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Build and they will come? Maybe not in Cambodia

An aerial view of Phnom Penh
Robert James Elliott | Bloomberg | Getty Images
An aerial view of Phnom Penh

Commercial developers are fast expanding supply in Cambodia on hopes for greater Asian demand, but the property market's shaky fundamentals could still keep investors away.

Office stock in the capital city, Phnom Penh, is set to surge 64 percent by 2018, according to new research by Knight Frank, as both foreign and local developers bet on revived interest ahead of an economic integration plan by The Association of Southeast Asian Nations (ASEAN).

Known as the ASEAN Economic Community (AEC), the project is due around year-end and aims to launch a single market for goods, services, capital and labor across the bloc's 10 member countries, which Cambodia is a part of. The hope is that companies and investors will take advantage of easier logistics to enter the region's frontier markets.

Several commercial projects are due for completion over the next two years, including a 20-story office building called Exchange Square by Hongkong Land in 2017 and an 11-storey unit called the Emerald Tower by year-end.

Approximately half of Phnom Penh's office occupiers are international businesses from China, Japan, Malaysia, South Korea and Singapore, Knight Frank noted, making the AEC an essential element to future demand.

Indeed, confidence is high among experts like Moody's Investors Service that the ambitious economic integration plan will benefit Cambodia, which should translate into more international companies entering the real-estate market.

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But high vacancy rates, rising land prices and political tensions could temper optimism.

Office vacancy rates stood at 47.2 percent in the second half of 2014 and 44 percent in the first six months of this year, Knight Frank said. The Vattanac Capital Tower, Phnom Penh's sole Grade A office building launched last year, only has an occupancy rate of 25 percent.

Grade-A is the highest rating given to buildings with central locations and outstanding visual design.

"Regulations relating to taxes and labor permits, have been enforced more strictly since the beginning of 2015, and have added to the cost of doing business in Cambodia. The [monthly] minimum wage also saw a 28 percent increase from $100 to $128 at the end of 2014," explained Ross Wheble, Cambodia country manager, at Knight Frank.

Expensive land prices could also deter investors.

Commercial prices in central Phnom Penh neighborhoods like Chomkar Mon and Tuol Kok rose as much as 31 and 22 percent on-year in the first half of 2015, The Phnom Penh Post reported citing a study by local real estate firm World Trust Estate.

Moreover, the ease of doing business in property remains a hot-button topic.

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Cambodia was ranked 100th out of 189 economies for ease of registering property in the World Bank's 2015 Doing Business Report.

Foreigners are currently constitutionally forbidden to own land, but they can take out long and short-term leases, according to a recent U.S. government investment profile on Cambodia.

On-going political friction between the ruling Cambodian People's Party and the opposition Cambodian National Rescue Party is a source of unease as well.

A peace deal struck last year between the two groups seems to be in danger following last month's indictment of opposition members by a court and rising disagreement on how to handle a border dispute with Vietnam.

In a note last week, Moody's flagged political turmoil that undermines consumer and investor confidence as a major risk to the country's overall economic health.