Indonesia is looking to bring its property laws into line with many of its neighbours by allowing foreigners to directly own real estate. Jakarta will have to strike a balance between the need to attract capital from abroad and reassuring the public that foreign ownership does not undermine the country's sovereignty.
In late March, Gita Wirjawan, the chairman of the Investment Coordination Board of Indonesia, announced plans to end a ban on foreign nationals owning property in the country, along with a proposal to loosen restrictions on overseas investments in some industries.
Describing the planned reforms as a move that would unblock value, Wirjawan told an investment seminar in Jakarta that reforms to regulations governing the real estate sector could be enacted by the end of the second quarter, clearing the way for ownership of both residential and commercial property.
Details of the changes to legislation are still thin on the ground, with state officials currently putting the final touches to the reform package. There has been speculation in the real estate sector and reports in the media putting the suggested term of ownership at between 75 and 90 years, in line with property regulations in many other countries around the world.
Tanto Kurniawan, the president director of Paramount Serpong, told OBG that, "We are optimistic that this could be the year in which the market opens up to foreigners, and there have been rumours that length of ownership could be as much as 95 years, which would exceed the expectation of stakeholders in the industry."
It is widely expected that the full details of the proposed reforms, and the timetable for their implementation, will be unveiled at the world congress of International Real Estate Federation (FIABCI), to be held in Bali on May 24-28. The venue could be an appropriate one, with the congress delegates set to focus on the process of globalisation of the real estate industry and developing strategies to ensure that process is sustainable.
According to Lennard Ho Kian Guan, the president director and chief executive officer of PT Intiland Development Tbk, the time is ripe for reform.
"I am fully supportive of opening the market to foreigners and I believe that it would be a positive for the market as a whole," he told OBG. "At the end of the day, Indonesian properties remain relatively cheap, not only in Asia, but globally as well. The fact that the rupiah is stable and actually has a chance of increasing in value should encourage foreigners to invest despite some of the challenges in terms of land title issues."
According to Hendro Gondokusomo, the vice-president commissioner of PT Intiland Development Tbk, lifting the barrier to foreign property ownership would help fuel a boom in the sector, though even without the proposed reforms the market is well placed for a strong showing in 2011.
"The outlook for the real estate market and investor confidence in the sector is the strongest it has been in quite some time due to political stability, a large population base and a growing economy," Gondokusomo told OBG.
With these factors all adding up to a highly favourable business environment, many believe that opening up the real estate market to overseas buyers could attract as much as $6bn in direct foreign investment annually.
While seen as an economic multiplier, the proposed real estate reforms could also become politically divisive. Any decision to ease the restrictions on foreign ownership of property will not be taken without a degree of apprehension by officials, who will know such a move could prove unpopular with some in the electorate. While many would welcome overseas buyers entering the market in built-up areas such as Jakarta and other major cities, there are concerns that ending the ban could see an influx into Indonesia's popular coastal regions, a tide of foreign investment that could swamp indigenous owners.
In order to allay any concerns, officials are considering including some breakwaters to hold back any flood tide of overseas investors. One of the suggested limitations was outlined by Wirjawan at the end of March, when he told the Reuters news agency that sales to foreigners could be restricted to the upper stories of high-rise buildings.
"The thinking is anything above a certain floor, you can buy," he said. "Anything closer to the ground has political sensitivity."
A restriction limiting foreign ownership of property to the high-rise buildings would appear to rule out the selling off of most beach-side properties, as long as regulations preventing the development of new multi-story residential complexes was maintained and indeed strengthened.
Though this measure might halt a rush of foreigners into Indonesia's famous resorts, it might also lower the appeal of the country to overseas property buyers, many of whom would be looking for an island getaway rather than a city apartment.
Similarily, according to Lucy Rumantir, the president director of Procon, "Measures must be introduced in order to protect the lower end of the market should the government decide to open the door to foreign investors."
If Indonesia is to capitalise on the growing international property market, it may have to allow some access to the country's real estate crown jewels, the coastal regions of its many islands. Much depends on how far the government is willing to open the door to foreign ownership while preventing a cold draft blowing over national sentiment.
