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As of June 2015, Bank Indonesia is set to increase the Loan-to-Value (LTV) limitation for home mortgage loans, thereby reducing the obligatory minimum down payment for primary home buyers. This issue has been in circulation since February 2015 in response to a slowdown in property sales across the board. This move by the Financial Services Authority (OJK) and Bank Indonesia is therefore being welcomed by players in Indonesia’s property development sector as a fitting instrument to bring hesitant buyers back to the market.
Indonesia’s property sales growth decelerated considerably in 2014 in comparison to the year prior. Data from Indonesia Property Watch shows that sales growth in Q3 2014 dropped by 69% year-on-year. In 2015, the first quarter saw a continuation of this trend attributable to an extended period of hesitation among home buyers throughout the presidential election campaign and the uncertainty that ensued. A combination of the policy to decrease the LTV for primary property purchases put in place by Bank Indonesia (Circular Letter No. 15/40/DKMP) since September 2013 in addition to high interest rates and a prohibition on mortgage loans for unfinished homes created a bearish attitude to the market among both buyers and developers.
Residential Property Sales Growth in Indonesia (Quarter-over-Quarter)
Source: Bank Indonesia, Residential Property Survey for Primary Houses
Bank Indonesia’s survey for the first quarter of 2015 revealed that residential property sales experienced a substantial dip in growth at quarter-over-quarter comparison. The sales turn-out for Q1 2015 recorded growth of 26.62% compared to 40.07% in Q4 2014. A weaker appetite for property consumption is further illustrated by the rate of bank mortgage disbursements for houses and apartments which rose by only 0.12% over the previous quarter while the closing months of 2014 recorded a modest 2.56% rate of growth.
The anticipated changes to the minimum down payment required for primary home purchases are expected to breathe life back into Indonesia’s flagging property sector. The statements provided by Bank Indonesia officials indicate that the new regulation will reduce the LTV ratio cap to 80% from 70% for properties above 70 meters squared utilizing conventional financing. This move should have a particularly significant impact on bringing in young professionals as first time buyers into the market in Jakarta and its satellite suburbs as well as secondary cities.
Previous LTV Rates for First Homes & Apartments in Indonesia
Source: Circular Letter of Bank Indonesia No. 15/40/DKMP, September 2013
Previous LTV Rates for Second Homes & Apartments in Indonesia
Source: Circular Letter of Bank Indonesia No. 15/40/DKMP, September 2013
In numerous media reports, various major industry players, such as PT Ciputra Development Tbk and PT Summarecon Agung Tbk, have voiced their optimism that the policy will bring about a much needed revival to the previously buoyant sector. However, the full effects of the new regulation may not be felt until late 2015 or early 2016 as some Indonesian banks continue to operate under tight liquidity. Despite this, various lenders have asserted that they are considering revising their targets for 2015 should the new scheme go into effect. Among others, Bank Tabungan Negara (BTN), one of Indonesia’s largest mortgage loan providers, plans to increase its credit growth target from 18-19% currently, while Bank Internasional Indonesia (BII) expects to exceed its original target of 10%.
Indonesia’s property sector contributes 10-15% to the overall economy; a slowdown in property sales is therefore felt across the board. Making down payments for primary home purchases more affordable is therefore a necessary move to incentivize home buyers. This holds particularly true for the country’s growing middle class among which home ownership levels remain comparatively low given that Indonesia’s mortgage to GDP ratio stood at only 2.8% in 2014. The new regulation coupled with the government’s efforts to support lower income home buyers through the Housing Financing Liquidity Facility - a fixed interest financing scheme with a 20 year credit term - should serve to bolster property sales and home ownership levels across the country.
Global Business Guide Indonesia - 12th June 2015
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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