Gloomy outlook predicted for property sector

JAKARTA (JP): Indonesia's property sector will continue to suffer the ill effects of the currency crisis for the next two years, as lower demand will slow down the market and force companies to reduce prices, a property consultant predicts.

"The property market has been dealt a triple blow," Jones Lang Wootton director in Asia, Phil Simpson, said yesterday.

According to the market outlook of PT Procon Indah and Jones Lang Wootton, the sharp drop of the rupiah against the dollar has severely bruised the property sector in the country and will likely cause a market correction.

Simpson said developers' foreign denominated debt had increased by over 30 percent, along with the depreciation of the rupiah.

High domestic interest rates imposed by the central bank also severely affected rupiah-based developers.

At the same time, higher inflation, higher interest and the erosion of wealth caused by the financial turmoil had reduced consumers' purchasing power and forced property buyers to curb acquisition and expansion plans, he said.

Procon's research head Bayu Utomo said the property market had been affected, with many sales pending.

High interest rates prompted investors to place funds into bank deposits and enjoy 30 percent interest rates instead of investing, he said.

He said the demand for new property would variably be reduced by 10 percent to 30 percent annually until 2000. This would cost the market a reduction of 20 percent to 30 percent in effective prices and value of property within the same period, he said.

Office

Although demand for office space in Jakarta's commercial and business districts during the first three quarters of this year was up 8.5 percent over 1996, Bayu forecast a lower demand in the future.

He said demand would likely decline by 30 percent next year from the current level, and by another 10 percent in 1999.

This was caused by an expected slowdown in banking, securities, construction and business service industries during the period, he said.

He predicted that average occupancy rates would also decrease from the current 95 percent to 78 percent by the end of 1999, and average rental would fall by 8 percent next year with a further softening in 1999.

The rupiah's depreciation had caused office sales in Jakarta's commercial and business districts to decline sharply in the last quarter, Bayu said.

Demand for office space outside Jakarta's main commercial and business centers was also projected to drop by 20 percent to 30 percent through 1999, he said.

He said the retail market in Jakarta would also be affected as retailers had delayed decisions to commit to new space due to economic uncertainty.

Higher inflation and suppressed economic growth would cause consumer spending power to decrease by 15 percent to 25 percent next year, and this would prompt demand for retail space to decrease by 25 percent between 1999 and 2000.

Bayu said higher inflation and increased mortgages would also reduce the affordability of residential housing, thus slowing down demand for the next 12 months.

He said developers would be required to reduce effective prices by 30 percent to 40 percent or increase incentives to compensate for the decline in affordability.

He said demand for condominiums would be limited for at least a year, while demand for low-priced condominiums would also suffer over the same period as mortgage rates would likely remain high, affecting affordability.

Condominium developers would be forced to accept lower prices for unsold housing in order to attract potential buyers, he said.

The economic slowdown would reduce demand for rental apartments by about 10 percent to 12.5 percent a year and the industrial market by 10 percent to 25 percent a year for the next two years, Bayu said.

He said the slowdown would affect the inflow of foreign investment and would cause many companies to consolidate.

Consolidation would curb the number of expatriates, who were the target market for apartments, he said.

Simpson strongly advised property developers with future projects to follow the government's lead and reevaluate projects that were in early development or construction stages.

Simpson said property developers and owners must also apply more stringent review parameters when evaluating future projects, and focus on cash flow rather than profit from existing projects.

"What is important now is cash flow, especially for companies which already have a lot of commitments -- they need to get whatever deal they can get, even if it means offering more competitive prices," he said.

On the positive side, Simpson said project delays "will potentially avert what was to be a more serious oversupply problem".

Procon's technical advisor Ian David urged the government to review or delay the implementation of a new title transfer tax, due to be effective next year, saying it would place significant pressure on the property sector during the current economic situation.

The new tax, approved earlier this year, will allow the government to collect a 5 percent tax from the transfer of ownership of houses and buildings with market prices of more than Rp 30 million (US$8,426), in addition to the existing property tax. (das)