Investing in a Condominium or a Condotel in Phnom Penh: Five Numbers to Analyze and Conclude
By: Hoem Seiha, Partner and RE Advisor at ERA Data Intel
An investor always looks for an investment opportunity which is both lucrative and safe for the hard-earned money he puts into. That is absolutely the normal thing one should do before throwing money into the thing.
With a sum of capital on hand, especially the hard earned money, choosing what to invest into could be a matter hard to decide--whether investing in a low risk, passive revenue-generating asset, medium-to-high risk stock, or a high risk, high return startup. Among one of those investment choices, I am going to give you an analysis on investing in a passive revenue-generating asset, such as a condominium. So the question is that why it should be a condominium and what factors will support this choice?
Of course, a number of things to dig deep in order to see the profitability, risks and opportunities, and here are five numbers to analyze and conclude before investing in a condominium in Phnom Penh.
Number 1: The ROI, Rental Yield, IRR, And Cost-to-Performance Ratio
In Phnom Penh, condominiums provide better rental yields than do any other property types, by providing 6% to 8% per annum for most of condominium projects across the city. A few projects out there could make it even up to 10% to 12% due to their good management and quality of the products they offer. This is way better than a high price shophouse or a detached villa, both of which can only run through less than 5% per annum of rental yields.
For example, if you're going to put $100,000 into a studio unit at a condo project, let's say, Le Condé BKK1, it will yield a monthly rental return of about ~$666 based on the average rental rate in the area and considering the quality of the condo which should grab an annual rent of 8% of your bought price. Here is how it comes:
Annual Rental Yield = (Monthly rent x 12) / cost of investment
Annual rental yield = 666 x 12 = 8,000
8,000 / 100,000 = 0.08 (it means 8%)
So what are the key indicators for condominium investment? Here are the key market averages you should know.
Number 2: The Comparative Analysis of Similar Assets
When you are looking for a condominium to invest in Phnom Penh, you will definitely be hassled by which one to choose to maximize your expected returns, since as many as 520 condominium buildings scatter across different areas of Phnom Penh.
In this example, I will provide a simulated comparable analysis for your study to understand it as compared to the real situation.
Looking at the five comparables, you might have to consider and choose one to invest. Let me simplify to make you easier to understand.
There are five condo projects for you to choose. They are condo A, B, C, D, and E, each with three investment options.
Option 1: Non-GRR - Self-Rental Service
Non-GRR (no guaranteed rental return) means your unit won't be leased back by the developer or the property management firm who manage everything at your condo project. You just buy it for your own stay or you may opt for renting it out by yourself. In the case you rent it by yourself to your client, your projected revenues, ROI, and IRR are based on market average in Phnom Penh. For this option, it seems Condo A outperforms all the other comparable projects by achieving:
Condo A should be the top choice for you (unless some other factors outside these numbers affect your decision).
ROI = 32.4% vs Project B: 30.6%, Project C: 26.2%, Project D: 26.0%, Project E: 27.3%
IRR (CAGR) = 5.8% vs Project B: 5.5%, Project C: 4.8%, Project D: 4.7%, Project E: 4.9%
Cost-to-performance ratio = 0.76 vs Project B: 0.77, Project C: 0.79, Project D: 0.79, Project E: 0.79
Option 2: With GRR and Combined with Self-Rental Services
GRR (guaranteed rental return) means you buy your condo with a plan of leasing it back to your developer for a period of time, say it 3 years. In this case, since you expect 5 years for your investment, the guaranteed rental return is 8% per annum for 3 years. After the fixed term expires, the developer releases your bough condo unit back to you and you do the rental service yourself for another span of 2 years, on average of 5% of the yield per annum.
Therefore, the result still favors Condo A.
ROI = 38.63% vs Project B: 32.37%, Project C: 31.4%, Project D: 32.0%, Project E: n/a
IRR (CAGR) = 6.75% vs Project B: 5.77%, Project C: 5.6%, Project D: 5.7%, Project E: n/a%
Cost-to-performance ratio = 0.72 vs Project B: 0.76, Project C: 0.76, Project D: 0.76, Project E: n/a
Option 3: GRR 18% Upfront Advance/Deduction
Sometimes if you are short of capital for the condo project you are considering on buying, you may opt for GRR 18% upfront advance or deduction. That allows you a less 18% on the unit you are going to buy. However, this will affect it ability to generate revenue for you. See the result below:
Condo A can still perform better than the rest.
ROI = 33.44% vs Project B: 23.72%, Project C: 28.9%, Project D: 28.8%, Project E: n/a
IRR (CAGR) = 6.77% vs Project B: 4.35%, Project C: 5.2%, Project D: 5.2%, Project E: n/a%
Cost-to-performance ratio = 0.62 vs Project B: 0.70, Project C: 0.75, Project D: 0.75, Project E: n/a
In conclusion, Project A outperforms and therefore you should choose this as an investment option, unless some other factors outside these numbers affect your decision.
Number 3: Investment Comparables by Portfolios - Avg. Industry Rates
For general understanding of the investment performances by each of different investment portfolios, below lists some important investment types with their IRRs and degree of risks. Some investment choices may yield less but pose low risk, while other may yield higher but pose higher risk. Therefore, you have to choose the ones with optimal yield and risk.
1) Condominium
On average, let's put it into a fixed term of five-year investment. If you're going to invest into a condominium unit in Phnom Penh, the threshold of internal rate of return (IRR) is between 3% (lowest) to 8% (best), with the average of 5.5%. Some condo projects may return better thanks to their quality, location, management, and facility factors. And the most important point is that condominium poses less risk and is a mild passive investment.
2) Bank Deposit (Denominated US Dollars)
Bank deposit (term deposit) is the saftest investment of all. If you have a large amount of capital and don't want to take any risk, depositing money into the bank with a fixed term is the saftest, usually with the return of 2% to 3% per annum. However, it is the most passive investment which means comparatively very low return rate.
3) Land Asset (Located in Outskirt Areas)
Investing in a parcel of land can be very lucrative, yielding a high return and some may bring a fortune just a blink of your eyes, but it may pose a huge risk too in some circumstances. For example, the area where your land is located has been laid out plan by the government to develop a satellite city. And you bought it just for $10,000 for a half hectare as it was a wet land condition just 5 years ago. The next day after the plan's announcement from the government, your land price will hop up $500,000. That's a fortune, isn't it, though this sometimes happens in Phnom Penh city. So your IRR should be about 118.7%.
(500,000 / 10,000) ^ (1/5) - 1 = 118.7
Let's forget about this very high rate of IRR, as it this relies a lot on fortune. For average possible return, land values in outskirt of Phnom Penh has opportunities to return between 15% to 20%, as listed in the sheet.
In Cambodia, informal loan business is not protected by laws. But you can still operate it, as it exists in many different parts of the world too. This investment portfolio provides a high rate of return, yet it poses very high risk. The average rate is between 18% to 24% per annum, that a very huge return compared to normal investment options. You can get rich very fast, but also risk losing a lot too, due to defaults and having no laws to enforce your loan contracts when bad things happen.
5)-6) Stock and Bond
In Cambodia these two options are not popular.
7) Startup
Startup a new business can sometime yield a good result, thanks to your contribution to the revenue generation and therefore yield a higher rate of return. Some business ideas can make you rich fast, but it really needs your smartness, hard work, good and right idea, and the way you operate. It is the very active investment.
Number 4: The Market Insights
Market insights and knowledge of the supply and demand are very crucial for you as an investors looking to invest in a condominium--whether the market is narrow or broad for your idea to successfully make a gain on the investment at this time. There you will look at:
Condominium Supply
About 520 condominium buildings scatter across Phnom Penh capital, and many of them are located in CBD areas. Total of these condos combined gives a market supply of about 142,700 units, 76,600 of which are residential ones. Up to now, most of the condominiums were and have been recently completed and in services. The majority of the units are owner-occupied are some left for rental or run as serviced apartments or condotels. See infograph below:
Most of condominium projects are located in central business areas (CBDs) which are inner circle of the city, and the boom and bust period was between 2016 to 2023. Condominiums also spread outside the city center to the suburbs during this boom and bust period. See map below for the scatter and illustration.
Tourism and Lodging Supply
Tourists are the main driver for your investment model into the condominium as serviced apartments or condotels, as they would alternatively rent a condotel when they are visiting Phnom Penh city, especially for long term stay.
According to ERA Data Intel, number of international tourists coming to Cambodia was almost 6 millions, while it is forecast to reach about 8 millions by 2030. The current supply of accommodations, including all lodging types, is about 95,000 keys/ units and it will reach about 11,000 keys/ units by 2030. Most of the supplies are within Phnom Penh and Siem Reap city.
Apartments, Condotels, and Hotels
Out of the all type accommodation supplies, apartments, condotels, 3-5 star hotels will represent half of the supply by 2030. In the event of your looking to invest in a condominium, that will contribute to the short or long stay accommodation supply. According the data, the market still has rooms for new supply.
Hotel Occupancy Rate
Occupancy rate for hotels was about 75% and so did serviced apartments and condotels across Phnom Penh city. Therefore, the risk is optimal for your investment plan.
Number 5: The Overall Economy and External Factors
Fast-Growing Economy
Cambodia is listed as is one of the fast growing economy, largely thanks to exports of agricultural, textile and garment products and the improved tourism industry. The direct foreign investments contributes to the major growth, while the real estate investments drive the a large part of the growth, with the support of mortgage and real estate financing schemes from banking sector.
Despite there is a lag for mortgage rate in these recent years, the recent stimuli by the central bank will help improve mortgage and real estate related financing.
Improved Infrastructure for Tourism, Travel and Transport
Techo International Airport (the new Phnom Penh International Airport) is set to become a world-class airport and will be the 9th largest in the world. It is expected to feature hotels, a conference center, office buildings, an eco-park, and private residences. The first terminal was 40% completed by the end of 2022, and the airport is expected to be operational by 2025, with a phased rollout that sees the first terminal finished in 2023, handling 13 million passengers per year.
This will enable direct flights from international destination into Phnom Penh, resulting in a flock of tourists and business visitors to Phnom Penh city. That is the promising future for supporting your investment plan in Phnom Penh's condominiums.
Contact R.E. Advisor
For additional details or real estate investment consultation, please contact Mr. Hoem Seiha via telephone: +855-12-699-553 / +855-10-699-553 | Telegram: t.me/Hoemseiha | E: hoem.seiha@eracambodia.com | Condo listings on Telegram channel: https://t.me/seiha_era_condo_listing
Disclaimer:
This analysis is an opinion made solely by Hoem Seiha, an independent real estate advisor and analyst for ERA Data Intel, based on some criteria and metrics deemed reliable for the current market. The opinion DOES NOT reflect any viewpoints of ERA Cambodia and therefore, we are not responsible for any loss or damage pertaining to reliance on this analysis for your investment.
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