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Indonesia’s real estate sector has been experiencing seemingly unstoppable growth for the last decade; however recent knocks to consumer confidence and higher interest rates are serving to potentially dampen the rate of future growth. In the midst of a possible property slowdown, the issue of foreign property ownership is once again under the spotlight as investors seek to tap into the country’s competitively priced real estate sector which still promises high returns. Restrictive regulations remain in place however progress has been made on this front as evidenced by Indonesia’s move up from 84th out of 139 (2010-2011) to 79th out of 148 (2013-2014) in the World Economic Forum Competitiveness Report’s state of property rights rankings. The attractive pricing in both Jakarta and secondary cities is therefore once again piquing investor interest for those prepared to weather regulatory uncertainty and take a long term outlook on the market.
The combination of a hike in key interest rates, stricter mortgage regulation and wavering consumer confidence has led to widespread speculation that Indonesia’s property sector is headed for a plateau. Initial reports of this year’s office space take up that is at best expected to match 2012’s total as well as the lowest volume of condominium sales in five quarters (Jones Lang LaSalle) lent credence to the notion that both corporate and private individual willingness to invest in real estate was waning. Given the sector’s meteoric rise over the last few years, this slowdown has led to speculation over the sector’s ability to sustain its growth trajectory.
While short term volatility is on the horizon, Indonesia’s real estate sector’s long term outlook is undoubtedly promising. Even with the aforementioned combination of factors weighing upon demand, property prices in Indonesia have continued to rise. An emerging middle class has spurred a third quarter increase in home prices of 14.6% relative to the same time last year in 2012 (Bank Indonesia).
Domestic demand remains resilient and investment opportunities are still abundant as Indonesian property prices are among the lowest in East Asia with considerable potential as high yield rental investments. Investors are therefore faced with a dilemma when choosing to invest, with Indonesia on the one hand offering unwaveringly strong fundamentals and on the other hand, restrictive and unyielding regulations that prevent the sector from reaching its full potential and thus offering the high returns that have been seen in other Asian tiger cities.
With regards to foreign property ownership, Indonesia’s potential remains firmly unrealised. To date, as stipulated in Government Regulation No. 41 of 1996 on Housing or Residential Ownership for Foreign Citizens Based in Indonesia, foreigners who maintain a presence in the country are allowed to own a leasehold on a property for up to 70 years, with the caveat that the agreement is subject to mandatory renewal after an initial 25 years and then again after another 20 years. Crucially, non-Indonesians are limited to obtaining leaseholds on property with a Right to Use (Hak Pakai) land title and are restricted from purchasing property with the more advantageous, easily transferable freehold (Hak Milik) land title (See Law on Foreign Ownership). Further complicating the process is the fact that foreigners can only purchase property with a minimum sales price of 1.5 billion RP (Global Property Guide).
With its priority of protecting Indonesian buyers and limiting speculative buying, the Indonesian government is unlikely to amend existing regulations, particularly with the upcoming presidential election likely to exacerbate inaction. Several changes to foreign property ownership regulation that were tabled in the past recently seemed to be gathering momentum but have stalled at the House of Representatives. Among these changes are a proposed extension of the leasehold period to a full 70 years without the need to apply for renewal as well as regulation that would allow foreigners to own condominiums worth at least 2 billion RP via the purchase of a Building Ownership Certificate (SKBG) that can be traded, unlike leaseholds. The latter of these two amendments was fully expected to go forward as of mid-2012, but little information has been provided on the progress of its implementation process after initial reports indicated that it would be delayed.
Foreign investors in Indonesia’s property sector must therefore be prepared to operate in the market within the existing regulatory framework and not the more advantageous proposed amendments. Some property developers are now being more creative in order to entice foreign buyers and facilitate mortgage financing, however investors should be cautious and take time to know who they are dealing with. This entails taking a long term, patient view and approaching real estate investments as complementary to other long term business interests in the country.
Insofar as foreign investors have a long term mindset, the breadth of opportunities available to them within the Indonesian property sector is considerable. The emergence of the country’s secondary cities has diversified real estate opportunities to outside of Jakarta and Java, with accelerated property price growth taking place in tourism hot spots and regions rich in natural resources. Makassar, home to southern Sulawesi’s primary port, fishing industry, cultural heritage attractions and a newly built theme park, was estimated to have experienced the highest increase in property prices as of the beginning of 2013, at 15.6% (Global Property Guide). Manado, a coastal city in North Sulawesi within close proximity to numerous coral reefs experienced gains in residential property prices of 34% in the third quarter of 2013 (Bank Indonesia).
The broadened distribution of the property sector boom in Indonesia can also be attributed to differences in minimum wage levels between provinces incentivising companies to locate their operations in more cost competitive regions. Surabaya, in East Java, for instance is expected to experience rapid property development as firms begin to look for alternatives to the increasingly labour-expensive capital city, Jakarta.
Upon the government making clear the current state of pending amendments to property regulation, foreign investors can also look to take advantage of one of East Asia’s highest rental yields by renting out luxury apartments. Should it prove to be the case that high end condominiums are available to foreigners via application for a Building Ownership Certificate, there exists considerable scope to tap into the growing rental market as a result of tighter mortgage lending policies. Moreover, although property prices have been increasing across the archipelago, they still remain amongst the lowest in the region; according to Cushman Wakefield, the price of comparable condominiums in Jakarta are roughly one-seventh of that in Singapore and one-tenth of that in Hong Kong.
While regulations pertaining to foreign investors remain less advantageous than neighbouring markets such as Malaysia and Singapore, Indonesia’s property sector remains highly competitive in terms of price and rental demand. The current cool down is therefore not symptomatic of a long term decline in demand as the country’s fundamentals remain intact through its rapidly emerging middle class. Foreign investors with a long term vision for the Indonesian market can readily access the country’s still relatively undervalued properties which can serve as highly lucrative assets as part of a long standing and sustainable investment strategy.
Global Business Guide Indonesia - 15th November 2013
Contribution to GDP: 2.79% (Q3 2015)
Mortgage to GDP Ratio: 3.5% (2015)
Housing Backlog: 15 million (estimated 2016)
Average Condominium Price: 48,100,000 IDR/sqm (CBD, Jakarta, Q3 2015)
Average Retail Space Rental Price: 500,00 IDR/sqm/month (CBD, Jakarta, Q1 2016), 545,968 IDR IDR/sqm/month (Jakarta, 2016)
Average Office Space Rental Price: 401,010 IDR/sqm/month (CBD, Jakarta, Q1 2016)
Average Industrial Land Price : $221.51 USD/sqm (Bekasi, Q1 2016), $144.16 USD/sqm (Tangerang, Q1 2016)
Relevant Law: Government Regulation No. 41 of 1996 on Housing or Residential Ownership for Foreign Citizens Based in Indonesia allows foreigners to own leaseholds of up to 70 years subject to renewals at 25, 20 and 25 year intervals.
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