Simon Lam 16/11/19

I have been investing in apartments in different countries for 12 years now, and manage a small portfolio of studios. Having lived in Cambodia and researching the real estate market here since early 2019, I want to share a few thoughts for those of you who are looking for new frontier markets to invest in.

Cambodia doesn’t allow land ownership for foreigners, neither buying a ground floor unit is possible without complicated maneuvers - so this post will focus on apartments, which foreigners are free to own.

In short - I would recommend against investing in a condo in the capital city, Phnom Penh, which may go in contrary to the general advice online (many sponsored by local developers), but the dusty beach resort town of Sihanoukville has some good prospects.

1. First, rental yields are actually very low in Phnom Penh if you compare them with other 3rd world countries. A quality, new apartment in a reasonable location (eg. in my development where I rent) costs around $2000 per square meter. 65sq m means $130k. At the same time, the same 65m condo can be rented for $350 per month (or $4200 per year). That’s what I pay after negotiating with the landlord. Of course, that's not what developers will tell you to sell you the flat. And that's standard around Phnom Penh - just compare real rental vs purchase prices in the same buildings. It will take over 30 years for your investment to pay off if you were to buy in my block. Instead, invest your money with a higher return - you can invest in a business, an apartment in a higher-yielding country, and even a USD deposit in Cambodia pays 7% per year. For example, I own a few modern studio apartments in UB city, Mongolia. I bought them at +-$20k each, done them up at $2K and have been renting them at $400 per month to locals and expats there. That's 25% yield. Instead of having just one apartment in Phnom Penh, I can have 5 in Ulaanbaatar, where rental prices are comparable to PP. Hint: It is better to buy than it is to rent in Ulaanbaatar. In Phnom Penh, it is the opposite. Reasons for yields/prices being at those levels are complex, something for a separate post.

2. If you buy, buy a small unit. Or in other words, rent luxury, buy utility. A small apartment, let's say a studio 30m2, costs roughly the same per square meter here as a large 3-bedroom of 150m2 in most developments. Let's say you have chosen a condo building, and they offer you two choices, a studio, and a 3-bedroom. The price they sell is $2k per square meter, so you will pay $60,000 for the studio vs $300k for the 3-bedroom in the same building. But the rental situation is very different. While the small flat can be rented for $300 per month easily, the 3-bedroom in the same building will not achieve 5 times more - $1500 per month - no chance. More likely, rent will be around $700. So it makes more sense to rent larger, more luxury properties yourself, but for investment purposes buy smaller ones. Example - instead of buying the 3-bed for $300K, buy five small units at $60k each, rent them out for the total rental income of $1500 rather than getting $700 from the large 3-bedroom one.

3. Capital appreciation has little room to grow now in Phnom Penh. Apartments are expensive - in fact very expensive, compared to average incomes, GDP per capita and to prices in other developing countries in the region. Property values are always about the availability of cash. In some countries (USA, UK, AU, EU more recently) it means low interest rates, growing wages, and banks willing to lend money. In others (Cambodia, China, Mongolia, other developing and Asian countries) it's about disposable income and savings. Basically, if there is lots of available money in the economy, the property prices go up, and vice versa. So what about Phnom Penh? The average wage is $400, and apartments cost $2000 per square meter. They are simply not affordable. It's not Hong Kong or London, and will not be (at least in our lifetime). Local banks are not very happy to lend, and if they do, the mortgage rates are 7-10% per year. With such rates and such low income, the market relies on Chinese buyers at the moment, but who will be buying your condo in 10 years' time at a higher price? Chinese? Would they not prefer new-builds where they get discounts, and of which tons are in the pipeline currently? Would they not choose another hotspot country by then and pull out from investing in empty condos in Cambodia?

4. Finally - it's not your country, you never know what happens in the future, titles and deeds are in mess and the construction standards are poor. While you can occasionally strike a great deal if you buy at a lower than the market price, (e.g. from a desperate seller with a sick mother who has to pay hospital bills), I would recommend to get to know the market first, know real, actual prices (rental and purchase), look at your financing options (if any - e.g. I bought my last apartment in Mongolia on a credit card advance), and then make your move if you see a good deal. From what I see though, Sihanoukville looks promising, with $1-1.5K per meter, and crazy high rents ($1k), maybe buy there.