Several factors have affected the market environment for residential property in Indonesia over the past two years. Slowing GDP growth, rising interest rates and central bank measures to prevent excessive speculation call for a reassessment of investment prospects. While most of these factors point to a less bullish market in the near future, the longer-term prospects remain intact.
Despite the rapid growth of Indonesia's property market in recent years, houses and apartments are still among the cheapest in the region. Global Property Guide lists the average price for 120 square-metre properties in Jakarta at $2,692 USD per square metre (2014 data), which is cheaper than in the prime locations of Malaysia, Cambodia and the Philippines and significantly below Thailand, where an equivalent property in Bangkok would cost $3,638 USD per square metre (based on 2015 data, however). On the back of rising personal incomes and with Indonesians flocking to the capital in search of better employment, this makes Jakarta – considered to be the second-largest metropolitan area in the world – an attractive rental market. While yields have come down in recent years as purchasing prices went up, they are still the highest in the region. Global Property Guide's list of countries where buy-to-let property earns the highest returns features Indonesia at the top of the region with an “excellent” typical gross rental yield of 8.9% per annum.
Gross Rental Yields in the Region (%)
Source: Global Property Guide; data is based on 120 sq.m. properties in premier city centres (downtown Jakarta in the case of Indonesia)
Indonesian house prices are not rising as fast as they used to, which reflects a significant cooling down of the market in Jakarta and adjacent regions. Bank Indonesia's (BI) Residential Property Price Index increased by 6.3% in 2014, down from an annual growth rate of 11.5% a year earlier. Given consumer price inflation of 8.36% in 2014, prices actually declined in real terms. The slowdown has been particularly pronounced in the metropolitan area of Jakarta, which BI refers to as Jabodebek-Banten (a term derived from the cities of Jakarta, Bogor, Depok and Bekasi and the adjacent province of Banten). Annual growth here slowed from 12.4% to a mere 5.1%. By contrast, the rest of the surveyed cities saw a more modest decline in growth, namely from 4.9% to 3.7%. These trends continued into 2015, and the central bank estimated that the metropolitan area would in fact under-perform in the second quarter, with year-on-year growth predicted to slow to 3% in Jabodebek-Banten while holding at 3.7% elsewhere.
Residential Property Price Index – RPPI (2002 = 100)
Source: Bank Indonesia (BI) data
Residential Property Price Index (year-on-year change in %)
Source: Bank Indonesia (BI) data
The divergent growth trend puts urban areas outside the capital squarely on the radar of real estate investors and developers. This includes the country's second biggest city, Surabaya, where prices were up an annual 8.8% in the first quarter of 2015, and Bandung in West Java (+10.6%). Other cities did better yet, such as Makassar (+17.21%), and Manado (+21.9%), which are transforming into economic gateways of eastern Indonesia.
The increase in property prices in recent years went hand-in-hand with rising building costs. While Indonesia still boasts a low-cost workforce when compared, for instance, with China, wages have seen rapid increases in recent years, not least because political decision-makers sided with labour unions in setting higher minimum wages. At the same time, the construction boom in the country has driven up prices of materials (See Indonesia’s Building & Construction Materials Sector).
Despite the rising prices in the so-called secondary cities, buy-to-let should become an appealing proposition in urban centres beyond Jakarta, where rapid economic development is playing catch-up with the capital. This is at a time when the upper end of the market in Jakarta is feeling the effect of slower GDP growth, which also weakens demand from expatriates and domestic business travellers. BI's figures for the first quarter of 2015 show that large properties saw the smallest annual increase in prices (+5.2%), while smaller sized properties rose the fastest (+7.1%). In Jakarta, the prices of large properties rose by a meagre 3.3%.
Unsurprisingly, the luxury segment is affected as well. The vacancy rate for high-end rental apartments in Jakarta increased from 11.7% to 14.7% year-on-year to end-June 2014, according to professional services firm Jones Lang LaSalle (JLL). In “The Wealth Report”, an analysis of prime residential markets by property consultancy Knight Frank, Jakarta slipped to 12th place in 2014 after leading the rankings in 2012 and 2013.
The property market slowdown is partly the result of tighter mortgage rules introduced by Bank Indonesia in September 2013 to prevent an excessive build-up of housing debt. Among other measures, the central bank lowered the maximum loan-to-value (LTV) ratio for landed houses and apartments acquired as second or additional homes, thereby raising the required down payment. Because the lower LTV ratio applies only to properties measuring more than 70 square metres, it aims specifically at the upper end of the market. Furthermore, banks were barred from providing loans for the purchase of properties that are still under construction. Aside from the legal changes, the rapid increase in interest rates creates a less favourable market environment for anyone using credit to bet on capital appreciation.
The cooling down of the market alleviates concerns that a real estate bubble could be in the making. Given the continued increase in demand for housing in and around Jakarta and the still low price level when compared to prime cities in neighbouring countries, there appears to be little need for a major market correction at this time.
Indonesian law severely restricts the options for foreigners to engage in the country's residential property market. Only Indonesian citizens can hold land titles; foreigners may only lease properties for a period of 25 years, which can be extended twice. In practice, of course, this often leads to Indonesians buying properties for foreign spouses or acquaintances.
While there has been talk of relaxing the restrictions on foreigners, it is not clear when this might come about. Most recently in May 2015, the government announced that it plans to allow foreigners to purchase properties in the luxury apartment segment which is defined as holding a minimum value of 5 billion IDR. Should it move ahead with these plans, it would provide a significant boost to the higher-end market.
Taking a longer-term view, the central bank measures should be welcomed in their effect to stabilize the market and prepare it for sustainable growth, with investment gradually fanning out into the regions from the real-estate hotspots of Jakarta and Bali. The long-term growth potential of Southeast Asia's largest economy is undisputed, and a peaceful presidential handover in 2014 underscored Indonesia's reputation for political stability. The country's population is young and growing; urbanisation and rising living standards underpin demand for landed properties. Ambitious government plans to improve both the quantity and quality of affordable housing spell enticing business prospects for low-cost development (See Mass Housing Plan Spells Massive Opportunity). The upper end of the market is equally attractive: In a 2014 report, Knight Frank predicted “an eye-catching 144% increase in Indonesia” in the number of ultra-high net worth individuals. Meanwhile, the increasing scarcity of space in Jakarta is driving up land prices and thereby creating a compelling case for investment in high-rise apartments, with skyscrapers already dominating the skyline of the capital.
The legalities involved in property acquisition in Indonesia are complex, which makes for relatively high transaction costs. While improving, the market is still considered to lack transparency. To mitigate risks associated with insufficient on-the-ground information, foreign developers and investors typically participate through joint ventures with local companies or indirectly through the listed developers (See Opportunities in Real Estate).
Global Business Guide Indonesia - 2015
Contribution to GDP: 2.79% (Q3 2015)
Mortgage to GDP Ratio: 3.5% (2015)
Housing Backlog: 13.5 million (estimated)
Average Condominium Price: 46,322,208 IDR/sqm (CBD, Jakarta, Q3 2015)
Average Retail Space Rental Price: 829,652 IDR/sqm/month (CBD, Jakarta, Q3 2015), 542,221 IDR/sqm/month (Jakarta, Q3 2015)
Average Office Space Rental Price: 342,581 IDR/sqm/month (CBD, Jakarta, Q3 2015)
Average Industrial Land Price : $220.2 USD/sqm (Bekasi, Q3 2015), $140.6 USD/sqm (Tangerang, Q3 2015)
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.