Tips for New Condominium Developers.
: Behind successful condominium businesses, there are lots of complicated issues. The new and even young condominium developers need to realize those issues from drafting out the business model to constructing and to operating the building if they wish to achieve successful development.
At a condominium business talk organized early September 2015 under the theme How to Build a Condominium in Cambodia" where 50 participants comprising of potential condominium developers, land owners and real estate agents attended, experts gave practical tips on things to consider before entering the condominium businesses.
The fundamental step that new condominium developers need to know is about knowing the right definition of condominium. Similar in height to an apartment building that is owned by a single owner for both the land and the building, a condominium is a high or medium-rise building in which the space and units in the building are separately owned by different owners.
Unlike owning residence in the residential block (borey), condo owners have the undivided interest on the common areas such as lobby, parking, haul way, swimming pool and reception areas. They need to share the maintenance responsibilities with the condominium developer on those common areas and that is why they are asked to pay the property management fees that can be managed by developer itself or other property management firm. They also have right on part of the land that the building is built on. Mr. Kevin Goos, CEO of Century 21 Cambodia, the subsidiary of the U.S. based global real estate agency Century 21 that organized the seminar. Century 21 Cambodia has registered 20 local affiliated real estate offices so far.
While Goos treats apartment investors that are rental-based cash flow as long-term investment, the condominium investments are short-term. It takes few years for condominium developers to generate their revenue and expand to new project(s), but it may take up to 10 years to realize the income and move to other apartment building for apartment owner."
Type of Condominiums
Before preparing your condominium business model, you should categorize clearly which condominium type you will develop and whether it fits the market's need or not.
Based on his extensive experiences in global real estate businesses, Goos raised several types of condominium business model that awakens many Cambodians who have expected only a single type exist.
Operating like a serviced apartment, the serviced apartment condominium allows the unit owners to lease the unit(s) back to a serviced apartment management company for a long period of time to yield investment.
Having been famous in United States, Taiwan, Hong Kong, and Singapore now, the town-house condominium which is yet to see in Cambodia but similar to multistory flat fit well for buyers that prefer living and doing businesses in the condo unit in the downtown.
The mall condominium which is built as a mall style like Sovanna and Sorya shopping mall allows developer to lease the units to separate tenants for a long period of time (lease-hold), than take the units back after the contract is ended.
Office condominium is potentially popular in Taiwan, Singapore, Hong Kong and Thailand. While developer has the right to name the building, the inside office units are separately owned by multiple owners. Goos observes smart foreign developers are bringing this kind of condominium to Cambodian market after they have realized that the office rental fees are more expensive here while more and more enterprises prefer owning the office unit rather than leasing. This condominium doesn't compete with residential condominiums as well, while its development also cost cheaper than residential condominiums.
The Peak project developed by Oxley World Bridge is the first hotel condominium in Cambodia where the Shangri-La hotel is also launched there. This condominium allows institutional investors or retail investors to buy the unit(s) as an investment by leasing it back for 15 to 30 years to Shangri-La"the property management company to operate as a hotel.
Resort condominium or time-share condominium which is currently popular in many resort communities in Japan and Korea allow different owners to possess in rotation of the same unit with different period of the year for their vacation.
The idea of the time-share is to get affordable vacation with the vacation place buyers want.
The CEO with frequent visit to many different countries said he believes Cambodia is the most potential real estate market among the three best Asian markets including Japan and Myanmar. While Japan market is already matured, Myanmar's business environment such as law is still far behind Cambodia."
Noticing that small investors prefer developing condominiums with smaller units like Embassy Residence as big developers like Oxley World Bridge, Nuri DandC and OCIC prefer the hundred-unit project, he recommends new developers to eye on medium-rise condominium, asserting that it is more attractive, financially affordable, easier for quality control as well as easier to get the bank's loan.
The property management has also played a big role to ensure the entire condominium is nice, beautiful so that it can attract more buyers and more people to stay there, he added.
Commenting on the situation of Cambodian condominium market in the next 3 years, Goos anticipated the most high-end condominiums will face the problems as they can't find enough buyers and people to rent the expensive. There will be a shift to the more affordable condominiums to meet the need for local middle-class buyers that resort to live in the downtown condo during weekday and relax at their outskirt villa at weekend, just like in Thailand nowadays."
Financing the condominium development
Financial issues are what Mr. Charles Vann, Executive Vice-President of Canadia Bank PLC and also the Acting Vice-Chairman of Association of Banks of Cambodia (ABC) alerts new condominium developers, whereas most borey developments don't face financial hurdles.
He advises investors intending to develop the condominium to ensure adequate budget to finance the construction, not to depend on clients deposit to complete the project, unlike few projects that are developed by few foreign developers then stuck.
You must ensure that you have enough finance to complete the project. You can't just have a plot of land then draw a condominium master plan, then do marketing and sell it and rely on deposits from customers to complete the building," he stressed, mentioning the stalled Gold Tower 42 and previously-stalled De Castle Royal as the example. It is quite risky if you follow this approach especially when the economy is fluctuated."
The developer's background and reputation are also what he emphasizes, explaining that nascent developers are difficult to compete with experienced developers that have already gained customers' trust through the many successful projects they developed.
Over-promising and over-marketing promotion to customers are also what this financial and building guru warns new developers if they wish to enter the market with success from one project to another. Some developers proudly announce their customers will earn up to 15% of ROI from the unit they buy, but customers will lose confidence on them when they can't fulfill their promise. This kind of over promise will upset buyers and will even affect their future projects as customers lost the trust on them."
Developers also need to ensure they have qualified people or professional agency that can ensure property construction quality and do proper construction costing to ensure the construction cost are within the estimated budget.
He also warns developers to be careful as contractor or their own project manager can exploit on the construction process by replacing the designated construction materials with low-quality materials to save money into their pocket.
Sometimes the project's landscape design looks great from outside, but after buyers move in and realize the equipped facilities such as water system and paint are terrible, how will they feel," he stressed. This little thing can hurt developer because of their negligence during construction process. If you want to repair it, you need to repair the whole building and it will cost largely."
As he is also the acting chairman of Cambodia Constructors Association (CCA), Mr. Chalses Vann has also been advocating with the government to ensure fire safety system like fire sprinkler and fire horse cabinet are installed in each condo unit and floor of the newly constructed condominiums due to the fact that no fire extinguishing machine can't pull off the fire accident on the building higher than 20 floors in Cambodia now.
Legal agreement to set up a condominium joint venture
Seeking the right partner(s), shareholders' disputes and drafting property the Joint Venture (JV) agreement between local company that usually owns the land and international firm that usually has the finance to develop the condominium are the major troubles Dr. Sok Siphana, Managing Partner of Sok Siphana and Associates, one of Cambodia's' leading law firm emphasized as the common legal issues when it comes to building a condominium.
Based on his observation, many local land holding firms are negligent when they registered their company with the Ministry of Commerce by paying little attention on how they list down the company's shareholders, board resolution, and Memorandum and Articles of Association (Mand A) which resulting in complicated legal problems when they intend to set up a joint Venture (JV) agreement with foreign developer to develop a condominium.
The international partner doesn't care if the shareholders in your company are all your relatives, but they only care that all the listed people in the company's board resolutions must has the right to sign on the JV agreement. Without their approval, the JV agreement can't be established." he said. These are the sources of disputes that can lead to shareholders' disputes that can stall the project construction, although they have enough funding."
Most of the business conflicts including the condominium joint development he has observed is the result of a small dispute like this, not because they don't have enough finance to develop the project.
Japanese developers are the good example of the way they set up the JV agreement to build the condominium with local partner because they have clarified everything including legal issues before they can reach the signed JV contract," he exampled. So, there won't be any future disputes occur because they have solved every legal conflicts prior the signing agreement already."
To prevent future conflicts, some strict developers, after setting up the JV agreement, even establish the partnership agreement that can cover on deeper aspects of their business relations. Other developers even go to one more detail step by clarifying the specific persons that can decide on the specific tasks inside the development, he added.
He also alerts local investors to be doubly careful when selecting foreign partner to set up a joint venture since they don't know each other's background well.
The miscommunication between local and foreign partner due to language barrier can also be a route of dispute, according to him.
Dr. Sok who lead in drafting the kingdom's long-awaited construction law also remind developers that this 360-article law will impact much on every developers once it will enter into force next year.
Besides touching on legal framework, he also said using different building codes to build the condominium can also hurt developer when it comes to project costing estimation. If you hire a consultant graduated from Singapore to calculate the project costing for a project designed using the French building code, it will cost a big problem for costing as their methods of calculation are different. You can correct it, but it is all about extra expense and delay time again."
Selecting the architect and engineer with only theatrical knowledge but not practical experience living in the condo to design the condominium structure can also be another headache.
They [Architect and Engineer] may be great at designing the condominium master plan based on what they learnt at school, but not all of them have experienced living in the real condo. So, they may not know if their design can practically comfort the habitants or not," he said. In other developed countries, they do a comprehensive motion study to see if what they design can comfort people living in the condo or not, but in Cambodia it may not be common yet."
Gaining generally knowledge about the commercial situation, industrial development, economic transaction and updated policies can also benefit condominium developers because those information can impact the condominium businesses. However, there are many more things that successful condominium developers need to know including project design and predevelopment, marketing and sales, condominium pre-registration and occupancy, condominium registration, title deed, management etc.