Bad debt in property may reach Rp 35t
JAKARTA (JP): Bad debt in Indonesia's property sector may jump to Rp 35 trillion (about US$4.6 billion) by the end of 1998 unless the government comes up with ways to help the ailing industry, an analyst said yesterday.
Property consultant Panangian Simanungkalit said the figure represented 25 percent of total loans to the sector.
"In 1994, bad debt was only Rp 3.9 trillion, and in just four years it could multiply by 10 times," he said.
He explained that domestic developers had been aggressively expanding their operations through rupiah loans and U.S. dollar funding.
The sharp decline in the value of the rupiah against the dollar had enlarged their overseas loans, he added.
He said dollar-denominated loans held by the property sector now totaled US$7 billion, of which $3.4 billion was owed by publicly-listed developers, $1.6 by non-listed companies, and the remaining $2 billion in the form of commercial papers.
Most of the bad debts were taken out to develop commercial property projects and to finance aggressive land accumulation. Now 87,000 hectares of land currently stand unused, he pointed out.
He stressed that unraveling property sector problems was a key to solving the country's banking crisis.
"Developers have cried out loud and clear that they can no longer pay their debts," he said.
Restoring the banking sector without cleaning up the mess in the property sector is a waste of liquidity, he said, pointing out that problems in the banking industry could not be separated from problems in the property sector.
The rupiah started to tumble in value against the U.S. dollar in August last year and reached its lowest level of Rp 17,000 to the dollar in January. In July it was trading at around Rp 2,400 to the dollar and is now hovering around the Rp 8,000 mark.
The currency crisis devastated the banking sector, which had been pursuing an aggressive lending strategy in the property sector.
As part of the multi-billion dollar IMF reform program, a total of 23 commercial banks have been shut down since last November, and many are now under the supervision of the Indonesian Bank Restructuring Agency (IBRA). The agency has also taken over the actual management of seven ailing banks.
Bank Indonesia said that it had given more than Rp 100 trillion to cash-strapped banks to keep them afloat.
"The government must use the property sector as a major policy instrument to deal with the crisis," Panangian said, pointing out that the situation in Thailand had begun to improve after the country took firm action to clean up the mess in its property sector.
He argued that the government should also introduce a mechanism similar to IBRA in the property sector, under which commercial property projects collaterized in local banks could be taken over and sold to foreign companies.
The government must also cut red tape and ease investment restrictions to lure foreign investors into the property sector.
He said that foreign investors commonly demand a return of between eight and 10 percent on investments, which meant that property must be sold at prices lower than those currently proposed by developers.
According to him, commercial property worth a total of $50 billion was available for sale to foreigners in Jakarta and Surabaya, including 10 million square meters in Jakarta's central business district.
The government must quickly take action to deal with problems in the property sector because it is now in a terrible decline, he said.
He said that occupancy rates in commercial property had tumbled to 60 percent from more than 80 percent during the pre- crisis period.
In addition, land prices in Jakarta's golden triangle had fallen by 40 percent, he said, adding that demand in the commercial property sector this year would be negative. (rei)