Cracks are beginning to appear in Phnom Penh's property market following news this week that Singapore developer TEHO International has placed its troubled, $500 million upscale real estate project on hold.
Citing an "unfavourable macro-economic outlook" in Phnom Penh's condo sector, the Singapore-listed firm blamed poor timing for its decision to halt development of The Bay as market forces take hold.
"There is a heightened risk of oversupply of condominiums which is expected to increase significantly through to 2018," the company said in its full-year results last Friday.
"In the best interests of the group's 'The Bay' project, and having considered the market conditions in Phnom Penh and other factors, the group and its joint venture partner have decided to put on hold the residential development phase of the project."
The decision contributed to a S$16.4 million impairment hit on its property division, which helped result in the group registering a full-year loss of S$23.8 million. TEHO's business is also struggling against the backdrop of a sustained downturn occurring in the oil and gas industry, with the company's marine, offshore oil and gas segment booking a S$2.3 million impairment charge.
The swathe of bad news means TEHO shareholders will forego another year without a dividend payout and are currently left in the lurch with regards to the property developer's future intentions concerning The Bay.
While TEHO said it was working with its project joint venture partner, Yim Chhay Line, daughter of Deputy Prime Minister Yim Chhay Ly, in assessing Phnom Penh's market changes and repositioning the development, a company spokesman would not disclose details on any new development plan and could not shed a timeframe on when further details regarding The Bay would be announced.
The move by TEHO to suspend The Bay's development, which was initially expected to begin construction at the end of 2015, has now left some industry commentators speculating if the project remains viable.
According to Stephen Higgins, managing partner at Mekong Strategic Partners and former ANZ Royal CEO, the large-scale nature of The Bay project is not conducive in the current climate.
"There's no question that the overall condo market has experienced a bubble that is about to deflate, if it isn't already," he said.
"A much smaller project might work, or if they're prepared to wait 20 years, maybe the original project might work then."
The development concept for The Bay had envisioned seven buildings in total, including The Bay Suites and The Bay Residence. The residence was set to comprise four 55-storey buildings that was expected to hold a couple of thousand one, two and three-bedroom units. Like many of the emerging property developments in Phnom Penh, The Bay development was also going to include a hotel which Japan's Okura Hotels & Resorts was in line to operate.
At the low end, prices for a condo at The Bay started at $150,000 but surpassed $1 million for a condo within The Bay Sky Villa building.
Higgins said a mega-project like The Bay, located on Chroy Changvar peninsula, was always a speculative project.
"When you combine that with the likely bursting of the condo bubble here, it is a sensible move to put it on hold," he said.
"The project in its previous form always seemed very speculative and too big for the location," he added.
While Dr Michael S Nhim, former regional country head for Cambodia, Laos, Myanmar and Vietnam at ECG, TEHO's subsidiary, told Post Property back in April that The Bay was making headway, announcing construction was imminent, doubts had surrounded the project's ability to get off the ground as far back as last year, when footage emerged of original 51 per cent joint venture partner and property tycoon, Sok Bun, savagely beating a former television presenter Ek Socheata.
Bun's holding in The Bay was subsequently transferred to Chhay Line, and while The Bay attempted to play down suggestions its reputation had been tarnished as a result of the scandal, little activity was seen at the project over recent months.
"The Bay is going in the right direction," Nhim told Post Property earlier this year.
With TEHO now going back to the drawing board, and with oversupply of residential units showing no signs of abating, concerns could arise regarding the viability of other large-scale projects in Phnom Penh, such as the $3 billion, 133-storey Thai Boon Roong Twin Trade Center Project.
Higgins said moving forward, only projects with sound fundamentals would be successful.
"High quality projects in high quality locations should still work, provided they aren't too big," he said.
Nhim told Post Property this week that adverse flow on affects from global events such as China's contracting GDP and Britain's exit from the Eurozone, coupled with Cambodian citizens' preference for living in traditional housing, had resulted in condo sales decreasing.
"I've researched and predicted this scenario," he said. "Then I advised the investing company to pause their operation [of The Bay] until 2018."
Meanwhile, Ea Saraboth, managing director of Maxem Property, said The Bay's initial strategy to focus almost exclusively on international buyers through their network of overseas agents, in the already crowded high-end condo segment, only compounded the challenges that the project would face.
"The announcement of the Bay project being put on hold wasn't a big surprise within the industry. Our out-take from this is to look at this case as being unique to them and not necessarily representative of the overall market," he told Post Property.
"Other segments in the property market are still seeing good sales activity, especially those focused more on affordable housing for locals such as boreys and smaller scale residential development projects between 50 to 100 units."
Saraboth said the pause button being pressed on The Bay was not enough to warrant extreme concern.
"If we start to see a few more international developers following suit, followed by local developers scaling back and putting their projects on hold, and finally a tightening of the credit markets, then these three signs would be a more worrying indicator of the broader market," he said.
"Right now, I would consider what happened with The Bay as a market correction within that particular segment."
Source: Phnom Penh Post