Driving higher demand for property in Indonesia

After showing substantial growth across the board in recent years, the Indonesian real estate market began a period of consolidation in late 2014 that is likely to last throughout 2015. This slow down in price rises has been broadly welcomed, however, as indicative of a maturing of the sector as it heads off previous fears of over heating. Despite the slower pace overall, residential and industrial real estate continue to show healthy growth, with Jakarta also continuing to be the most active and international market.

Facts & Figures

Indonesia was impacted particularly badly by the Asian financial crisis in the late 1990s. However, in the early 2000s the country’s economy began to bounce back, reaching 5% GDP growth by 2004, and 6% by 2008, according to World Bank figures. While the global downturn slowed this to 4.6% in 2009, the Indonesian economy then showed remarkable strength, surging back to 6.5% growth by 2011. While this has slowed again since, GDP expansion was still 5.8% in 2013 and 5% in 2014. This has meant a significant growth in per capita incomes, with major implications for real estate. While Indonesia’s adjusted national income per capita was just $546 in 1999, the year after the crash, it was $3010 per head by 2013.

In Jakarta the income level is far higher, with the capital province concentrating some 9.5m people in just 665 sq km, and producing 13% of Indonesia’s GDP, according to Jakarta provincial government figures. This translated to a non-hydrocarbons GDP per capita of Rp47.78m ($3949) for the province in 2013, the most recent data available from Statistics Indonesia (BPS), when the figure for the country as a whole stood at Rp10.15m ($839). The slight decline in the national per capita total between 2012 and 2013 is illustrative of the tight economic constraints faced by any country experiencing a GDP growth slow-down while population growth remains high. As the fourth-largest country in the world by population, according to the World Bank, population growth averaged 1.4% to 1.6% from 1995 to 1999, then dropped to 1.2% by 2013.

Meanwhile, Indonesia’s rural population has been declining as urbanisation rates rise. In 1995, 64% of the population lived in rural areas, while by 2013, the figure was down to 48%. World Bank projections suggest that by 2050 the urban population will be up to 67%. As the economic, political and cultural centre, Jakarta has attracted many of these internal migrants, who place pressure on existing housing while pushing the city both outwards and upwards. Economic growth has also attracted many businesses to the capital, both from elsewhere in Indonesia and from overseas. This has also raised demand for real estate stock, particularly higher quality commercial and residential space.

The jump in per capita incomes, along with general growth in population, has also meant a much larger Indonesian middle class. A recent report by Boston Consulting Group (BCG) suggested that some 100m people could be classed as belonging to Indonesia’s middle-income group, out of a population of 249.9m in 2013. By 2020, BCG suggested, the cohort would have grown to some 141m people. Such a class has a much stronger capacity and desire to purchase property, as well as to demand higher standards of real estate, both factors that can help to drive demand.

Adding Value

While the Asian crisis saw many developers overleveraged and exposed to foreign currency debt, with an era of easy money adding to the country’s woes, substantial restructuring of the economy and its financial sector thereafter left the country in a much better position to deal with the global downturn a decade later. This produced a positive investment environment in the years that followed, with external factors such as the US programme of quantitative easing, the China-led commodity boom, and high oil and gas prices benefitting the economy.

While those factors are now largely gone, the new government of President Joko Widodo is intent on arresting the recent decline in GDP growth with a major drive to boost investment. Hand-in-hand with this has been an effort to persuade banks to keep interest rates low, with the aim of creating a positive business environment. The Bank of Indonesia (BI) reduced its benchmark rate from 7.75% to 7.5% in February 2015, although this was controversial, given that inflation had risen in 2014 to 8.36% on the back of reductions in fuel subsidies. However, this should help to stimulate lending, with clear benefits for real estate as mortgages become less burdensome and developers find financing.

Foreign Ownership

Pressure is also growing for a change in the rules on foreign property purchases. At present, foreigners buy either through Indonesian proxies, or via a series of limited lease arrangements. Indonesian incorporated foreign joint venture companies may obtain a “right of cultivation” 35-year lease, extendable for a further 25 years, or a “right to build” 30-year lease, extendable for a further 20-year period. Individuals, meanwhile, are limited to a 25-year “right of use” arrangement, extendable for a further 20 years. However, while all these types of leases may be extended longer, there is no guarantee of this being allowed, nor of any rights to transfer or bequeath ownership.

In his election campaign, the current president proposed an amendment to these rules, which would see properties worth Rp2.5bn ($206,650) or more and 200 sq metres or more in size being exempted from these restrictions in major cities and on the island of Bali. The year ahead may thus see a change in restrictions on foreign property ownership, which would likely be a significant shot in the arm for the residential sector.

Getting Around

Certain infrastructure projects demonstrate a strong likelihood of being beneficial for the real estate sector, and particularly in the capital. Number one is the Jakarta mass rapid transit (MRT) system, an urban railway network that broke ground in October 2013 and is scheduled to see its first services in 2018, in time for Jakarta to host the Asian Games. Other key transport projects include the construction of new toll roads and a possible light rail transit system, if developers can be found. These projects will not only relieve chronic traffic congestion in the city, but should also add value to those areas close to stations.

The MRT has two lines, one running north-south and the other east-west, with the former extending from Kampung Bandan to Lebak Bulus, crossing over the latter line at Sarinah. The east-west route runs from Ujung Menteng to Kembangan 2. The north-south route in particular should benefit the Sudirman corridor – an area of business, retail and residential use running along one of the city’s main arteries.

Beyond Jakarta

While the capital remains the focus for practically all real estate outfits in Indonesia, there are signs that other regions are also undergoing significant property expansion. Edhi Sutanto, the director of Cowell Development, told OBG, “The construction of residential property has been one of the fastest-growing sectors in Indonesia’s economy in recent years, as demand has surged significantly among Indonesia’s expanding middle class. This is the case despite tax increases and an overall uncertainty in government regulations moving forward.”

The BI residential property price index (RPPI), which starts from a base line of 100 points in 2002, shows the region known as Jabodebek-Banten, which consists of the mega-city sprawl now encompassing Jakarta, Bogor, Depok, Bekasi and Tangerang in Banten (also referred to as Jabodetabek), as standing at 200.19 in the first quarter of 2015. In terms of price growth, this outstrips many regions, but not all. Bandung, also on Java, stood at 229.26 that quarter; Palembang and Medan in Sumatra at 224.03 and 214.41, respectively; Makassar in South Sulawesi at 275.81; Manado in North Sulawesi at 267.81; and Surabaya, in East Java, at 273.85.

Residential Growth

The BI report also shows that for the country overall, in the fourth quarter of 2014, the RPPI rose 1.54% quarter-on-quarter (q-o-q), giving year-on-year (y-o-y) growth of 6.29%. This was down on the third quarter of 2014, when annualised growth stood at 6.53%. The best performing type of residence in the fourth quarter of 2014 was large houses, which saw an RPPI rise of 1.68%. The BI put price increases down to rising construction costs, both in terms of labour and materials. Price hikes were also broadly in line with inflation according to the BPS, with the consumer price index figures for the housing sub-category rising from 0.77% to 1.27% over the quarter.

With price growth slowing, sales volumes in the fourth quarter of 2014 showed an increasing trend, with sales up by 40.07%, q-o-q, while in the third quarter of 2014 they had risen 33.69%, q-o-q. The BI predicted this pattern of slowing price increases and rising sales to continue in 2015 and beyond, although also predicting that the Jabodebek-Banten region would likely see the highest regional price rises.

However, in 2014 Jakarta’s luxury residential segment saw a decline in prices. According to global real estate consultancy JLL, in local currency terms, the city saw zero price difference between the third and fourth quarters of 2014, while prices fell 0.8% y-o-y from the fourth quarter of 2013. In the condominium market, average prices across upper, middle and lower segments did continue to grow, however, with global real estate firm Cushman & Wakefield reporting average prices of Rp42.1m ($3479) per sq meter in the central business district (CBD) at year-end 2014, a figure up 38.9% y-o-y. Indeed, these prices were so high that the agency warned that alternative districts such as Serpong, West Bekasi and Cikarang were likely to benefit from developer interest, as they have access to the CBD, but still offer land at a lower price.

Looking to Rent

In Jakarta’s rental apartment market, supply increased during 2014, with rents remaining relatively flat, according to Cushman & Wakefield. As of year-end 2014, the cumulative supply of rental apartments stood at 63,294 units, up 4.3% q-o-q and 11.8% up on year-end 2013. New units were featured in Woodland Park residence, City Light Apartment, Royal Springhill Residences and Belmont Residence, amongst others. The Ascott Kunningan also opened for business at the end of 2014, with serviced apartments seeing a supply increase of 5.3%, y-o-y. In US dollar terms, serviced apartments also saw a slight rent decrease over the year, due to the depreciation of the rupiah. Average rents on this category were $28.50 per sq meter per month in the fourth quarter of 2014, down 0.1% y-o-y, although up 0.65% q-o-q.

The year 2015 should see supply of both serviced and condominium for lease apartments increase in the city, with 20,000 new units in the latter segment and 338 in the former. Indeed, according to data from global commercial real estate firm Colliers International, the number of new apartments of all types being built has continued to increase in recent years, although at a declining rate. In 2013, 15,068 new units were constructed, while in 2014, the total was 20,889 – a hike of 38.63%. Colliers predicted that for 2015, 24,854 units would be constructed, an increase of 18.98%.

While the rate of increase may be slowing, the overall numbers are still considerable, as Jakarta still offers lower prices than many other Asian cities. The Jakarta middle classes spend an average of Rp200m-Rp500m ($16,500-$41,300) on an apartment, according to an August 2014 Indonesia Investments report, compared to $15,764 per sq meter for an apartment in central Singapore, or $1727 per square meter in downtown Kuala Lumpur. This continues to make the Jakarta residential market an attractive option for many investors, while the market, being largely one of end-users, has an extra buffer against speculative bubbles.

Office & Commercial

The economic slowdown in Indonesia was also apparent in the office segment during 2014, with real estate advisory firm Savills reporting in February 2015 that average rents for premium grade office space in Jakarta’s CBD had fallen from $36.80 sq metres per month in the second half of 2013 to $36.60 in the second half of 2014. Other grades had seen increases, however, with grade A up 6.4%, grade B up 7.3% and grade C up 10.8%. This reflects the pattern of decline in new international arrivals, alongside continued domestic growth. Savills also reported that by year-end 2014, the total premium and grade-A office stock in the CBD had remained static from the second half of 2013 to the second half of 2014, while grade B had increased 0.6% and grade C had shrunk 0.3%, likely the result of a combination of upgrades by companies and turning over of office stock to other uses.

The slowdown in new offices coming on-line kept occupancy rates high in 2014, with premium grade showing 98.3% occupancy, grade A 93.6%, grade B 94.9% and grade C 93.7%. Looking ahead, a major surge in new projects in the CBD will see some 3.2m sq metres of new office space come on-line in the next five years, according to Savills. Around 36% of this total is premium grade, and 55% grade A, with around 53% of the total also being located in the Sudirman corridor. The Rasuna Said area will receive around 27% of the new build, and Gatot Subroto around 16%.

This will likely produce downward pressure on prices and occupancy levels over the next few years, unless there is a major surge in economic growth and expatriate arrivals. At the same time, the year 2014 saw an increase in supply in the city’s non-CBD office market push down occupancy levels, yet rents continued to rise. Indeed, in West Jakarta, rents were up 20.7% in the second half of 2014, y-o-y, and 11.7% in non-CBD overall. West Jakarta was the year’s stand out, with occupancy there rising from 83.8% to 87.5% y-o-y, while South Jakarta saw occupancy decline from 95.6% to 92.6%, although rents still increased, by 10.9% y-o-y.

Retail & Industrial

Retail also had a slow year in 2014, with the depreciation of the rupiah against the US dollar a key factor affecting consumer spending. At the same time, a moratorium on new mall building in Jakarta, re-imposed in 2013 by then-governor Joko Widodo, has limited supply. On the industrial side, Cushman & Wakefield reported that the fourth quarter of 2014 saw take-up of industrial land rise 38% q-o-q in the greater Jakarta area, largely on the back of increased automotive sector activity. The year 2014 also posted 28% more take-up than 2013, with the 2014 figures the first positive numbers seen in three years.

Transactions for industrial land remained dominated by small plots, at an average of 3.2 ha. This is likely to remain the case going forward, with no new major industrial entrants forecast for the region. Meanwhile, improvements to transport infrastructure will also likely bring increased supply of industrial estates further away from downtown Jakarta. Erick Wihardja, head of corporate finance Bekasi Fajar, told OBG, “Current regulations do not allow for existing industrial estates to expand, encouraging the development of new ones. However, the necessary infrastructure is lacking in many of these new locations, so investors will continue looking at the existing estates to invest in the short term.”

Outlook

While 2014 saw a slowdown overall, there are grounds for expecting the years ahead to see some resurgence. The new infrastructure roll-out under way and plans for its acceleration by the new government should see increased consumer confidence and optimism. These factors in turn should boost the real estate sector, making areas of major cities more accessible and certain neighbourhoods more desirable. Fundamental factors such as population growth will keep delivering strong organic demand, while the growth of the middle class pushes up appetite for property of increasing sophistication. While growth may not be what it was, the sector will still be a major international performer.