Indonesia: Unlocking property

A long-awaited change in property ownership rules for foreigners in 2011 could further heat the country’s real estate market amid bullish investor sentiment in the sector. But the government has sent mixed messages over proposals that could potentially incite nationalist sentiment.

In March, the chairman of the Indonesian Investment Coordination Board (BKPM), Gita Wirjawan, said that he was confident parliament will pass a draft bill regulating foreign ownership of land by the third quarter of 2011. His remarks came as local media revealed that property prices in Indonesia’s major cities have risen by an estimated 20% this year, and rents in Jakarta have climbed 9.5%. The property boom is taking shape amid rising consumer confidence and commodity prices, and ahead of widely anticipated land acquisition legislation.

Yusuf Yuniarto, the public housing minister’s expert staff on spatial planning, land affairs and settlements, told the Jakarta Post in April that the proposed legislation would only permit the purchase of apartments, but without the need to regularly renew the right to lease as is now the case. “We want to create a wider market for our apartments, especially among foreigners,” he said.

Currently foreigners are entitled to lease apartments, but not land or freestanding houses, for up to 70 years. With the right to use real estate, foreigners sign a convertible lease agreement with property management companies or use the name of an Indonesian citizen with whom they have a separate agreement. Foreigners must also periodically renew their right to use. The constitution prohibits foreign ownership of land.

If foreign ownership legislation is enacted, it could generate an extra $3bn-6bn of foreign direct investment a year, an estimate boosted by widespread expectations that the country’s credit rating will soon be raised to investment grade. Jakarta also forecast in May that economic growth will accelerate at 6.9-7% this year due to rising investment and exports.

The legislation could supplement a widely anticipated land acquisition bill seen as crucial to improving the country’s infrastructure, with government officials estimating that the processing time for most land deals will be cut in half.

The acquisition law would put in place a negotiation framework and appeals process in which independent evaluators determe the price of the land and landowners are given a limited amount of time to negotiate the price. If parties fail to reach an agreement, the government can seize the property. However, some observers say the bill does not go far enough for real estate market’s needs.

Harun Harjadi, managing director of property developer Ciputra Group, told local media in May that “Land prices in Jakarta are crazy, and last year prices went up 30%.” However, he said growth was limited by borrowing restrictions on land acquisition that were put in place after the 1997 Asian financial crisis. “Post-crisis, acquiring large tracts of land has been almost impossible,” he said

Last year hopes were raised that Jakarta would consider allowing foreigners to buy property with a minimum value of $150,000, and introduce a simplified, 70-year lease that could qualify for bank financing. However, the initiative is believed to have faltered due to nationalistic and populist reasons. For instance, analysts say foreigners would favour luxury house construction at the expense of large-scale, low-cost housing developments.

While foreign owners face limitations on purchases, the rising confidence level of Indonesian consumers is keeping the real estate market on a high. Consumer confidence rose to a record 142.6 in the month of April, as per the KADIN-Roy Morgan Consumer Confidence, 11.3 points higher than a year ago. Potential homebuyers will be reassured by forecasts from Bank Indonesia’s deputy governor for monetary policy Hartadi A Sarwono, who said in May that the country could keep the inflation rate below 5.5% if fuel subsidies are maintained.

In an April report, real estate consultancy firm Cushman & Wakefield said condominium development in established residential areas of Jakarta was expected to grow. The report said the average price of condos in the capital’s central business district was Rp17.45m ($2000) per sq metre in the first quarter of 2011, up 4.2% from the previous quarter. In prime areas the average price was Rp16.71m ($1915) per sq metre, up 3.9% from the last three months of 2010.