most optimistic developer that there plainly was no market for 100,000 additional units of town-houses (ptea leweng) at $25,000 to $45,000 for a ground floor (see article below), or up to $130,000 for a 2 ½ story building. Normal people don’t have this kind of money, cannot and won’t be able to afford it for some time to come in view of that miserable economic situation we’re all in now.

Let me give you those numbers again. Cambodia has 14.5 or so million people, of whom 75% live in rural areas, 30% live below the poverty line of $1.00/day, 60% survive on $50 to $75 a month, the average wages in the cities is at that level, average salaries are in the $200 to $300 range, big business is run by 5 tycoons, the per capita GDP is $2100. These numbers vary slightly from different sources. But even these most basic numbers can’t fail to tell you that the bubble was so inflated that it would burst, at minimum deflate eventually, which in my view has happened since there is still activity in the real estate sector, prices haven’t plummeted despite the official reports of 35% to 40%. In some sectors it’s more like 10% to 15%. Price structures vary widely by location. But then, 30% to 40% would call for drastic action, wouldn’t it?

Calls for government help make for good headlines but are altogether disingenuous, unjustified, and uncalled for. The people crying now are the ones who didn’t heed the basic fundamentals of the economics 101 in the past few years.