Thu, 14 Jan 2010
Despite strong GDP growth, Indonesia's real estate prices were flat in 2009. Key factors affecting the market include foreign ownership restrictions, unpredictable inflation fluctuations, a construction boom and an underdeveloped mortgage system.

Even with economic resiliency and political stability, house prices in Indonesia remained almost unchanged in 2009.

In Q3 2009, the price index for new houses rose 2.02% y-o-y, but when adjusted for inflation house prices barely rose with 0.24% increase. Nevertheless, the third quarter’s performance is better than the past six quarters, according to figures from the Bank of Indonesia.

In 2008, nominal prices rose by an average 2.45% y-o-y but it actually fell by 7% in real terms. During the first two quarters of 2009, nominal prices rose by 2.2% but fell by an average of 3.75% when adjusted for inflation.

In Jakarta, the average asking price of strata-title apartments also remained relatively unchanged since 2008 at IDR 11.5 million (US$1,191) per sq. m. in Q3 2008, according to Colliers International, an international real estate firm.

Jakarta luxury apartments saw price increases of 8% - 10% in 2007, propelled by the strong economy, although the over-all national house price index fell 0.6% in real terms (5.8% in nominal terms).

The stable (or stagnant) property prices may be viewed positively compared to devastating house price crashes in other Asian countries. However, it may also be viewed as disappointing since Indonesia’s economy had the strongest GDP growth rate in the region in 2009.

Indonesia was also not besieged by the political instability of afflicting neighboring Thailand and Malaysia. Yudhoyono’s reelection for his second and last 5-year term was widely anticipated. He won an outright majority during the first round of voting, mainly due to political and economic reforms he implemented.

The economy grew by an average of 5.9% from 2005 to 2008, including a GDP growth of 6.3% in 2007, the highest for a decade. GDP growth is expected to slow down to 4% in 2009, a very strong showing amidst economic contraction in most countries in Southeast Asia.

There are several possible reasons for the lackluster performance of property prices. Restrictions on foreign ownership of real estate dampen demand for real estate. Foreigners tend to invest in real estate as property developers leading to a huge supply of new condominiums and houses.

Other possible reasons for the inability to translate pent-up demand to house price growth include economic uncertainty brought by inflation and the underdevelopment of the mortgage system. Insecure property rights and the huge informal economy also tend to depress housing market development.
High inflation leads to uncertainty

The relatively poor performance of residential real estate prices in Indonesia has been something of a puzzle. There is tremendous pent-up housing demand. Indonesia’s population is the world’s fourth largest, at 230 million. Rapid urbanization has led to high urban densities, especially in Jakarta.

And there has been good economic growth. By the early 2000s the Indonesian economy had stabilized after the Asian Crisis. GDP growth averaged 4.6% from 2000 to 2003, then 5.4% from 2004 to 2006, and finally 6.2% in 2007-2008.

But economic growth never translated to strong house price increases. In 2008 the Indonesian house price index was still about 50% below its 1994 peak in real terms.

One possible reason is Indonesia’s highly unpredictable inflation rate, typically outpacing economic growth. From 58% in 1998 and 20% in 1999, inflation was wrestled down to 3.8% in 2000. In 2001 and 2002, inflation soared to more than 11%. Then it eased to 6% in 2004. Then the consumer price index jumped again to 10.5% in 2005, and 13% in 2006. Inflation dipped back to 6.2% in 2007 before rising to 9.8% in 2008.

High inflation with its subsequent effect on economic growth, wages and interests increase the level of uncertainty over the economy. This tends to discourage people from borrowing to finance house purchase.

While real estate investment may be used by wealthy people as a hedge against inflation, this is not an option for the majority of the population.
Construction boom

Another possible reason for Indonesia’s lacklustre residential prices has been the massive amount of real estate construction when the economy grows.

Before the Asian Crisis, the supply of apartments in Jakarta rose from around 6,000 units in 1996 to around 18,000 in 1997, with an additional 2,000 units completed in 1998 and 1999. Scant new supply came onto the market from 2000 to 2003, mostly projects started pre-crisis.

Real estate sales picked up in Q4 2001, encouraging developers to launch new projects, albeit slowly. With strong take-up and increasing occupancy rates, construction picked up pace in Jakarta.

* In 2004 around 9,500 new units were completed, bringing total supply to around 31,500 units.
* In 2005 and 2006, more than 5,000 units were completed annually.
* In 2007 construction exploded, and more than 15,500 units were completed, pushing total supply to 57,353 units.
* During the first half of 2008, 7,500 units were added to the stock, with another 11,107 units expected during the rest of 2008.
* As of Q3 2009, total apartment stock in Jakarta reached 74,920.
* Over the next two years, the total stock is expected to reach 120,000 by 2011, according to Colliers International


This massive rise in the number of apartment units has impacted prices and some say the downward pressure is likely to continue.
Weak mortgage market

Surprisingly, all the building has taken place despite a relatively underdeveloped mortgage market.

Indonesia’s mortgage market has grown by an average 33.5% annually from 2003 to 2008 in nominal terms. But some apparent growth is due to inflation, and mortgage lending has come from a very low base.

Outstanding credits for house and apartment purchases have risen from IDR15,976 billion (US$1.66 billion) in 2000, to IDR122,794 billion (US$12.7 billion) in 2008. And yet, despite tremendous growth for the past five years, mortgage credits were just 2.5% of GDP in 2008, still below the 2.8% of GDP in 1997.

Despite the recent financial turmoil, Indonesian banks remain strong and adequately capitalized. However, memories of the Asian crisis are still vivid leading banks to be extremely cautious in extending housing loans to the real estate industry. According to a 3Q 2009 Residential Property Survey by the Bank of Indonesia:

* 46.7% of residential property development projects were financed internally
* 34.2% were financed through bank loans
* 10.4% of projects were financed by consumer payments (pre-selling)


For home buyers, interest rates at 12-13% (used by 67% of property buyers under house ownership credit or KPR in Q3 2009), relatively low Indonesian standards, impose a huge burden. During the post-Asian Crisis period, interest rates by commercial banks typically exceeded 20%.

The survey also showed that 16.7% of buyers used progressive cash payments, while 7.6% bought using hard cash.
Yudhoyono, the reformer

The 2004 election of Susilo Bambang Yudhoyono, Indonesia’s first directly-elected president, has been followed by a revival of confidence and substantial economic reforms. A retired general with a doctorate in economics, he has had the political and intellectual acumen to implement reforms, including unpopular ones.

New laws and reforms on Yudhyono’s watch:

* Laws to improve the investment climate and the delivery of public services
* A landmark investment law providing equal treatment regardless of nationality, to attract more foreign investments
* A new tax administration law strengthening the rights of taxpayers, while limiting arbitrary decision-making by tax officials
* Streamlined business licensing procedures
* Higher corporate governance and risk management standards for state-owned banks.


The fruits of the reforms are visible. Approved foreign direct investments (FDI) surged to US$40 billion in 2007, after steadily rising from US$10.2 billion in 2004. FDI to the “Housing and Offices” sector rose from US$57.2 million in 2006. to US$1.04 billion in 2007.

President Yudhoyono was easily reelected in April 2009 with 60.8% of votes during the first round. His closest opponent was former president-Megawati with only 26.8% of votes.

With high domestic consumption and investment, the government is confident that a 5% GDP growth is possible in 2010 while keeping inflation at around 6%.
Foreign ownership restrictions

Pressure for the government to relax foreign ownership rules is growing. The International Real Estate Federation or FIABCI, was the most recent one to air such calls. They note the huge potentials for real estate investment of Indonesia.

In April 2009, rental yields in Jakarta ranges from 12% to 13.5%. This is among the highest in the world, according to Global Property Guide research.

In the past, the government has considered extending the property usage rights of foreigners to 70 years, from the current 25 years, with two extensions possible, of 20 and 25 years. More recently, attention shifted to direct foreign ownership of real estate.

Early in 2009, President Yudhoyono stated that he would ask the National Land Agency (BPN), the home minister and the state minister for people's housing affairs to conduct an in-depth study into granting expatriates home ownership rights.

Theoretically, foreigners can own condominiums or strata-title residential property. However, a decade after Regulation 41 of 1996, no foreigner has actually received a strata title certificate of ownership. Foreigners are likewise not allowed to own land.

Foreigners can only control landed property in Indonesia either by setting-up a Penanaman Model Asing (PMA) Company or through long-term leases, with the right to buy if the ownership laws are changed.

However, these schemes add unnecessary costs, management difficulties and risks to foreign property buyers. In some cases, foreigners use loopholes in the existing laws to buy houses, apartments or condominiums indirectly.

For instance, a foreigner will ask a national to buy a house using his money. Then before a notary, the two would sign an agreement saying that the national is acquiring a loan from the expatriate worth the same amount of the property value. Part of the agreement is that the loan will be made permanent while the property, used as collateral, can be retaken anytime.

Removing ownership limits can greatly help the real estate sector revive and development in line with the global economic recovery. Government officials, however, noted that safeguards must be placed to prevent speculative purchases. One way of doing this is to limit ownership to permanent residences.



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