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.