Indonesia is one of the few countries that successfully escaped the pitfalls caused by the recent global financial crisis. As such, the country is increasingly gaining spotlight in the international stage as one of the new rising stars in Asia.
The view from respected financial institutions such as Morgan Stanley and CLSA that Indonesia will soon join China and India as one of key regional growth centres is an indication that global investors´ sentiment towards the Indonesian economy has gradually strengthened. The country also gained higher recognition from the international community on the socio-political front as a new rising democracy as indicated by two successful and peaceful direct presidential elections in the past six years. Such optimism has long been expected in order to boost foreign investment and accelerate economic development in Indonesia.
Therefore, this momentum should be used by the local stakeholders – mainly the government together with the private sector – to prepare a roadmap that focuses on the economic development, which would further establish Indonesia as a top-notch country amidst todayâ€™s global competition.
Key aspects that are needed to be improved in this regard include current policies and regulations. Based on this framework, old policies and regulations that may hamper the economy and business growth potential should be adjusted to adapt to the ongoing and future development.
In the property sector, a good example of an inefficient existing policy is the regulation on foreign property ownership. The regulation is viewed to have many restrictions, and at the same time, generates confusion in its implementation. This makes investing in the Indonesian property market looks unattractive to many foreigners.
Foreign ownership regulations
According to the current agrarian law (UUPA No. 4 Tahun 1960), foreigners who reside in Indonesia can only acquire a (residential) property that is built on land with Hak Pakai (Right of Use) title. However, property developments that are built on Hak Pakai land are very rare; almost all existing and proposed developments in Indonesia are built on land with Hak Guna Bangunan (Right to Build) title. This automatically limits foreignersâ€™ capability to acquire properties in Indonesia.
The other way for foreigners to buy a property is through an Indonesian-registered company. A foreigner can set-up a single-asset company in Indonesia that may own a property. With this scheme, a foreigner, as the owner of the company, can purchase a property built on a land with an HGB title just like local companies or institutions. In addition, we also understand that a lot of foreigners are buying properties in Indonesia through an Indonesian nominee, which is a common practice in certain areas like Bali and Batam. However, both schemes are perceived to be complicated and risky, and a lot of foreigners are not interested to go through the hassle of Indonesian bureaucracy in this regard.
What can be changed?
Basically, there are several points in the current foreign ownership regulation that have to be reviewed to make it easier for foreign ownership. The first is concerning the type of land title allowed for foreign ownership. As a foreigner can only purchase a property that is built on land Hak Pakai title, the limitation of projects developed Hak Pakai land has become the most fundamental issue. In addition, the 25-year period of ownership has made this an even less attractive option as other countries apply much longer periods of ownership. Furthermore, the indefinite content and purpose of the regulation itself were considered as counter-productive to market growth. Therefore, once the new or revised regulation is issued by the government, we hope it can effectively regulate market practice and activity to attract foreigners to invest more in Indonesiaâ€™s property sector.
Considering that the current sentiment of international investors is on the positive side, we can conclude that this is the right time for the government to launch a breakthrough policy in order to lure foreign investors entering the domestic property market. In this regard, the revision of foreign ownership law is expected to be the most anticipated agenda for this year.
Additionally, we may expect the multiplier effect of ease of foreign ownership. This begins with the income tax for the country, higher potential growth to the property industry and its downstream businesses which include the manufacturing and banking industry, and also wider employment for Indonesian citizens. Finally, economic development in the regions will also get the benefit. Indonesia – an attractive proposal
The property market in Indonesia is actually attractive to prospective foreign investors. One of the key attractions would be the price. Compared to other markets in the region, the price for most property types in Indonesia is considered the lowest – even as compared to less-developed markets like Vietnam – yet, the quality of property projects here is comparable to other developed markets. The other pull factor is the attractiveness of certain areas in Indonesia such as Bali, Lombok and Batam, which are quite famous amongst foreigners, including international travellers and holiday makers.
Even the capital city of Jakarta, where the property market is regarded to be still in the development phase, has plenty of upsides and potential in the future. Compared to its Asia Pacific counterparts, the Jakarta property market has performed relatively well throughout 2009 - a sign that the market still has considerable potential demand to attract foreign investors to the country.
In the commercial office sector for instance, throughout the course of 2009, the CBD market absorbed a net take-up of almost 100,000 sq m of office space. In contrast, regional financial centres such as Singapore, Hong Kong and Sydney witnessed negative absorption levels. The healthy take-up rate was due to the continuing expansion of big corporate occupiers in Jakartaâ€™s commercial buildings. The same thing happened in the residential sector. Even though condominium sales plummeted compared to 2008, activity in both primary and secondary markets in 2009 is still enduring and positive as a whole.
The growth of the property sector in the previous years is an indication of Indonesiaâ€™s large domestic economic potential, which is supported by banking, telecommunications, fast-moving consumer goods and other mass consumer-based industries. Yet, this potential can be maximised if it is also leveraged by the involvement of global investors in the domestic market. For this purpose, a good and transparent system and regulation are needed to encourage overseas companies and individual investors to consider investing in Indonesia. Ultimately, the regulation on property ownership for foreigners in Indonesia should be reviewed and adapted according to the global standard, as Indonesia is the only large country that still prohibits direct foreign investment in the property sector.About the Author:
Anton Sitorus is the Head of Research in Jones Lang LaSalle Indonesia. With over nine years of experience in the industry, he provides the insight for effective and efficient decisionmaking through comprehensive research and thought provoking papers on the Indonesian property market for various clients. Mr. Sitorus is based in Jakarta and can be contacted at email@example.com