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Understanding the full impact that the coronavirus pandemic will have on the world is a timely and complicated process. What we do know is that countries around the world have closed borders, imposed strict controls on businesses and enforced a policy of social isolation. Saving lives and preventing the spread of the virus has naturally been the top priority that countries are addressing right now. But what impact does this have on the economy?
Having spent years working here in Cambodia and in China, the Cambodian economy is of particular interest to my business. Among Southeast Asian countries with reported cases of COVID-19, Cambodia has one of the lowest numbers of infections, a higher recovery rate and no related deaths as of this writing. Still, the Cambodian government is implementing measures to prevent potential outbreaks of the virus, including international flight bans, school closures and one of the most important public holidays of the year postponed. How will the Cambodian economy react?
The Effects Of An Economic Slowdown On Cambodia
This year will bring a sharp rise in unemployment. Businesses are having to adapt to the new market conditions and the impact it is having on revenue streams. We are already seeing salary cuts, enforcement of unpaid leave and a reduction in workforce numbers across multiple industries. Tourism is one of the industries hardest hit.
Tourism
With no international tourists arriving and locals taking isolation measures, the tourism sector has effectively ground to a halt. In 2019, tourism accounted for approximately 12% of Cambodia’s GDP. This number will be severely affected as the Asian Development Bank (ADB) estimates a decline in tourism revenue of $856.6 million, equating to approximately 3.5% of Cambodia’s GDP. Businesses large and small are all feeling the impact, an impact that will have a ripple effect across the entire economy. As an example, in the first two months of 2020, the number of foreign tourists visiting Angkor Wat decreased by 37.2% (download required). The decrease in tourism will have a knock-on effect on the retail, entertainment and hospitality sectors.
Real Estate
The key influencer on the Cambodian real estate industry will be the length of time it takes for the world to get on top of this virus. If things return to normal in the next three months, I would expect property prices to be almost unaffected. If we are looking at a 12-month time frame or longer (which is quite likely), I believe we will definitely see a decrease in property prices, with some sectors being affected more than others.
Land Prices
One of the strengths of the Cambodian real estate industry that doesn’t get nearly as much attention as it should is the comparative lack of exposure to debt. Although the level of household debt has risen steadily over the past five years, with banks becoming more sophisticated and interest rates falling, it’s still comparatively low. Many property purchases are still being made in cash, as the tradition of Cambodians borrowing money from their extended family still remains firmly in place. The big benefit of having low debt exposure is that when economic shocks such as the coronavirus hit, the impact on land prices is minimal. With fewer loans to default on, there are fewer fire sales and bank seizures. This all helps to keep prices steady. Given this, I predict land prices will remain flat in 2020.
Commercial And Retail Rental Prices
I feel certain that office and retail space will see an adjustment this year. While there is currently no official announcement from the government forcing landlords to cut rent, we are seeing rent reductions being negotiated as landlords see the benefit of keeping tenants in the current climate. This rent relief will only be short-term, though.
For the commercial sector, much of the demand was coming from international companies using Cambodia as a hub for their SEA operations. This demand has dissipated for the time being and prices will have to adjust accordingly. Given this decrease in demand, I foresee a 10%-20% reduction in commercial rental prices by the end of 2020.
The retail sector is going to be hit much harder. Across Phnom Penh, we are seeing the closures of restaurants, pubs, bars and beer gardens due to lack of customers. The vast majority of retail stores are in a similar position as customers stay home. With businesses closing and no new ones looking to open up in this market, the simple dynamics of supply and demand will see retail rental prices drop by anywhere from 15%-30% this year.
Condominium Prices
Much of the demand in the condo sector was coming from the international market, especially the mid- to upper-tier price ranges. On the negative side, a lot of this demand has disappeared. On the positive, a lot of this demand came from China, which seems to be entering a recovery phase on the economic front. While we will likely see Chinese investors coming back to Cambodia in the near future, we still see prices remaining flat with the potential for a price decrease. Many of the condos here were sold as investment properties. With limited international arrivals and businesses cutting costs, the demand to rent condominiums will see a sharp decrease. Empty properties deliver no return on investment to their owners, so we may see quite a few units on the market at a reduced price as investors seek to cut their losses.
We are certainly in for an interesting 12 to 18 months. The pandemic has revealed the capacity and shortcomings of every nation. International relationships will be tested and, by the time we have come through this, many economies will be profoundly reshaped in a lasting legacy of this crisis.