Utami Prastiana, Consultant
It is now almost certain the global economy is mired in a recession due to the devastating impact of the United States financial crisis which has spread to Europe, setting off negative sentiment while unleashing tremendous downward pressures on Asian financial markets.
Most analysts now foresee at least one year of recession in the developed world and low growth in the emerging economies as consumers and investors lose confidence.
Certainly this gloomy economic outlook will adversely affect the property market around the world, including that of Indonesia.
Bank Indonesia further tightened its monetary policy by raising its short-term benchmark interest rate to 9.50 percent early this month when inflation reached 12.14 percent year-on-year last month. This credit crunch will certainly hit the property market as commercial banks follow up by raising their lending rates.
Given the sharp depreciation of the rupiah over the last few days and the bearish sentiment on the Jakarta stock exchange, the central bank will most likely maintain its tight money position.
Worse still, the almost 60 percent loss in the market capitalization of companies listed on the stock market as a result of the collapse of the composite stock index earlier this month will slash the purchasing power even of medium and high-income people -- so far the majority of property buyers.
Home mortgage financing rates have now increased to between 14 and 17.5 percent per year, compared to the previous level of 11 to 14 percent (which was previously even lower for some banks).
If this tight money situation continues until next year, people will find it hard to get housing ownership credits (KPR) or apartment ownership credits (KPA), thereby cutting the demand for properties.
We also note that a number of potential purchasers of upper-class condominiums with investment motives have postponed the decision to buy.
Although, the inflation rate is predicted to be much lower next year, at around 6.5 to 7.5 percent, the Economist Intelligent Unit (KIU) predicts that Bank Indonesia will keep the interest rate at 9.5 percent until well into 2009 to defend the rupiah.
Some flexibility to allow government to lower the interest rate will only become feasible once the rupiah has stabilized, which is unlikely to be within the next few weeks.
A stable rupiah will therefore play a key role in maintaining any upturn in the property market next year.
If the rupiah continues to depreciate sharply as it did over the past week, that will further increase construction costs and consequently property prices as well.
The global financial crisis and recession in the developed economies will certainly be a drag on Indonesian economic expansion. The EIU, for example, has revised downward its prediction on Indonesia's economic growth to 3.7 to 3.8 percent next year, as against its earlier projection of 5.1 to 5.7 percent.
This will also slow down business expansion and investment, a trend which it is estimated is likely to continue for the next two years. The EIU forecasts that the Indonesian economy will only recover to between 4.6 to 5.5 percent growth by 2011-2013, followed by a stronger property market.
During the course of this year, the office sector has thus far achieved quite high occupancy, a trend expected to continue for the next few months. However, next year the occupancy rate for the office sector is expected to fall to between 83 and 85 percent.
In the retail sector, with projected lower consumer spending in 2009 due to high inflation in 2008 and continued high interest rates in the first half of 2009, it looks like a challenging year for retail mall developers.
Currently, about 400,000 sq.m of retail space are being constructed and are scheduled for completion in 2009.
Although new shopping malls seemed to be well occupied by tenants and the overall occupancy rate for leased malls in Jakarta reached 86.6 percent at the end of third quarter of 2008, rentals were under downward pressure due to weaker consumer spending.
Therefore, some shopping mall operators and developers have given attractive incentives to retailers so as to encourage them to keep their tenancies, while downward pressures on rentals are expected to continue in this market during next year.
Until September 2008, the financial foundations of property developers in Indonesia were much better than during the Asian economic crisis of 1997. Before the 1997 crisis, banks provided loans excessively for their own business groups in the property sector in violation of legal lending limits.
Nowadays, most banks are staying cautious on providing lending to the property sector. However, most developers have been seeking alternative solutions for their project funding, for instance by obtaining pre-sales for property units or even using their own cash to finance development.
In the current situation we may see delays in some projects which have not secured funding.
Cash-rich buyers or tenants will be more selective in choosing properties. Secured project funding, developer's reputation and the current stage of construction will be major considerations influencing buying decisions.
Projects which have obtained high pre-commitment on rents and sales, will have a bigger chance of completing their project on time.
In facing the global economic recession, the domestic market needs to be strengthened to increase property demand.
Therefore the government needs to continue controlling inflation but not through tighter monetary policies. A stable rupiah also needs to be supported to maintain investor confidence and make it easier for businesses to calculate costs.