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Real Estate Crunch Hits Local Banks

Nearly every morning over the last few weeks, owners of construction companies around Phnom Penh have gathered at their sites, looking sadly on under-constructed homes they've been unable to sell. These investors worry constantly over how to collect the large sums they need to pay back loans they made for real estate investment.

Experts worry that this inability to repay loans on large mortgages will lead local banks into their own economic crisis, echoing the global downturn that was itself caused by the failure in part of the US housing market.

Nearly 50 percent of Cambodian real estate investors, from almost 20companies, depend heavily on borrowed money from local banks, which had until recently provided them with great benefits in a booming sector, real estate agents say. But after the global financial crisis,the price for land and houses in Cambodia fell dramatically.

Somaly, who owns a self-named company, told VOA Khmer recently she owed the banks around $500,000, which must be paid back at the end of the year. Unfortunately, she said, she can't even pay the interest,about $5,000 per month.

"A lot of houses got stuck [and] can't be sold because there are many sellers and no buyers," said Somaly, who only gave one name. "If so,how can we find the money to pay them back?"

Investors like Somaly worry that their properties will be seized by the banks if they have no money to pay the interest.

Equity loans rapidly emerged at the end of 2006, as several large commercial banks competed with each other for investors. Land prices were high and rising, and by the end of 2007, property development loans reached $100 million, according to statistics gathered by the National Bank of Cambodia.

The market slowed in 2008, with a sharp drop in the final quarter, and investors will face collection from the banks in the first four months of 2009.

"Those who used bank credit, they now have no choice," said Sung Bunna, head of the Bunna Realty Group. "That will cause our land market even more silence."

In such a climate, economists worry that banks will not only fail to collect debt but can ruin their own credit in the process, as they collect confiscated property instead of cash.

Kong Chandararoth, president of the Cambodian Institute of Economic Study and Development, said banks in Cambodia could face a financial crisis if they couldn't get their loans back in cash.

"If [investors] are not unable to pay back the banks, mortgaged property will be confiscated," he said. "So the banks will face theirown financial crisis, because what they get back is not liquid cash."

"There will be a problem," said Sam Genthy, a banking expert at the Royal University of Law and Economics and former adviser to the National Bank. "We'll wait and see what happens. If the bank can't find resources to replace their ruined credit, they will suffer."

Economists worry Cambodia's banks will suffer the same fate as US and European banks that offered up nearly 100 percent of their credit to real estate loans and are now bankrupt, despite a regulation put out by the National Bank in July that permitted only 15 percent of total credit to be loaned to real estate borrowers.

Stephen Higgins, chief executive officer for ANZ Royal bank, said his bank had been insulated from the crunch through the selection of valued customers.

"We have some loans, property development loans, but they are from very good customers who have plenty of cash flow," he said. "So for ANZ Royal bank, we don't have a problem."

However, representatives of other local banks confessed anonymously that some of their resources were already stuck with real estate loans in collection.

Tal Nay Im, general director of the National Bank of Cambodia, saidshe hasn't received any reports of crisis, but she said banks thatface market downturn difficulties will have to sort the problems forthemselves.