In an attempt to stop large-scale property projects from failing, the Finance Ministry has drafted a new law that will make it compulsory for developers to provide the government with regular updates on construction progress as well as detailed audits of the project’s finances.
Property experts said the draft was inspired after a string of multimillion-dollar residential projects, such as South Korean-funded Gold Tower 42 on Phnom Penh’s Monivong Boulevard, fell flat in the aftermath of the global financial crisis.
According to a draft of the Law on Housing Development, property firms will be obliged to submit quarterly financial statements as well as progress reports on construction to the Ministry of Finance. Government officials will also be given the right to conduct impromptu onsite inspections of residential property projects.
“[The] housing developer shall report the construction progress and cash flow statement…and shall certify on the report that it is true and correct,” according to the draft law, which is dated Oct 13.
“If necessary, the Ministry …may assign specialized officials to do onsite inspection on the actual construction progress and check the cash inflow and outflow to/from housing development accounts of the developer.”
It is unclear whether or not the law also covers large-scale projects being made for retail and office space.
Beng Hong Socheat Khemro, spokesman for the Ministry of Land Management, said that the new law was aimed at ensuring more investor confidence in the property market. Prior to the financial crisis, property prices here in some areas rose tenfold, only to come crashing down when demand dried up in 2009.
That left construction of Gold Tower 42, which is being built by Hanil Construction, incomplete with no sign of starting up again.
Work on CamKo City, a satellite city on the outskirts of Phnom Penh, has also ground to a halt with its main investor—South Korea’s Busan Savings Bank—being investigated for the alleged use of illegal loans to finance the housing project.
“Right now, we can’t track companies or individuals on whether they have the capital to guarantee construction projects,” said Mr. Socheat Khemro.
The draft law also stipulates that property developers establish a local bank account where the money for the project must be held. The idea is to make sure that there is enough financing for a project before construction begins.
“One of the biggest contributions of the law is that developers would have less of a chance to channel money from well-funded projects to another project that is not doing so well. That is very dangerous for those customers because they are not protected,” said Sunny Soo, country head of the global realtor Knight Frank.
Mr. Soo said that higher levels of transparency in building projects brought about by the law could encourage banks to lend more easily to property firms. Since the financial crisis, banks have tended not to lend to the property sector and have turned more toward the trade and agriculture sectors.
But other aspects of the law may need to be reconsidered. For example, the draft law states that all residential property projects must apply for a license for a construction permit with the Ministry of Finance before work goes ahead.
“It could create complications if you are financing the project yourself [or] if you are building a single house, because you shouldn’t need to get a developer’s license, so it’s adding another license to one you already have to get from the municipality or the Ministry of Land Management,” said Matt Rendall, a partner at Sciaroni & Associates, a legal consultancy.
He added that the draft was also unclear on what type of projects would be governed by the law. He also said that the penalties set in the draft law for breaking the provisions, ranging from $1,250 to $5,000, are not enough to dissuade larger developers from breaking the law.