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Property | Mass Housing Plan Spells Massive Opportunity

Indonesia's new government has vowed to tackle a national shortage of housing by increasing state support for affordable accommodation and by constructing hundreds of apartment blocks for low-income residents, including those currently living in makeshift shelters. As governor of Jakarta, president-elect Joko Widodo proved to stand by his word when he rehoused squatters from the slum areas to newly-built low-cost apartments; he is expected to pursue similar policies on a national scale as president. Media reports suggest the new administration will redouble efforts to encourage developers to provide subsidized housing and banks to support such projects with reasonable mortgages. This spells business opportunities for residential developers and suppliers of building materials, particularly in the budget end of the market (See Indonesia’s Building and Construction Materials Sector).

Mass Housing Plan Spells Massive Opportunity
The renewed vigour in the provision of affordable accommodation to Indonesia's fast-growing urban population spells enticing business opportunities for low-cost developers and their suppliers

The Indonesian Constitution guarantees every citizen the right to decent accommodation, but the state has largely failed in securing this right amid rapidly rising demand. Demand is driven not just by national population growth, but particularly by the influx of domestic migrants to the industrial heartland of the country; the western part of Java Island. By conservative estimates, the population of the Jakarta metropolitan area is expected to exceed 35 million inhabitants by 2020, up from just below 28 million in 2010. Since space has become a rare commodity in Jakarta proper, urban sprawl will see most new development take place on the fringes of the metro area. Not just is there a need for more homes, but bigger ones, as well, because economic development is raising the standard of living for most Indonesians, which in turn is raising expectations as to the size and quality of family housing.

Urgent demand particularly for low-cost units

Indonesia requires approximately 800,000 new housing units every year, according to government data. In addition, the country needs to address a backlog of some 15 million units, which will provide decades of work for developers. Indonesia's Financial Services Authority (OJK) is pushing banks to provide more long-term mortgages, with OJK Chief Executive Firdaus Djaelani saying in January 2014 that he expected government-owned institutions to lead the way in financing residential construction (See Indonesian Banking Sector Outlook: In Need of a New Growth Strategy). The shortage of housing is particularly pressing in the low end of the market, as affordable housing is proving increasingly hard to provide due to rising land prices in urban areas. Prices are also driven higher by better-off Indonesians investing in a second or third apartment.

The government attempts to tackle this dichotomy in the market by subsidizing mortgages for low-cost properties, while discouraging speculative buying. The Housing Finance Liquidity Facility (FLPP) programme provides mortgages for low-incomes families at below-market interest rates. This is achieved through a state subsidy to the banks that dispense those mortgages. FLPP loans were used to buy 87,765 units in 2013. For 2015, the Housing Ministry announced, FLPP mortgages would apply exclusively to flats rather than houses due to the shortage of building space in the vicinity of major cities. To cool credit lending in the upper market segment, meanwhile, the central bank has recently increased the minimum down payments for mortgages to acquire large or secondary homes.

Jakarta: more than a thousand apartment buildings planned

In addition to helping low-income buyers finance their mortgages, the government is engaged in the construction of low-cost apartments, or rusunawa, itself. As governor of Jakarta, Joko Widodo said the city aimed to erect at least 200 low-cost residential towers per year over a five-year period, partly to provide accommodation for residents moved out of riverbank slums as the capital tackles congestion and flooding. Media reports suggest the towers would be built mainly in the areas of Pulo Gebang, West Jatinegara and Komarudin in East Jakarta, Muara Baru in North Jakarta and Daan Mogot in West Jakarta.

While the political measures to boost housing make the low-cost market more attractive for developers, investors still lament low margins, as construction costs have risen quickly along with wages and the price of building materials (See Challenges in the Construction Sector). The rising price and scarce availability of land in reasonable proximity to city centres, obviously, is another major hurdle for private-sector developers. As for state-owned enterprises, the government has promised to help them develop government land. In 2013, the cost of small homes with a floor area of less than 36 square metres rose considerably faster than that of medium or big homes, according to central bank data (See Property in Indonesia: Overview). The increase was particularly pronounced in Greater Jakarta. In spite – or because of – these difficulties afflicting the low-cost segment, the new government may be compelled to lift the price cap on properties for which FLPP mortgages can be granted.

Bureaucratic hurdles

Slow progress in the provision of low-cost housing has in the past also been blamed on red tape and graft. While the affordable housing policies are initiated at the national level, their implementation rests largely with local authorities, and coordination between the two levels of government is often left wanting. Developers have complained that overlapping regulations and other bureaucratic hurdles affect particularly the low-cost segment, driving some companies to shift their focus to the middle-income segment instead. The majority, however, remain committed to the low end of the market.

Pre-fab technologies in high demand

The renewed vigour in the provision of affordable accommodation to Indonesia's fast-growing urban population spells enticing business opportunities for low-cost developers and their suppliers. Modular structures where major components for walls and roofs are produced off-site and assembled on-site can reduce both the cost and time of construction. The Association of Precast and Prestressed Concrete Companies (AP3I) has been reported as saying that the use of precast concrete in Indonesia was still low due to a lack of knowledge in the field. AP3I chairman Wilfred Singkali said that precast concrete accounted for less than 10% of total concrete supply. However, given the above mentioned pressure and support to produce low-cost housing, prefabricated technologies and apartment buildings made of precast concrete will in all likelihood gain increased attention.

Meanwhile, the top end of the market could also receive a boost in demand. Before the presidential election, a member of Mr. Widodo's campaign team said foreigners would be able to acquire apartments of at least 200 square metres in major cities and on the islands of Bali and Batam, where many foreigners reside. Currently, foreigners are not allowed to own property, though some are believed to do so indirectly through Indonesian acquaintances. Finally, increased development of transportation infrastructure is another factor that bodes well for residential construction in Indonesia over the coming years (See Indonesian Infrastructure: Tremendous PPP Opportunities).

Global Business Guide Indonesia - 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.