The government’s relaxation of property ownership rules, which will take effect next month and allow foreigners to own property for up to 90 years, is expected to be a windfall for the market.
However, Hiramsyah Thaib, president director of property developer PT Bakrieland Development, told the Jakarta Globe that even without the change, real estate will take off next year, thanks to strong economic growth, a stable political situation and the prospect of the nation getting an investment grade rating.How will relaxed foreign ownership impact the sector?
We expect it to help set the scene for a property boom in 2011. But even without the new rules we think the sector would have seen a boom next year.
Property prices in Indonesia are currently very cheap compared to Singapore and Malaysia. The highest price paid in Jakarta is Rp 25 million ($2,775) per square meter, which is 10 times cheaper than Singapore.
The rules on foreign ownership have had a dampening effect on property prices in Indonesia. This was compounded by the impact of the 1997-98 Asian financial crisis, which contributed to lower property prices as the government grappled with reform. Property prices in Indonesia only started to recover in 2004, but this was hit by the global financial crisis in 2008.
Currently, international investors are focussing more on Indonesia. Indonesia has low barriers of entry compared to China, property prices are cheap, the banking sector is stable in terms of liquidity and the political situation is more settled than countries like Thailand and the Philippines. Many international companies and organizations are currently looking at setting up offices in Jakarta. Just as Hong Kongers got into investing in Chinese property, Singaporeans will start investing here because of the exciting prospects.If a property boom does occur in 2011, how far do you expect prices to climb?
Based on China, prices could go up by as much as 30 percent a year. But even in prime locations in Jakarta, prices had went 20 percent to 30 percent even after hit by crisis.If property prices rise sharply, will this create a bubble?
We are far from a property bubble. Bubbles and crashes only happen when people fund property acquisitions with large amounts of debt. The subprime mortgage crisis in the US happened because its mortgage to GDP ratio was 80 percent, while Indonesia’s is only 2 percent.What impact will relaxing foreign ownership have on the high-end property sector?
The relaxation of rules will definitely hit the high-end of the property market first. Currently, the high-end accounts for less than 10 percent of the market. Because prices of property are still cheap, people prefer standalone houses but once prices rise people will become more interested in high-rise apartments. In Singapore, not many people can afford to buy houses. The mid-to-high sector will also be affected. Not just because of the relaxation of the rules but because Indonesia’s strong economic performance is increasing foreign interest.How will the relaxation of ownership laws affect foreign direct investment?
Based on what happened in Malaysia, we expect an extra $3 billion to $6 billion of foreign direct investment a year in Indonesia. Foreign direct investment in Malaysia jumped when it relaxed rules on foreign ownership of property. It will cause a multiplier effect that will resonate through the entire economy.What contribution does the property sector currently make to economic growth?
It is very small, property is not yet a major driver of growth in Indonesia. Our mortgage to GDP ratio of 2 percent compares with 9 percent in Thailand and 26 percent in Malaysia. Easing foreign ownership rules will boost the sector’s contribution to growth. Banks are targeting 45 percent mortgage growth this year, twice that of last year, and interest rates are at almost their lowest levels ever. We have never been in a situation like this before where inflation is very low, the rupiah is strengthening, the banking sector is very healthy, and there is a supply shortage in the property sector. All of these factors are very conducive for the industry.Is there room for the mortgage rate to be decreased again?
Yes there is. Bank lending rates usually lag changes in Bank Indonesia’s key interest rate by about three to six months. So the potential for banks to offer lower rates is large. We expect the current mortgage rate of 9 percent fixed for two years could drop to 8.5 percent or 8 percent, because in 2008 when the Bank Indonesia rate was higher than it is today mortgage rates were as low as 8.8 percent.