Indonesia is experiencing phenomenal year-on-year economic growth, although this surge in activity has not translated to comparable performance in the residential real estate market. Home prices rose 4.5% by the year’s end, but experts feel this is not representative of the overall growth being experienced in the across the country. The lack of bigger gains is blamed on bureaucratic roadblocks, high construction costs, foreign ownership limitations and high interest rates. The central bank plans on adjusting those rates down to combat inflation, but oversupply and a weak mortgage market may marginalize prices moving forward. For more on this continue reading the following article from Global Property Guide.
Indonesian residential property prices rose by 4.5% during the year to end-Q3 2011, according to Bank Indonesia’s Residential Property Survey. Higher prices of construction materials (up by 7% to 12 %), higher workers’ wages and a higher permittance were some of the reasons for the price rise witnessed in new construction.
Over the year to Q1 2011:
- Small houses of 36 square meters and below had the highest price increase of 5.2% (-1.5% in real terms).
- Medium houses of 36 – 70 square meters had the smallest price increase of 3.9% (-2.8% in real terms).
- Large houses of 70+ square meters, had average price increase of 4.4% (-2.3% in real terms).
The relatively poor price performance of residential real estate in Indonesia has been something of a puzzle. There is tremendous pent-up housing demand. Indonesia has the world’s fourth largest population of 245 million people. Despite strong economic growth and high levels of investment, some of the major factors that have hampered the growth of Indonesia’s housing market are:
- High mortgage interest rates
- Foreign ownership restrictions
- High costs of building materials
- High tax rates
- Red tape in government
Rapid urbanization has led to high urban densities, especially in Jabodebek-Banten (Jabotabek) which led the property market among the regions. Jabotabek or greater Jakarta is the urban development around Jakarta with more than 28 million residents, and its population continues to grow due to migration from all Indonesia. Here property prices were up 5.74% over the year to Q1 2011. However, in inflation-adjusted terms, prices were down by 1% over the same period.
Greater Jakarta was followed by Makassar with price increases of 5.32%. Makassar’s economy is driven by the fishing industry; it used to be a major trading port. About 8 % of Indonesia’s total population lives in this historic port city. In the near future, property prices in Jabotabek and Makkaser are expected to outpace the rest of the archipelago of Indonesia, barring Bali.
Indonesia comprises approximately 13,000 islands. The five main islands and their capitals are Java (Jakarta), Sumatra (Medan), Kalimantan (Pontianak), Sulawesi (Makasser) and Irian Jaya (Jayapura).
Residential property transactions, for new construction, rose by 4.5% Y-O-Y to 17,714 units in Q1 2011, according to Bank Indonesia, which collects data from 12 major cities. In 2010, there were about 67,707 units sold, up 13.8% from 59,498 units in 2009.
Residential property sales in Q2 in 2011 grew by 17.83% q-o-q, the largest increase being in medium sized units (up 31.29 %), followed by large units. The sale of small units declined. In Q4 the volume of sales is expected to continue to increase especially for landed houses, according to the survey.
Interest rates heading down
To curb inflationary pressures, the central bank raised the key rate by 25 basis points to 6.75% in February 2011. But generally, the direction of interest rates has been down since December 2005, when Bank Indonesia’s policy interest rate stood at 12.75%. Inflation eased to 5.54% in June 2011 from 6.65% in the previous quarter, and Bank Indonesia expects inflation to be under 5% going into 2012.
The Rupiah is still vulnerable to weakness in moments of global crisis, but it is noticeable that the 2011 ‘crisis of the West’ has hardly affected Indonesia’s exchange rate. In fact slow growth and low interest rates in developed countries since 2008 pushed funds to emerging markets, including Indonesia.
Indonesia’s high growth, high inflation
Indonesia’s economy grew 6.1% in 2010, after 4.6% growth in 2009, despite the global crisis. With high domestic consumption and investment and healthy export revenues, the Indonesian government is confident that the economy will grow by 6.6% in 2011.
GDP growth averaged 4.6% from 2000 to 2003, then 5.4% from 2004 to 2006, and finally 6.2% in 2007-2008.
But economic growth never translated to strong house price increases. In 2008 the Indonesian house price index was still about 50% below its 1994 peak in real terms; according to research done by Global Property Guide.
One possible reason for property’s weak performance is Indonesia’s unpredictable inflation rate, typically outpacing economic growth. From the Asian crisis peak of 58% in 1998 and 20% in 1999, inflation was wrestled down to 3.8% in 2000. In 2001 and 2002, inflation soared to more than 11%. Then it eased to 6% in 2004. The consumer price index jumped again to 10.5% in 2005, and 13% in 2006. Inflation dipped back to 6.2% in 2007 before rising to 9.8% in 2008. Then, it eased again to 4.8% in 2009 and 5.1% in 2010. In January 2011, it again increased to 6.9%, but steadily declined through the year and it was reported at 4.14% in November 2011, according to Bloomberg.com
High inflation increase the level of uncertainty in the economy. This tends to discourage people from borrowing to finance house purchases.
While real estate investment may be used by wealthy people as a hedge against inflation, this is not an option for the majority of the population.
Another possible reason for Indonesia’s lacklustre residential prices has been the massive amount of real estate construction.
Before the Asian Crisis, according to Bank Indonesia, the supply of apartments in Jakarta rose from around 6,000 units in 1996 to around 18,000 in 1997, with an additional 2,000 units completed in 1998 and 1999. Scant new supply came onto the market from 2000 to 2003, mostly projects started pre-crisis.
Real estate sales picked up in Q4 2001, encouraging developers to launch new projects, albeit slowly. With strong take-up and increasing occupancy rates, construction picked up pace in Jakarta.
Research carried out by Colliers International reveals that:
- In 2004 around 9,500 new units were completed, bringing total supply of new apartments to around 31,500 units.
- In 2005 and 2006, more than 5,000 units were completed annually.
- In 2007 construction exploded, and more than 15,500 units were completed, pushing total supply to 57,353 units.
- During 2008, 19,607 units were added.
- As of Q3 2009, total apartment stock in Jakarta reached 74,920.
- In Q3 of 2011 3363 units were completed, which brought the overall apartment units in Jakarta to 102,265, a 16.6% Y-o-Y increase.
- The total stock is expected to reach 120,000 by the end of 2011
In the last two years the areas of South and West Jakarta have seen an increased supply of apartments because of good infrastructure and facilities like schools, malls, and supermarkets. According to Colliers international’s latest report on Indonesian property market, there was an addition of 3363 apartment units in Q3 of 2011 (an increase of 3.6% q-o-q). Out of this 2250 were large apartments, mostly in West Jakarta.
Pondok Indah is a South Jakarta upscale residential suburb much sought-after by expatriates due to the proximity to the Jakarta International School. The overall take-up rates in this region were 75.3%, a slight decrease from 76.4 % in the previous quarter. The CBD also offers many buildings aimed at the middle to high income group individuals and expats.
The average price for the Jakarta area edged 6.9% higher Y-O-Y to Rp12.52 million / sq m (US $1,384/sq m). In East Jakarta, apartments still under-construction had higher take–up rates, mostly because they were offered at affordable prices.
In South Jakarta, many projects such as Residence 8, Senopati Suites, One Park Residence and Kemang Village have been located in premium residential areas. Prices of apartments in this area are expected to increase because land is becoming increasingly scarce. This has caused apartment prices to increase by 70-75% in the premium regions in 2009-2011. In 2009, apartment units were offered at around Rp13 to Rp14million / sq m (US $ 1,440/sq m) but now, with good sales performance, offering prices have jumped to Rp23 to Rp24 million / sq m (US $ 2,547/sq m). Two ongoing mixed-use projects located along Jalan Satrio, i.e. Kuningan City and Ciputra World Jakarta are two projects which have witnessed a sharp price increase.
Bali’s stunning growth
In Bali, real estate investment has been rapidly developing in the main tourist areas of Kuta, Legian, Seminyak and Oberoi. Most recently, high-end 5 star projects have been under development on the Bukit peninsula, on the south side of the island. Expatriates have also shown keen interest in buying property in Bali. Bali is one of Indonesia’s wealthiest regions. About 80% of Bali´s economy depends on tourism, of which one offshoot is the growing real estate industry. Both Indonesians and foreigners are showing interest in investing here.
Million dollar villas are being developed along the cliff sides of south Bali, commanding panoramic ocean views. Foreign and domestic (many Jakarta individuals and companies are fairly active) investment into other areas of the island also continues to grow. Land prices, despite the worldwide economic crisis, have remained stable.
There are an estimated 30,000 expatriates living in Bali, according to Wikipedia. The positive economic outlook will likely continue to trigger demand in Bali’s residential sector, causing prices to climb.
Weak mortgage market
Surprisingly, all the building has taken place despite a relatively underdeveloped mortgage market. Indonesia’s mortgage market has grown by an average of 33.5% annually from 2003 to 2008 in nominal terms. But some apparent growth is due to inflation, and mortgage lending has come from a very low base. Despite significant growth during the past five years, mortgage credits were just 2.5% of GDP in 2008, still below the 2.8% of GDP in 1997.
In 2009, in an effort to provide decent housing to low income families and to boost a secondary mortgage market, the government and the central bank signed a joint decree to boost house financing through the sales of mortgage-backed securities. This would allow banks to get quick funds from selling their mortgage claims. The government also decided to increase its subsidy to low cost housing.
Despite the recent financial turmoil, Indonesian banks are strong and adequately capitalized. However, memories of the Asian crisis are still vivid. Banks tend to be extremely cautious in extending housing loans to the real estate industry. According to a Q2 2011 Residential Property Survey by the Bank Indonesia:
- 55.4% of residential property development projects were financed internally
- 29% were financed through bank loans
- 12% of projects were financed by consumer payments (pre-selling)
For home buyers, interest rates at 12-13% (used by 67% of property buyers under house ownership credit or KPR in Q3 2009), relatively low by Indonesian standards, impose a huge burden. During the post-Asian Crisis period, interest rates by commercial banks typically exceeded 20%. The survey also showed that 16.7% of buyers used progressive cash payments, while 7.6% bought using hard cash.
Rental yields high, but property investment unattractive for foreigners
Jakarta recorded rental yields on high-end properties of 10.2% in June 2011, according to Global Property Guide research. This is among the highest in the world. Despite this, property investment is relatively unattractive for foreigners, because of the high tax rates that non-residents are liable to pay.
- The tax levied on the average annual income on a rental apartment/property in Indonesia is 20% which is the third highest in Asia, only after Bangladesh (25%) and Malaysia (22.4%).
- A 10% Value-added tax (VAT) is levied on gross rental income.
- Capital gains realized by individuals from the sale of real property in Indonesia are taxed at a flat rate of 5%. The tax base is the transfer value of the property, without any deductions.
- Property tax is levied at 0.5% on the assessed value of the property. The assessment value of taxable property is determined as a percentage of the deemed fair market value of the property
The total cost of buying and then re-selling a residential property ( including Registration costs, Real estate agent fees, Legal fees, Sales and transfer taxes), is one of the highest in the region.
Yudhoyono, the reformer
The 2004 election of Susilo Bambang Yudhoyono, Indonesia’s first directly-elected president, was followed by a revival of confidence and substantial economic reforms. A retired general with a doctorate in economics, he has had the political and intellectual acumen to implement reforms, including unpopular ones.
New laws and reforms on Yudhyono’s watch:
- Laws to improve the investment climate and the delivery of public services.
- A landmark investment law providing equal treatment regardless of nationality, to attract more foreign investments.
- A new tax administration law strengthening the rights of taxpayers, while limiting arbitrary decision-making by tax officials.
- Streamlining business licensing procedures.
- Higher corporate governance and risk management standards for state-owned banks.
The fruits of reform are visible. Approved foreign direct investments (FDI) rose from US$10.2 billion in 2004 to US$40 billion in 2007. More importantly, realised FDI has been steadily on the rise. In 2008 realized FDI reached US$14.9 Billion. In 2009 there was a marginal dip to US $10.8 billion, but realized FDI is expected to reach US$35 billion by 2014. Greater Jakarta has received around 50% of all FDI. The real estate sector’s share in realised FDI has more or less remained stable at about 6 %.
President Yudhoyono was easily re-elected in April 2009, with 60.8% of votes during the first round. His closest opponent was former president-Megawati Sukarnoputri with only 26.8% of votes.
However, Yudhoyono’s reputation has been tainted by his alleged involvement in corruption. Though the president’s election platform focused on the rule of law, fighting corruption and wooing foreign investment, Yudhoyono has himself been alleged to have been involved in corruption, for example during the scandal-ridden rescue of Bank Century. Public satisfaction with Yudhoyono’s performance dropped from 63.1% in January 2010 to 46.2% in October 2011, according to the Lingkaran Survey Indonesia (LSI), as a result of disappointment over the government’s economic, political, legal, social and foreign affairs performance. Yudhoyono continues to rate well on issues relating to internal security.
Secret US diplomatic cables have accused the president of using his power to protect corrupt politicians and other officials in office of authority. Even the religious leaders have criticised Yudhoyono for his silence over these issues and not doing enough to resolve them. Both domestic and foreign investors are becoming increasingly frustrated with the situation. Transparency International still rates Indonesia quite poorly on its corruption index.
Foreign ownership restrictions
Pressure for the government to relax foreign ownership rules is growing. The International Real Estate Federation or FIABCI, was the most recent one to air such calls.
In the past, the government has considered extending the property usage rights of foreigners to 70 years, from the current 25 years, with two extensions possible, of 20 and 25 years. More recently, attention shifted to direct foreign ownership of real estate.
Early in 2009, President Yudhoyono stated that he would ask the National Land Agency (BPN), the home minister and the state minister for people´s housing affairs to conduct an in-depth study into granting expatriates home ownership rights.
Theoretically, foreigners can own condominiums or strata-title residential property. However, more than a decade after Regulation 41 of 1996, no foreigner has actually received a strata title certificate of ownership. Foreigners are likewise not allowed to own land.
Foreigners can only control landed property in Indonesia either by setting-up a Penanaman Model Asing (PMA) Company or through long-term leases, with the right to buy if the ownership laws are changed.
However, these schemes add unnecessary costs, management difficulties and risks to foreign property buyers. In some cases, foreigners use loopholes in the existing laws to buy houses, apartments or condominiums indirectly.
For instance, a foreigner will ask a national to buy a house using his money. Then before a notary, the two sign an agreement saying that the national is acquiring a loan from the expatriate worth the same amount of the property value. Part of the agreement is that the loan will be made permanent, while the property used as collateral, can be retaken anytime.
Removing ownership limits could greatly help the real estate sector. Government officials, however, note that safeguards must be placed to prevent speculative purchases. One way of doing this is to limit ownership to permanent residences.
Outlook for the future
Indonesia’s growing economy, relatively stable political climate, surging consumer saving and spending, should lead to an increase in demand for property in the near future. The Indonesian property market was among the top 10 fastest-growing sectors in the economy in 2011, according to Jones Lang LaSalle. Despite looming international economic problems, demand for real estate development in Indonesia is likely to remain strong over medium to long term.
The Medium Term Development Plan, targets average economic growth of 6.3%-6.8%, reaching 7%+ with unemployment at only 5%-6% by the end of 2014. In order to achieve this growth, Indonesia needs to push through the red tape and invest in better infrastructure. To achieve that, the government’s draft 2012 budget, released in August 2011, has allocated IDR168.1trn (US$19.67bn) for infrastructure spending by government institutions, up by 16% from the 2011 revised budget.
Since Indonesia’s net exports only make up about 3% of its total GDP, global trade does not substantially impact economic growth. For this reason, the Indonesian economy and its real estate sector remain relatively unaffected by global slowdowns.
This article was republished with permission from Global Property Guide.