Gloomy outlook predicted for property sector

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)