Room to grow: Demand for industrial land looks set to continue expanding

While Indonesia’s GDP continues its steady climb and the middle class rapidly expands, many firms are looking at the country as a consumer market rather than strictly as an export hub. Domestic sales are rising, prompting suppliers to seek industrial land for expansion. Costs are increasing and capacity is maxing out, while food and beverage, building materials, chemicals, palm oil and metals producers are eager for more manufacturing space. Colliers International reported a 10.5% quarter-on-quarter rise in industrial land prices in the first quarter of 2013, driven by high demand and low supply. The automotive industry made up 73% of sector activity, followed by food and beverages (7%), building materials (5%), chemicals (4%), steel (3%) and logistics/warehousing (2%). While it has become more expensive to export, companies have more incentive to produce for the domestic consumer market. Demand has skyrocketed and private land supply cannot keep up, thus land values are expected to rise further.

Industrial Parks

Since 2011 Japan has provided the most investment in industrial real estate, as key players like Suzuki and Toyota have expanded automotive production. Wilson Effendy, the director of Bekasi Fajar Industrial Estate, told OBG, “Investment in Java has seen increased appetite, especially in automotives, with multinational manufacturers like Ford, GM and Mitsubishi entering the fold. However, labour wages are rising and manufacturers are setting up factories in cheaper parts of the island, like central and east Java, where the labour is up to almost 40% cheaper.”

Jakarta suburbs are also experiencing a transition; whereas industrial parks were once primarily based in the regions, manufacturers are now looking into industrial real estate around the capital. Over the past 15 years, manufacturers have moved into locations like Depok, Bekasi and Bogor, increasing sector employment by 159% in Jakarta. There are currently over 35 industrial parks totalling 18,000 ha in the Jakarta region.

Domestic Processing

In July 2013 the ChinaIndonesia economic and trade cooperation zone broke ground on its first project, a nickel pig iron smelter in Central Sulawesi. The new plant will have a capacity of 300,000 tonnes per year and is to begin processing at the end of 2014. Sulawesi Mining Investment is overseeing construction of the plant, which is expected to be the first of many across Indonesia since the government announced it will place a 20% export tax on raw ore beginning in May 2014. Ibris Group of Singapore will also invest $1.8bn in a new rotary kiln electric furnace smelter, also in Sulawesi. Though raw ore export restrictions have been criticised by the mining industry, the rush to build domestic smelting plants should drive demand for industrial estate even further.

Palm oil processing firms are also expanding in Indonesia and new plants should be fully operational by 2018, after palm oil firm TDM reaches its planting goals of 40,000 ha. The company is constructing four new plants in Nanga Pinoh, Kalimantan, which will have a processing capacity of 60 tonnes per hour. Currently in the planting stage, the project will require around $312m in funding over the next four years. The company has had success in Indonesia in the past and will likely seek more industrial land for high-demand palm oil production once these projects are completed.

Looking Ahead

While there are many opportunities for expansion across the industrial real estate segment, improving infrastructure, particularly roads and ports, is the biggest concern for developers. Although industrial estates can build and manage efficient internal transport systems, the government must focus on toll roads, bridges and shipping ports to relieve the logistics headaches that often discourage rental and investment. Colliers International also noted that a lack of adequate land stock will pose a challenge to expansion goals in 2014, particularly for new tenants, as renting priority is often granted to current tenants looking to branch out. If interest rates remain stable and the depreciating rupiah’s effect on building costs can be mitigated, the expansion of industrial land should continue, supported by rising demand for production space.

What do high growth rates in recent years, along with the recent fluctuation of the rupiah, mean for Indonesia’s real estate sector in 2014?

WIDJAJA: Domestic consumption has still not been greatly affected and this is a positive sign for the sector. Furthermore, new laws are being put in place that slow down price increases in real estate in Indonesia, making real estate more affordable for all citizens. However, the recent trend of depreciation the rupiah has been on is something that does affect property developers as our costs increase, especially those costs which are incurred abroad. For some projects, quite a bit of the cost involved is pegged to the currency increase. However, as developers, we are committed to continuing to build large projects, and we simply have to absorb these rising costs. So when a new project is undertaken we take all of these things, including currency fluctuation, into consideration and implement buffers. While I think there will certainly be challenges in 2014, preparations have already been made as everyone has been forecasting this to be a challenging year.

Would you characterise the rapid increase in Indonesian real estate values in 2012 and 2013 as a real estate bubble, and what trends will we see in 2014?

WIDJAJA: I would call what happened in 2012 and 2013 a phenomenon, and I think 2014 will mark a return to normalisation for the real estate sector. If this trend of rapid increase in real estate prices continued for another two or three years, then maybe the word bubble would apply. But I would hesitate to use this label because the government took the necessary steps to help us avoid this situation. Ever since a measure was introduced to regulate down payments by increasing the minimum down payment to 30% of the value of a given house, we have seen business in the real estate sector stabilise relative to the previous two years. This has eased property speculation and brought growth in the market to a normal rate. The rest of 2014 and beyond should see this theme of normalisation in real estate continue.

How stressed is the domestic banking system when it comes to financing these projects, and what role will domestic capital markets play in 2014?

WIDJAJA: Our domestic market has been very strong in absorbing quality assets and it is not problematic to get the capital, but I think that domestic markets will not be able to fill the gap entirely. I see this as a good point for foreign investors to come in, as the rupiah is very low at the moment. With the upcoming presidential election and the nervousness that comes with it out of the way, I am sure our investment climate will experience a boost. We are also seeing increasing interest from developers in South-east Asia in exploring growth in Indonesia, and this regional investment should continue to increase. In 2012 and 2013 we saw a lot of real foreign direct investment put into tangible assets, but these investments need time to be realised and this realisation will be achieved in the coming years.

How do you evaluate the dialogue between real estate developers and government?

WIDJAJA: Dialogue with the government can often create positive results. For example, I think the moratorium on building malls in central and south Jakarta is a necessary step. It is great for existing malls as it enhances the value of current properties by reducing competition. In addition, it helps to regulate traffic in Jakarta, benefitting the city as a whole. Although as developers we would like to develop more, this government moratorium will really bring about some much needed control to the supply of retail space. However, there is still room to develop better dialogue with the government when it comes to areas like zoning. Oftentimes, when things like airport expansions are planned, there is a high cost to land acquisition, as well as the price associated with relocation, leaving less money with which to actually build. I think in the coming years we will see fresh ideas, and we are already seeing some of the results of new solutions when it comes to issues with transportation and infrastructure being addressed.