After boom in property investing in Thailand, Malaysia, and more recently Vietnam, Cambodia seems also to get attention of late. As fundamentally value investors committing ahead of the crowds, we took a look at the economic fundamentals of the new destination – Cambodia has seen massive investment inflow and economic growth in the past few years, and we reckon could be a next Vietnam if the government play their moves right…
FAI – 15 years of accelerating growth to peak?
We start by looking at the fixed asset investment as a percentage of GDP – if Cambodia follows only its neighbours Vietnam (green line, Chart 1: peak FAI as % of GDP c. 35%) or Thailand (purple line: peak at 42%) then its current 26% level (magenta line) has a long way to go yet – perhaps all the new airports (9 on the drawing boards for a 17m population country!), new national highways, and high speed rails will form part of that wealth growth in the next decades:
Chart 1: Cambodia’s FAI growth has c.15 years to run before peaking (e.g. Vietnam peaked in 2010, Thailand in 1996)
Urbanisation also early days yet – huge upside almost a certainty
We were taken back by the vast amount of construction that is taking place in Cambodia in a recent research trip there – it reminds one of the buzz of property construction activities saw in China during the early 2000s. In fact the Chinese are probably THE main thrust of the current breakneck growth in both new build and regentrification construction in Cambodia.
So how does this rush to urbanisation relate to the creation of wealth for the people? We compare the past experience of fellow SEA countries to where Cambodia is now to give some context to how fast the country might grow in future years:
Chart 2: Real GDP to surge just following the footsteps of other East Asia countries
The chart above warrants some explanation:
a) as urbanisation spreads, real GDP per capita also rise, for example, urbanisation rate only reached 20% for Malaysia in the 50s (or before, earliest data from 1964 only), Thailand in the 60s, Vietnam in the 90s, and Cambodia 2010s!
b) as Cambodia's urban development gets fast tracked with Chinese expertise and capital (not enjoyed by fellow SEA peers back then), we expect a minimum milestone of 35% urbanisation rate of at least somewhere between Vietnam and Thailand (dotted blue arrow above) by 2039 and correspondingly a real per capita GDP growth of 4.8% from 2021 to 2039;
c) however, if the current rapid speed of growth is maintained (ie same slope as the past few years – see solid blue arrow) rather than at the slower rate between Thailand/Vietnam, then a far higher level of per capita GDP might be achievable. When Cambodia reaches 35% urbanisation, a per capita GDP growth of 8.6% may be achieved in the same time... The only proviso is that this level of GDP was only reached by Thailand when it hit 52% urbanisation, and Malaysia when it reached 57%, a tall order...
In either case, we now have a good range to go by as our guide of future growth in Cambodia: 4.8-8.5% real GDP growth - per capita! This is very substantial indeed as in nominal and whole-country terms the numbers will be much higher.
Youngest populations in Asia, and almost growing the fastest
Not surprisingly given the recent history of the country, Cambodia has one of the youngest populations in Asia, at a median age of 26.5, just clipped by Philippines at 24.5:
Chart 3:Cambodia’s population is young and growing fast
The country is also growing the fastest amongst the SEA cluster, at a 1.2% p.a. growth rate. Surprisingly Thailand is now looking quite 'middle age', with median age at 39 and growth rate a meagre 0.2%... perhaps not an investment destination for high growth anymore?
Retail consumption also growing fast
With rising wealth, there should come rising spending. Using the GDP forecast (4.8-8.6% p.a.) we have arrived at above, it is not difficult to estimate the growth rate of retail consumption as well:
Chart 4:Cambodia’s domestic consumption likely track GDP growth
Given how consistent the GDP-consumption relationship holds in other jurisdictions, we should see Cambodia's real consumption rise by a similar magnitude of 4.6-8.2% per annum in the next 18 years as shown by the vertical orange arrows in Chart 4. For retail property investment, we should consider the additional compounding effect due to urbanisation, which will concentrate more of that same spending power in city areas. Even though many big developers are building mega malls which rival some of the monsters seen in developed markets, well located future Orchard Roads (SGP) / Nathan Roads (HK) of Phnom Penh will be sure to emerge – for the savvy investor the returns will be truly significant.
As a true representation of the property market at large, one cannot avoid looking at how home prices have tracked, sadly there are only 2 years worth of data for us to look at. Interestingly it seems the turn south for Phnom Penh prices (red line) could be a result of oversupply compared to rest of the country which is less over built, and thus continuing to rise to new highs:
Chart 5:PP’s Residential price seeing a correction – perhaps a good time to research and wait for a next cycle trough…
In summary, the macro tailwinds are very strong indeed, but micro supply issues will make stock picking most crucial for successful property investing. On top of these, this country also poses additional challenges of ownership structuring (e.g. ground floors still off limits to foreigners except with nominees or trust arrangements) and politics remain a subject in need of detailed study.
