How is Indonesia growing the property market

As an economy largely dependent upon private consumption and commodity prices, Indonesia’s property market is sensitive to fluctuations in both areas. Since the Asian financial crisis of 1997-98 Bank Indonesia, the central bank, has been understandably cautious whenever market anomalies are identified. As a result, a deceleration in economic growth in 2014-15, coupled with rising property prices, ignited fears of a property bubble. This prompted the bank to impose higher interest rates and larger minimum down-payments for mortgages, while also curtailing lending for second-home mortgages to prevent an accumulation of housing debt. However, recent market stagnation has forced the bank to rethink its strategy.

Following a commodity price rebound in early 2019, several incentives were introduced to reinvigorate the property market in the second half of the year. Among the changes implemented were lower interest rates, a relaxed loan-to-value ratio and smaller minimum down payments, while mortgage lenders have also introduced schemes aimed at enticing the growing young middle class to get on the property ladder.

Market Influences

The fact that 2019 was an election year may have weighed on the real estate market. “The presidential election campaign went on for too long, so investors adopted a wait-and-see approach,” A H Marhendra, COO of property developer Springhill Group, told OBG. The re-election of President Joko Widodo, better known as President Jokowi was deemed to be favourable for the investment environment, and activity rebounded somewhat upon confirmation of his reappointment.

Over the long term activity should increase further following the major announcement in August 2019 that a new capital city will be built in East Kalimantan. Property-related stocks rose by 13% in 2019, prompting Bloomberg to predict in December that shares would average a further 32% rise over the course of 2020. However, this prediction was made before the onset of the Covid-19 pandemic. February 2020 saw a sharp decline in share prices – attributed to fears that Chinese involvement in the local construction sector would be hindered by Covid-19. The fact that foreign ownership of property in Indonesia is restricted may help shield the country from the worst economic effects of Covid-19; supply and demand are primarily driven by domestic consumers and companies. Under Government Regulation No. 103 of 2015, foreigners who legally reside in Indonesia can own landed property for a period of up to 80 years, but it is very difficult to obtain a mortgage, as foreign ownership falls under the “right-of-use” rather than “right-of-ownership” category.

Hopes that Indonesia might be insulated from the worst impacts of Covid-19 began to subside in March 2020, however, as countries around the world began to impose strict containment measures, which resulted in sharp declines in economic activity. Given the sensitivity of the wider real estate industry to global events, it seems inevitable that some sections of the market, particularly the commercial and industrial property segment, will be affected, as global supply chains become fractured, travel and accessibility is restricted, and consumers rein in discretionary spending. While external shocks and broader economic constraints affect segments of the local property market to varying degrees, some long-standing challenges also remain.

Land Registration

One of these is related to the large proportion of unregistered land. Law No. 17 of 2015, concerning the Ministry of Agrarian Affairs and Spatial Planning (MASP), stipulates that it is the ministry’s duty to oversee the effective formulation and implementation of laws and legislation relating to land distribution and use, as well as any related issues. MASP’s role is therefore complex, given that Indonesia’s total land area amounts to 1.9m sq km and a large proportion of it is unregulated and unregistered. This creates confusion over land ownership, making acquisition a real obstacle to infrastructure and real estate developments. President Jokowi’s comprehensive infrastructure drive has injected additional urgency into the need for a solution to a sensitive issue, which is further complicated by matters relating to culture and tradition.

The government started compiling a definitive land use map that encompasses the whole of Indonesia in 2011 under President Jokowi’s predecessor, Susilo Bambang Yudhoyono. Creating this has subsumed over 85 data charts and maps from different government ministries, but since many of these contain conflicting and overlapping information, there is a need for more effective coordination between government departments and ministries at the national and sub-national level. The first version of the map was released in 2018, but it was not fully complete as much of the land remained unregistered. Recent years have seen some acceleration in the land registration process, with MASP under orders from the president to register all of Indonesia’s land by 2025.

New Capital 

President Jokowi’s August 2019 announcement that a new capital city will be built on 1800 sq km of land in the Penajam Paser Utara and Kutai Kartanegara districts of East Kalimantan has seen the status of land in the heavily forested region of Borneo brought into focus. While Covid-19 will delay the start of construction, the region is likely to remain the centre of attention of the market for the medium term. Large plantations and industrialised areas of the forest are set to be reclaimed from private and state-owned entities on the basis that those companies currently hold rights to land management – rather than land ownership – and are therefore not entitled to compensation.

The state claims ownership of 90% of the land earmarked for the development of the new capital, and has stated that the remaining 10% will be obtained in accordance with Law No. 2 of 2012 on land acquisition in the public interest. The bulk of that 10% is made up of farms and villages, meaning rural families will be relocated. Many farmers in the area were allocated this land during President Suharto’s transmigration programme of 1970, an initiative intended to disperse dense concentrations of the population throughout the archipelago. Again, relocation and compensation packages will come under scrutiny. Indonesian law stipulates that in such a scenario, prices offered to citizens for land must reflect its overall taxable value.

Land Value

Naturally, after plans for the new capital were announced, the value of land in East Kalimantan rose sharply. In August 2019 the Association of Indonesian Real Estate Companies requested that the government intervene in order to deter speculators from purchasing land from locals and manipulating higher market prices. In response, the government implemented a land value freeze that prevented current owners from selling land to third parties. Another method that could help to moderate land costs would be for the government to apply special economic zone (SEZ) status to the areas in question. Although SEZs are generally managed and populated by private entities, land contained in such areas can only be sold to the government.

Implementing strategies to safeguard the cost of land and properties in the areas that surround the new capital city will be challenging, and real estate developers and speculators are reportedly pursuing property in what will be the new capital’s satellite towns and cities, such as Balikpapan and Samarinda. Existing residential and commercial premises in these areas are being aggressively marketed, and the shares of property developers operating in the region have risen in value as the potential multiplier effects of the new capital become apparent. Indeed, Agung Podomoro Land, a domestic property development company, has confirmed that interest in its Borneo Bay City project – a residential, commercial and recreational development under construction in the port city of Balikpapan – has increased significantly since the new capital was announced.

Smart & Green

According to the administration, the new capital will be constructed as a smart city. While smart real estate developments are significantly more expensive at the planning and implementation stages, over the course of their lifetime the financial and environmental advantages are considerable, given their lower maintenance requirements and greater efficiency. Globally, buildings account for 40% of energy usage, 12% of water consumption, 25% of waste production and 35% of greenhouse gas emissions. The progressive technological tracking of a building’s operational requirements and performance has allowed for the removal of unnecessary overhead costs incurred through, for example, the cooling or heating of unused spaces and the lighting of empty rooms. City-wide implementation could help to lower the use of resources dramatically.

Although the need for energy reduction measures in Indonesia is most pressing in Jakarta, in 2017 the government launched its 100 Smart Cities initiative in a bid to uniformly optimise the energy consumption and economic performance of the main population centres and improve citizens’ quality of life. The three-year programme ended in November 2019, with approximately 97 Indonesian cities added to a list of smart cities, which already contained Jakarta, Bandung and Surabaya. The interconnectivity of the many physical assets of urban centres, made possible by smart technologies, is revolutionising the way that cities function. Installation of these facilities across the archipelago should stimulate sizeable economic benefits; however, the growing presence of such advanced systems also increases the need for a suitably skilled workforce capable of harnessing the opportunities that smart buildings and cities present.

Mortgages, Millennials & Urbanisations

Revitalised cities and urban areas are creating opportunities for those who live within them as well as the real estate market. After posting positive quarter-on-quarter growth of 16.2% for residential property sales in the third quarter of 2019, developers saw a contraction of 16.3% for the fourth quarter across all types of residence. Meanwhile, the residential property price index registered growth of 0.3%, down from 0.5% in the third quarter.

The growing middle class is seen as offering the most solid prospect of a significant and sustained increase in residential property sales, and it is guiding market trends in more ways than one. “As the middle class continues to grow, we are seeing a trend where consumers prefer premium products over value ones in the building materials industry,” Kam Kettin, president director of construction materials supplier Depo Bangunan, told OBG.

Over 50% of the population is under the age of 30, and mortgage lenders have been devising strategies designed to ease the financial burden of home ownership for the large millennial demographic. Majority Malaysian-owned bank CIMB Niaga introduced its KPR Xtra Bisa mortgage product in early 2019. The key features of the scheme are a 5% down payment option and a three-year fixed interest rate of 5.5% with a 25-year tenor. CIMB Niaga was encouraged by the number of millennials purchasing loans for residential properties, and, in a bid to appeal to the consumer habits of its target demographic, the lender is collaborating with digital marketplace PROJEK to offer mortgage products. The offerings vary depending on property type and length of tenor, with interest rates ranging from 6.75% to 7%. In addition, prices of properties listed on the platform are typically lower than those offered by traditional agents and developers.

Urbanisation is expected to gather pace in the coming years, and inner-city apartments are expected to provide the primary mode of habitation. A fourth-quarter 2019 Colliers International report on the residential property market showed that the average asking price for an apartment in Jakarta’s central business district (CBD) was Rp52.2m ($3680) per sq metre, representing an increase of 0.8% yearon-year (y-o-y), and Rp39.1m ($2760) per sq metre in the south of Jakarta, up 1.7% y-o-y, reflecting the steady pace of market activity over the period. Rents in those same areas were Rp460,000 ($32.40) and Rp370,000 ($26.10) per sq metre, respectively. Prices are set to rise in and around transit-oriented developments, which will function as all-in-one communities comprising residential and commercial facilities in proximity to transport centres (see analysis).

Affordable Housing

As part of the One Million Houses (OMH) programme – an initiative launched in 2015 to build 1m affordable housing units each year – the administration finished the construction of its first zero-down-payment, low-cost apartment complex, Klapa Village, in Duren Sawit, East Jakarta, in 2019. The site consists of 780 one- and two-bedroom apartments available for Rp185m ($13,000) and Rp305m ($21,500), respectively, excluding tax. Though such projects represent positive steps, the housing deficit still stands at around 11m units.

The deficit presents a pressing social issue, and more efficient public-private collaboration could provide a much-needed solution. While there exists a stagnant property market characterised by oversupply and limited purchasing power, there is also a chronic shortage of houses for the lowest earners. Government-subsidised public housing projects offer both a bankable option for developers and a clear strategy to kick-start the market, as increased activity at the lower end would stimulate movement further up. The OMH programme relies heavily on the private sector, yet several property associations involved in the initiative have expressed concerns that the 2020 government budget of Rp11trn ($775.5m) for the Housing Financing Liquidity Facility (FLPP), which offers loans for affordable housing development, is insufficient to cover the 260,000 houses targeted for construction through the scheme over the year. President Jokowi responded with the assurance that the government is aware of the issue and that additional funds would be allocated.

If passed by Parliament, President Jokowi’s Omnibus Law on job creation could be influential here, as it aims to jump-start higher levels of foreign investment and employment, which could, in turn, offer the most practical method of stimulating higher tax revenues and boosting state funds. The state budget for the FLPP has also increased year-on-year, and other schemes and initiatives are set to be implemented to assist in the provision of affordable accommodation.

Office Space

The commodity price decline of 2015 adversely affected the office rental market, with oil, gas and mining firms downsizing their operations. However, trends emerging in recent years have offset some of the impact; increased demand in the tech and flexible workspace market is expected to continue once the disruption caused by the Covid-19 pandemic subsides. Additionally, the opening of Jakarta’s Mass Rapid Transit (MRT) system in March 2019 prompted rises in office occupancy rates in the areas it serves. “The presence of both the Jakarta MRT and the Jabodetabek [the local term for the Jakarta metropolitan area] Light Rail Transit are benefitting the real estate market,” Syahzan Kudus, general manager of real estate services firm Jakarta Land, told OBG. “This is especially true for properties located in Jalan Sudirman, the core business district of Jakarta.” Transit-related growth in both supply and demand is expected to continue as more sections of the MRT become operational and, likewise, when the light rail transit system comes on-line in 2021.

Major residential and office construction projects around transit centres are set become a key feature in Indonesia (see analysis), particularly in Jakarta, as the government attempts to transition to a more sustainable development model. Indeed, the desirability of office space in areas near MRT stations has enabled suppliers to hold high rental prices, relative to the norm, in both central and outlying areas of the capital. Average office rents in Jakarta remain low: space in the CBD was offered for around Rp276,400 ($19.50) per sq metre per month in the fourth quarter of 2019, representing a decrease of 2.7% over the previous year; and in the areas of Jakarta outside the CBD, average fourth quarter 2019 rents stood at Rp196,200 ($13.80) per sq metre, up by 1.9% y-o-y.

Jakarta’s relatively low prices are likely the result of supply outstripping demand, due to a wave of recent major developments, including 11 new office buildings completed in 2019. Total office space in the city amounted to 10.1m sq metres at the end of 2019, up by 5% from the previous year, while the city’s occupancy rate stood at 60%. The inflow of new supply is expected to abate between 2021 and 2023, following the relocation of the bulk of governmental administrative operations to the new capital, which will leave swathes of premium office space vacant.

Retail

Market disruptions continue to put pressure on retailers, and occupancy levels in Jakarta’s malls and retail spaces in 2019 displayed a moderate decline throughout the year, reaching 79.8% by the end of the year, showing an annual decline of 3.8%. While this was partly due to some malls being refurbished, ever-evolving innovation in the virtual shopping space is forcing brick-and-mortar stores to rethink their strategies to remain competitive, with added emphasis now being placed on shopper experience. Such pressure has led to many traditional brands and department stores vacating premises. A significant number of reoccupied units have become food and beverage outlets, contributing to a shift in the shopping and recreation landscape. Similar trends are also emerging in Surabaya, East Java.

The average monthly retail rent price in the Jakarta Metropolitan area was around Rp609,000 ($42.90) per sq metre as of the fourth quarter of 2019, compared to central and west Surabaya rates of Rp587,807 ($41.40) and Rp522,257 ($36.80), according to the Colliers report. The above figures for each city were relatively stable quarter-on-quarter. With occupancy levels in the different regions of Jakarta and Surabaya showing only slight fluctuations throughout 2019, stable rents could be the result of mall operators seeking to maintain occupancy in the face of shifting market forces. Already under pressure, brick-and-mortar retail outlets are expected to be significantly affected by Covid-19, as lockdown measures combined with economic uncertainty take a toll on footfall and discretionary spending.

Outlook

The landscape for real estate is clouded somewhat by constraints, including land disputes and the ongoing pandemic. However, once the dust settles from the Covid-19 shock, opportunities abound across the segment, including in smart city projects, transit-oriented developments, the construction of a new capital city in East Kalimantan and a growing number of tourism offerings across the archipelago.

With President Jokowi vowing to cut bureaucracy, streamline legislation and remove impediments to investment in his second term, the government may be better placed to tackle its affordable housing backlog with private sector support, while also increasing its chances of securing the level of finance required to see major initiatives through to completion. All of this should add to the appeal of its sizeable domestic market, and demonstrate to investors that Indonesia’s real estate sector offers many prime opportunities.