Fri, 05 Dec 2008
From: The Jakarta Post
By Vivin Harsanto, Analyst
The debate about whether Asia has decoupled earlier this year is now history as it is clear that Asia's fortunes are clearly intertwined with those of the United States and the European economy.

Fortunately Indonesia's economy has relatively low exposure to the direct source of the credit crunch; the subprime mortgages and related derivatives. Nonetheless, we are not immune to the global economic turbulence.

How has this impacted on our property market? The property business is and will always be highly dependent upon accessibility to the financial market. On the supply side, property developments are generally financed through a combination of developers' equity, debt financing and project pre-sales.

As financing becomes scarce and increasingly expensive nowadays, developers will have to either increase their equity contribution or seek equity partnership.

On the demand side, buyers of property who are heavily reliant on banks for financing are also severely impacted as a result of higher interest rates and increasingly tighter lending standards.

Apart from the liquidity issue in the financial markets, we are also faced with the key issue of confidence. Banks are reluctant to grant loans as overall confidence in the economy erodes and creditworthiness of borrowers (end-users and developers alike) are more closely scrutinized.

Some developers are also increasingly reluctant to take on loans as they are worried about the financing bank's ability to provide pre-committed liquidity throughout the whole development process and do not want to be left holding an unsaleable half-complete development.

These developers are naturally choosing to delay construction until the pressures on liquidity have eased. On the consumer side, confidence regarding whether the developer can complete the project has also raised concerns. A truly challenging and vicious circle.

The impact in Jakarta has been quite noticeable. The past two months have seen sales and leasing activity softening and some activities even slowly grinding to a halt.

The slowdown is also somewhat influenced by the Idul Fitri and Year end period as well, which traditionally creates a seasonal slowdown in overall sales and leasing activities, thus creating a double whammy on sales. We will probably see the true impact of the slowdown by the first quarter of next year.

In the investment market for larger value properties, investors are generally taking a 'wait-and-see' stance until next year.

Investors with idle piles of cash are expecting a flood of distressed and foreclosed assets entering the market, and so are naturally aiming to buy at low prices.

However, for small to medium investment size properties, investors still show positive sentiment and demand as these properties tend to be more resilient due partly to the lack of need for financing creating a bigger pool of potential buyers.

So, what are the alternative actions?

Rather than lamenting about the current situation, we need to focus and find ways to adapt to the credit crunch. Property players need to be more creative in finding ways to sustain their business. Landlords of office buildings may opt to convert U.S. dollar rents into rupiah, or implement a pegged rate system as experienced in 1998.

This will enable tenants to have a more certain figure in terms of forecasting their expenses. For retail projects, landlords may offer a more flexible payment scheme such as a combination of fixed rental with concessionary rates, and/or stepping rental.

Apartments and landed residential developers should take the opportunity to demonstrate their quality and strength by delivering their products as promised. It is now, when consumer can distinguish the "real" developers.

Developers who entered the property business with a "me too" philosophy and do not have a strong background and capacity will struggle, as buyers become more prudent.

It is during times like these that the market will correct itself and reputable developers with quality products will outperform the market.

Alternative funding sources for developers also need to be explored; finding equity partnerships and forming consortium with other developers are viable options.

Furthermore developers who have ample funding should choose to continue construction even though at a slower pace, rather than a complete halt. Historically, projects that have stopped have proven to be harder to market again as compared to ongoing projects.

This is also an opportunity for developers who have the ability to complete construction, to be positioned with ready to use products to absorb pent-up demand when the market recovers.

For consumers who are taking advantage of the current pressure in the market, and seek to buy property, they must ensure that the developer is financially secure and has the commitment and capacity to complete the project according to plan.

What opportunities lies ahead?

Property has always been considered as a hedge against inflation. Historically over the past 10 years, property values achieved an average increase of 8 percent to 10 percent per annum depending on the location, above the average inflation rate. Following the Asian crisis in 1998, the Indonesian property market started to recover in 2001 and capital values increased gradually.

The current crisis is nowhere close to recovery. However we should take heart that Indonesia has always managed to weather the test of time. In the 1960's we experienced a local crisis with high unemployment rates, in 1998 we suffered a regional crisis and now we are facing a global crisis.

Can we overcome this? During the 1998 crisis, we were relying on foreign investment to support the market. Although we are facing global pressures, we should instead shift our focus towards strengthening the domestic market to help us recover sooner.

With well over 200 million domestic consumers, low cost producer advantages, huge natural resources and relatively progressive and stable democratic government there is tremendous potential in the Indonesian real estate market.

The first challenge is to carefully navigate these turbulent and tricky times as opportunities will abound when the storm clears. The second challenge is to identify, position and carefully time the introduction of tailored real estate products in various regions across Indonesia to enjoy the full benefits of the pent-up demand to come.

Vivin Harsanto is a director of capital markets at Jones Lang LaSalle (Indonesia) The writer can be contacted at
vivin.harsanto@ap.jll.com



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