Distortions spoil property business

Distortions spoil property business

By Benget Simbolon Tnb.

JAKARTA (JP): As the national congress of the Indonesian
Association of Real Estate Developers nears, property business
has come into the spotlight during the last few weeks. What has
actually happened to this least observed industry?

A property analyst, Panangian Simanungkalit, said: "Economic
distortions abound in this business. All problems arising in the
business resulted from the distortions only recently observed."

After the tight money policy in 1990, many non-property
businesspeople rushed to enter the apparently attractive sector.
They were lured by the rapid increase of property prices --
averaging 30 percent per year, as compared with the inflation
rate of nearly 10 percent per year and interest rates of about 20
percent.

Currently, 15 conglomerates are involved in property
development. Helped by the easy procedures of getting land
clearance licenses and the growing national economy, the
companies have rapidly expanded ownership of cleared lands all
around the greater Jakarta area.

"Can you imagine, they already control 60 percent of cleared
lands or 60,000 hectares in the greater Jakarta area," Panangian
told The Jakarta Post recently, in commenting on the latest
development of the property business.

According to Panangian, who is also president of Panangian
Simanungkalit and Associates, Indonesia needs some 1.2 million
new houses per year. The 15 large property companies can supply
only 12 percent or 115,000 homes in Greater Jakarta.

For the development of the 115,000 homes they only need some
2,500 hectares of cleared lands. The 60,000 hectares that they
control equals their development needs for 25 years. This has
become oligopolistic.

The expansion of land ownership by conglomerates continues. By
their expansion they keep their lands out of the market
mechanism. Land supplies for housing development then continues
to decrease, while the demand for land demand continues to
increase.

Most of the developers purchase land with loans. With the bank
interest and taxes that they have to pay accumulating, the
companies' financial burdens increase. These burdens are then
passed on to home buyers.

Price increase

Such is the condition that has contributed to the rapid
increase in the price of land they own. And this trend continues
uncontrolled. As a result, the prices of land outside the 60,000
hectares follows suit.

Then the increasingly higher prices drive developers to set
their selling prices higher and higher every year, leaving less
and less people who are able to buy.

The conglomerates set their house selling prices at a minimum
of Rp 75 million per home. By that, only 8 percent of about 12
million of the greater Jakarta area's population -- who are of
middle and high classes -- can buy the houses.

The other 92 percent of the population can only afford houses
of below Rp 40 million. This majority is partly helped by the
government's policy which requires developers to build six low-
cost houses and three medium houses for every luxury house they
construct. This requirement is commonly called the 1:3:6 policy.

Unfortunately most developers do not comply with the
stipulation. For their recalcitrancy, the House of
Representatives chastised the developers and voiced concern over
the seemingly worsening problem.

Even if the developers do fulfill the government's
requirement, the needs of the majority cannot be accommodated.
"The 1:3:6 requirement is not enough," said Panangian.

He opined that the main problem in the business is how to
eliminate the market distortions so that property prices are left
for the market mechanism to decide.

If not, the property business will continue to increase
uncontrollably. And a property crash will happen as only few
people can afford to buy.

Already a number of analysts see the problem looming. They say
a large part of property loans -- Rp 41 trillion as of September
this year -- have the potential to become problem loans.

There are three regulations ruling the property business,
namely Agrarian Law 1960, Law No.4/1992 on housing and settlement
and Law No.24/1992 on land space. But according to Panangian, the
rules should be integrated into a master regulation that also
covers the issue of monetary and fiscal policy in the business.

He cited an example that land ownership should be limited and
that land which is neglected for more than three years should be
highly taxed.

"For this purpose, I think fundamental intervention from the
government is badly needed. Otherwise, the current ill trend will
continue," he said.