Global Business Guide Indonesia

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Business Updates | New President, New Property Sector Outlook?

The impending inauguration of Indonesia’s seventh president, Joko Widodo, has speculation abound in anticipation of policy shifts to be enacted by the new government. Though what is to be expected for businesses and investors in a selection of strategic sectors has been touched upon in Jokowi’s political manifesto; the property sector in particular has been subject to discourse in local as well as international media. Having suffered in recent months from a ‘wait and see’ approach to long-term investments, property in Indonesia looks set to benefit from renewed consumer and business confidence.

Luxury property open to foreign investment?

One segment of the property market that has continued to flourish amidst the uncertainty of the election period and preceding economic turmoil is that of the luxury property market. Insulated from the impact of issues such as currency and interest rate volatility, Jakarta’s luxury property could provide a much needed source of foreign exchange if opened up to foreign investors. While keeping his cards close to his chest on immediate policy implementation for the moment, in July 2014 Widodo’s campaign team made public their intention to open up the luxury end of the market to foreign investors. Prospectively, foreign investors would be permitted to own properties larger than 200 square meters and worth at least 2.5 billion IDR in Jakarta, Bali, Batam, Makassar and Surabaya.

In ascertaining as to whether this easing of restrictions on foreign ownership will actually come to pass, it is important to take into consideration the government’s motivation behind it. Central to proposed regulations permitting foreign ownership of premium high-rise real estate is the goal of boosting tax revenues. This objective is in keeping with the new government’s planned higher spending on education and health to prioritize social equality, which will necessitate a rise in taxes to fund the influx of projects (See New Government May Reinvigorate Indonesia’s Investment Appeal).

It is also worth bearing in mind the timing of the initial announcement. The decision to allow foreign ownership of luxury apartments in Indonesia is by no means congruent with Widodo’s lineup of populist programs appealing to the local electorate. Its being made public during the campaign, with nothing to be gained from a vote-getting perspective, thus seems to suggest that once in power, Widodo’s government has no reason to renege when there was no ulterior incentive at play previously.

However, it must also be noted that roadblocks remain in the form of a House of Representatives to be controlled by the opposition coalition. Regulations of this nature have had the tendency to stall and peter out even under a House of Representatives more amenable to the president’s interests, as was the case with previous attempts during Susilo Bambang Yudhoyono’s ten year term to enable foreign ownership of condominiums worth at least 2 billion IDR (See Property in Indonesia; Where do Foreign Investors Stand?).

Still the world’s hottest luxury property market

Should the new government under Widodo facilitate the entry of foreign investors into upscale high-rise real estate, the opportunities to be taken advantage of are substantial. Jakarta at the beginning of 2014 was named the world’s hottest luxury property market by Knight Frank’s Prime Global Cities Index, having posted growth in the price of premium real estate eclipsing 37% between 2012 and 2013. Driving this trend is the market’s high demand coupled with still limited supply. With the second highest ranked global city achieving less than half of Jakarta’s growth in price (Dublin at 17.5%), Jakarta has thus emerged as a key market for property investment characterized by a consumer base “keen to snap up new builds as soon as they come online”, as quoted by David Cheadle, Managing Director of Cushman & Wakefield Indonesia, in a CNN special report.

In spite of some expectations that demand for luxury apartments will “soften in the remainder of 2014 in view of slower business expansion and the country holding a general election” (JLL Indonesia), the capital city continues to offer a highly promising luxury property market. A Knight Frank report for the first semester of 2014 still has Jakarta placed first in its measure of price growth for high-end real estate, coming in at a 27.3% rise year on year as of June 2014. Average price per square meter in Jakarta that currently stands at only a fraction of comparable high-end apartments in Hong Kong and Singapore makes this an especially timely opportunity.

Priorities at the other end of the spectrum

Widodo’s transition team - a committee tasked with overseeing the incoming government’s preparation of new policies and a new cabinet – have for obvious reasons been more forthcoming with the president-elect’s plan to focus on public housing. In line with Widodo’s image as a man of the people, plans for mass housing include the construction of 200 towers a year in Jakarta to move residents from slums into accommodations offering a higher quality of life. Having successfully taken steps to implement such measures as governor of Indonesia’s capital city, expectations are high for Widodo in this subsector as he follows on from a similar initiative led by outgoing President Susilo Bambang Yudhoyono that produced only 50,626 apartment units out of a planned 500,000 (Kompas).

Given Indonesia’s housing backlog that comfortably clears 15 million units, Widodo’s government will likely maintain an active interest in developing low cost housing as a priority for Indonesia’s property sector. This is projected to bring about new business opportunities for developers of residential property as well as construction material suppliers (See Mass Housing Plan Spells Massive Opportunity).

Continuity in the capital

One of Widodo’s most memorable policies affecting the property industry during his time as Governor of Jakarta was his decision to curb the issuance of permits to build shopping malls in the capital. Continuity between his vision for Jakarta and that of his former deputy Basuki Tjahaja Purnama should see this limit stay in place in light of 173 shopping malls already saturating the market.

Opportunities in commercial property in Indonesia are thus going to be concentrated in satellite towns surrounding Jakarta as well as secondary cities further afield offering greater accessibility to land needed to undertake large scale projects. Depok, Tangerang, Bogor and Bekasi in particular are expected to develop into centres for retail according to Head of Research and Advisory at Cushman & Wakefield Indonesia, Arief Rahardjo.

Indirect impacts

The election of Joko Widodo is also expected to influence Indonesia’s property sector through the planned implementation of cuts to fuel subsidies – a strategy that has been met with approval from industry analysts and the sector’s foremost players. Mr Haryanto Adikoesoemo, President Director of leading property development firm AKR Land Development, told GBG Indonesia that any short term challenges to the property sector caused by a jump in fuel prices will be offset by long-term gains to a stable fiscal structure that allows for increased spending on infrastructure. Actively addressing one of Indonesia’s primary weaknesses that has in the past been a disincentive for investors will serve as a boon to strong long-term growth in Indonesian property prices going forward.

Global Business Guide Indonesia - 29th September 2014

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Indonesia Property Snapshot - Real Estate

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.