Buying an apartment can be wise investment option

Rudijanto, Contributor, Jakarta

The market for apartments with strata title here looks rosy this year as more Indonesians seek an alternative investment due to currently low interest rates offered by banks. However, if not properly managed, the buoyancy of this overconfident segment may ruin expectations.

Since the continued decline in the interest rate of Bank Indonesia (BI) certificates, depositing money in the country's banks has become the last option for affluent Indonesians.

With the current 4 percent interest rate for deposits, which is further reduced by 10 percent tax on the interest received, one may end up losing money in the long run should inflation reach more than 3 percent. Inflation here is estimated around double the figure or higher.

Facing such unattractive interest rates, many affluent Indonesians have taken their money from banks to invest in other, more lucrative investments. Hence, strata-titled apartments have turned into a promising option.

Data from Jakarta-based property consultant PT Procon Indah (Procon) shows that 30 percent of apartments purchased are for investment, while the majority -- some 48 percent -- bought the apartments as a primary residence, and 13 percent as second homes.

Colliers International's residential manager Aleviery Akbar said that though quite a number of people buy apartments for use as their own residence, many will not hesitate to sell if the price is right. Customers in this category are indeed savvy investors with a shrewd business sense.

Akbar said that while bank interest rates had been speedily declining thus making deposits close to unthinkable, the country's property sector, apartments included, had, to the contrary, become a gold mine since the boom last year.

"They estimate that if they invest in property, they will enjoy another boom in the next five years since the property sector here booms every five years. That is the cycle in the property market. The smooth legislative election held recently also encourages them to invest in this sector," said Akbar.

Chairman of the Indonesian Real Estate Broker Association (AREBI) Tirta Setiawan also concurred when he said that investing in apartments was a wise move. He was quoted by Indoproperty.com as saying that, currently, investing in residential property offered a larger profit margin in a short time.

Apartments for investment, Setiawan suggested, were those with reasonable prices and built by developers with a good track record. A good location, for example, in the center of the city was also another prerequisite.

In addition to an increase in the resale price in the not-too- distant future, buyers of strata-titled apartments in certain strategic locations may also reap still larger profits. For instance, apartment owners in the Casablanca area will benefit from the Jakarta administration's plan to construct a monorail project that will serve the area.

"It is only natural that the price of land and property around the monorail project will go up. It will be a significant increase, as the available land is limited," said PT Century21 Casablanca's president director Tonny Eddy, as quoted by Sinar Harapan daily.

Procon's research director Lini Djafar added that on top of a handsome profit and capital gain, owners of strata-titled apartments have another source of income: rent from tenants, if their unoccupied apartments are put up for lease.

With bank interest rates remaining low and possibly declining still further, such projected gains in purchasing apartments in certain strategic locations may be hard to resist for anyone, like affluent Indonesians who seek investment opportunities. This partly explains the reason for optimism in this sector.

Procon said that this year's first quarter (Q1) sales of strata-title apartments had recorded a significant increase from the same period of last year, from 184 units to 246 units. This further justifies the buoyant atmosphere in this sector.

Though this Q1 figure is dwarfed by the Q4 figure of last year, which totaled 681 units, Djafar believes this year's sales will perform well since sales normally reach their peak in Q4.

"Why sales in Q4 normally increase is because developers tend to be more flexible in their pricing strategy as most have to meet established sales targets," said Djafar.

In spite of a number of political and economic uncertainties, developers seem to be optimistic, as reflected in ongoing construction. Among the numerous new projects is the low-rise apartment Patra Maisonette, which commences construction this month. The 53-unit apartment is scheduled to enter the market in June 2005.

Another apartment project in the central business district (CBD) is Capital Residence, which will start construction in June. Scheduled to be completed in 2006, this 328-unit apartment will add more supply to the market.

Still in the CBD area is the 300-unit Setiabudi Residence, which will commence construction in September. Located close to CBD's Rasuna Said area, the apartments will enliven the market in September 2006.

Other apartment projects that are under construction or will commence development in the near future include ITC Kuningan Apartment, Puri Garden Apartment, Mediterania Garden Residence, Tanjung Duren Apartment, Gading Mediterania Residence, Apartemen Laguna Pluit and Marina Ancol Apartment.

While the activities show optimism on the part of developers, who seem to be anticipating another boom in the strata-titled apartment market, Akbar warns that an excess, or oversupply, on the other hand may turn out to be a "property crash" that could ruin the apartment market.

"The developers are currently continuing to build because they have the money or maybe they are afraid of missing an opportunity if they do not construct now, but, somehow, if there is no control, say from the government, the ensuing oversupply will be damaging to them and owners as well," said Akbar.

At the current rate of construction, he explained, supply already exceeded demand, and a price war had started. In the long run the initial attractiveness of the apartment business might lose its luster.

"In Singapore, for example, the price of apartments has already dropped by 35 percent due to oversupply. Given that situation, developers there have to be satisfied if they can reach breakeven point. That is why the Singapore government is now finally restricting or limiting new construction," said Akbar.

The imbalance between supply and demand, according to Akbar, will force prices further down even within this year. Buyers have also become more selective as there is an abundance of choice on the market.

"Customers are now extremely sensitive to even the slightest price difference. Recently, one apartment building sold more than another -- although both were at the same location -- due to a small price difference," said Djafar.

This situation, where price has become a crucial factor, should be regarded as an early warning for those who purchase strata-titled apartments for purely investment reasons, as they cannot expect huge gains this year should prices remain flat.

Not only is such an oversupply detrimental to individual investors: Obviously, it can also inflict a severe financial loss on developers eager to enter this market. Surprisingly, however, to date, interest in entering this seemingly lucrative segment remains at an all-time high.

Akbar also said that several foreign investors had approached Colliers to seek advice on this market. He told them to opt for a wait-and-see attitude temporarily rather than immediately jump on the bandwagon.

"We presented our data on current prices, which have tended to remain flat, and some of them withdrew upon seeing the prices," said Akbar.

Strata-titled apartments may seem like one of the wiser investment alternatives, for both individual buyers and developers. However, should massive construction in huge numbers go unsupervised, especially in terms of a balanced supply and demand, investment in this sector could be disastrous.