Thinking about investing in Cambodian real estate? Maybe think again.

Before beginning my article about why you should avoid Cambodia-based property, I would like to make a few disclaimers. Firstly, the organization I represent sells property, insurance and pure financial products and hence profits from all types of investments. Therefore, no conflict of interest exists. Second, I am not denying that some people have profited from Cambodian property in the past, and some will in the future.

With that out of the way, I would like to speak about the main reasons why property in Cambodia should be avoided. The first thing to consider is, why are you thinking about investing in Cambodian property in the first place? Is it because your Khmer wife or husband is always speaking about it and nagging you about it? That is hardly a reason to invest nor is a `dream` property. You should invest for rational reasons, not emotional ones.

That brings me onto some of the more emotional reasons people invest in property. Many people believe in unfounded and false ideas about property including the idea that property has outperformed other asset classes historically, which is simply not true.

Equities (stock markets) in developed countries like the US have consistently outperformed other options including cash, government bonds, and can be invested in from a very low monthly amount. Long-term investors and those investing monthly into the market do not need to care about short-term volatility such as a market crash; in fact they benefit from that.

Diversification is important and having one house to call your home isn’t a bad thing assuming you don’t go mad on home improvements, refuse to take a better paid job because you don’t want to leave your home and having stretched yourself to buy in the first place.

Notwithstanding the fact that most house owners seem to fit into those three categories at some time in their lives, you have to then ask why Cambodia? Why South East Asia for that matter? When you have cheap and good value property in many US cities and in some parts of Europe such as Berlin, which has good potential to appreciate in value and are run from well-regulated markets where the rule of law exists, why are you thinking about investing in Cambodian property?

If you are really going to settle here, it may we worth purchasing a bargain home if it is cheap. But given the current trends around the world, including the fact that hot money is flowing back into the United States now that record amounts of QE have now stopped and interest rates seem set to rise in the US and maybe the UK, this isn’t the time to be investing in any emerging market.

Cambodia does have many advantages compared to nearby countries. It is cheaper, on average, for homes compared to Thailand, Indonesia, Vietnam and most other South East Asian countries. Laws (for now) are less protectionist for foreign investors. The US Dollar is used extensively, which reduces the risks of the house price depreciating in USD terms. And yet there are better investment options out there.

Even if you want to invest in property, investing in a liquid low-cost pension fund is more effective. Look at it like this. Nobody can predict markets. It is close to impossible to beat the market consistently for years. In other words, it is very difficult to consistently and sustainably beat the average rate of return.

You might beat it in the short term or get unlucky and do worse than the average. However investing in a low-cost fund that tracks hundreds of construction and building companies worldwide or has invested directly into hundreds of properties, is a much safer way of benefiting from a bull market from property.

10 reasons not to invest in real estate

During my time working in the investment industry, I have heard a lot of misconceptions about various financial instruments. However, some of the biggest misconceptions are about property. There are good reasons to own property, especially one family home which isn’t leveraged through mortgage payments, but this blog will focus on some reasons why not to invest in property.

1 – Herd mentality

The fact that `everybody` thinks property is a good idea is one reason why not to invest in it. Warren Buffett’s observation that `if too many people are on one side of the boat, you should be worried`, couldn’t be more important here.

2- Overvalued

Following on from point 1, too many property bulls, coupled with rising debt levels around the world, zero interest rates and central bank QE, has lead to sky high valuations in many markets around the world. In many cases, now is a selling opportunity, not a buying opportunity.

3 – Long-term performance

It is a misconceptions amongst property bugs that real estate has out formed other asset classes. In fact in the long-term, equity markets have outperformed real estate. The S&P and Dow Jones have both comfortable outperformed real estate.

4 – Property’s long-term performance is less certain than equities

The reasons why property have gone up in the last fifty years, including rising incomes and population, low interest rates, and women joining the workforce, might change or are one time boasts. For instance, unless it becomes a norm for 3-4 friends to have a mortgage together, which seems unlikely, women coming into the workforce and hence giving couples more spending power was a one-time boast to the mortgage and real estate industry. World population is also rising less quickly than before, and might stagnant after 2050, once growth rates are decreasing, with interest rates due to rise in many markets.

In comparison, the logic in buying stocks is the same as before. The 100 most productive and successful companies in the US, will, almost for sure, gradually become more productive and profitable as time goes by, with new technology and the survival of the fittest.

5 – Costly

Investing in stocks can often cost 1% or less per year, depending on the product. With real estate, often property insurance is compulsory or at least recommended, whilst bills, including local government taxes, need to be paid. Maintenance is another cost people don’t think about, as is rent-free periods where you will need to cover the mortgage payments yourself.  If you add up the initial commission from the broker or agent and all these hidden costs, that decreased overall returns.

6 – High barrier of entry

Stocks can be bought for hundreds of dollars, and regular savings plans can sometimes be had for $50 per month for low cos, whereas even in some of the cheapest cities in the world for real estate, $50,000-$150,000 is often needed. If you don’t have the money, you need a mortgage, which means more debt payments, and therefore more indirect costs. Once most mortgage holders account for inflation and take away all the aforementioned costs, they might find they haven’t made as much from property as they originally believed.

7 – Makes relocating more difficult

In the end, your salary and/or your profits are one of the biggest, if not the biggest, influence on your wealth. The more you earn, the more you can save and invest. If you don’t want to accept a new lucrative opportunity in another country or city, and one of the reasons is that you don’t want to leave your dream house or you can’t sell it, you are indirectly losing big time.

8 – Illiquid investment

Further to the last point about not being able to sell your property, property isn’t like liquid cash, funds or stocks. With cash, you can, in 99% of occasions, take it out of your bank straight away. With funds and stocks, you can, in 99% of occasions, sell straight away and need to wait a few days to get the money back. With property, it can take months to sell, sometimes years, if there is political instability in the country, or you have bought a house which is near a mobile phone operation that is linked to cancer like my father once did…….

9 – Tax implications

A property, as an illiquid asset, cannot be easily moved abroad, unless you invest in a trust, which has its own implications. Therefore, if you become an expat but want to rent out your house to have more money, you are earning an income from your home country and your new country of residency. As a general rule, this is tax inefficient and in some circumstances, might be double taxed. In fact if you continue to earn significant amounts of money in your home country, your home country’s tax authorities might look into whether your overseas income should be taxed or not, as you haven’t cut your ties that much.

10 – It is inconvenient.

A lot of people invest in property because they think it is easy money. It is actually much more hard work as you are dealing with people. If you invest into quality funds every month, you can sit back, and realize that as markets go up and down, over the long haul, you can make money. If you have 3-4 houses and need rental income, you need to find tenants, and as tenants are people, eventually you are going to have big problems sooner or later. It could be non-payments, or thrashing the place or any number of things.  Furthermore, as time is money, such inconvenience only adds more indirect costs to the process.