Buying an apartment can be wise investment option

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.