Is recovery building for the property sector?
By David Eyerly
JAKARTA (JP): The country's property sector is, according to the experts, showing signs of recovery -- or so they have been saying for most of the year.
On Feb. 3 The Jakarta Post quoted property consultant Procon Indah/Jones Lang LaSalle as saying the ailing property sector in the capital is expected to recover gradually this year, with the retail market leading the process.
On April 27 in the Post, property developer Ciputra offered his view of the matter, saying the property sector, particularly housing, would recover to precrisis levels in 2001 as sales in 2000 were expected to double from 1999.
Procon Indah/Jones Lang LaSalle had more to say on May 29, asserting the property market in Jakarta was marked by signs of recovery in the first quarter, and further growth was expected.
The property consultant had much to say for the second quarter activities, pointing to a net take-up across the board in the sector.
It was the same story for the third quarter of the year.
Property consultant PT PricewaterhouseCoopers (PwC) declared the property sector had displayed signs of improvement. But a caveat was added.
"Although there were signs of improvement especially since 1998, unless we see some new construction activity we cannot say that a sustained recovery is underway," it said.
"Recovery in the property sector depends to a certain extent on how the government deals with the current political, economic, social and security problems in the country."
This phrase, in one form or another, is almost guaranteed to be the first thing one hears from a property consultant after they assert the property sector is showing signs of recovery.
Even the most casual observer of Indonesian affairs will tell you that if this is the case, the property sector is not likely to recover anytime soon, with the government doing very little to resolve these problems.
One thing the experts seem to agree on, besides that the property sector is recovering but not yet recovered, is that this seemingly interminable process is being led by the retail sector.
As Mina Ondang of Procon Indah/Jones Lang LaSalle said way back in February: "The faster turn around of the retail sector is mainly caused by the fact that the retail business, especially hypermarkets, has been growing steadily despite the crisis because people cannot help but keep on buying their daily needs from these stores."
Can a recovery in the retail sector then be used to herald an overall recovery of the property sector, given that people cannot help but continue to purchase from stores the things they need to survive?
According to PwC, an improved retail sector must be given a closer look to see whether it does indeed signify an overall recovery.
Jay Smith, senior manager of the group, said: "If GDP growth has some element of foreign investment, it is good for the property sector. If GDP growth is driven only by consumer spending, then it is only good for the retail sector."
Or, as PwC noted in its quarterly property publication, Jakarta Property Trends: "True recovery can only take place when rentals, prices and occupancy rates show substantial and prolonged improvement. This will then justify new development activity and construction projects will herald the end of the recession."
Whether it is the vanguard of a property sector recovery or simply the result of increased consumer spending, nothing more and nothing less, the retail sector has shown much promise over the year. Procon Indah said in February, looking back at 1999 and ahead for 2000, increased demand for retail space meant an increase in occupancy levels, up to 88.2 percent by the end of 1999 from about 80 percent in 1998.
The company saw these occupancy levels continuing to rise over 2000 to above 90 percent, with few new retail spaces opening during the year, mainly refurbished shopping centers that were burned in the May 1998 riots.
Did these rosy predictions come to pass? According to the PwC property group, they did indeed. The year saw the reopening of some markets (Slipi Jaya Plaza, Ratu Plaza, part of Duta Merlin and the Makro retail warehouse.) The average occupancy of retail spaces in Jakarta was put at 97 percent by the group, with take- up for the year of at least 50,000 square meters.
The property group sees the possibility of occupancy increasing to 99 percent next year, with limited new space opening because of a lack of financing for new projects. With increasing demand and no new supply, rents, which went up some over 1999, should continue to rise, particularly with most five- year leases in prime shopping centers in and near the Central Business District up for renewal.
The office sector has seen some signs of life since the crisis hit and businesses packed up office and split town, leaving whole office buildings virtually deserted, the modern equivalent of the Old West ghost town; from boom to bust with a bullet.
Occupancy rates bottomed out at 72 percent in the fourth quarter of 1999, from 91 percent in 1997 when businesses still believed there was gold in them thar hills.
There has been some positive movement since. Property services company Koll IPAC put the occupancy rate in the Central Business District at 78 percent at the end of August this year, a 5 percent increase from the beginning of the year.
The Central Business District, or Golden Triangle, is delineated by Jl. Thamrin to Jl. Sudirman to the west, Jl. Gatot Subroto to the south and Jl. Rasuna Said to the east. Buildings in Mega Kuningan and along Jl. Imam Bonjol are also included for the sake of surveys of the area.
And PwC, in its Jakarta Property Trends, has the occupancy rate for all of Jakarta at 76 percent. Most property experts agree that a major contributor to these positive signs is demand for office space by companies in the IT, insurance and consumer goods sectors.
If you are in the market for some office space, there is good news on the rent. Most buildings now rent in rupiah or U.S. dollars with a fixed exchange rate, so you may be able to pick up some nice office space on the cheap. However, with very little new office space expected to enter the market over the next couple of years, occupancy rates are expected to continue their upward creep, which will likely lead to an upward trend in rents.
The question, then, is where does the property sector go from here? Will it be another year of signs of recovery but not really a recovery? Will the sector take a turn for the worse, influenced by outside factors such as the country's political and security situations? Will the sector reach the promised land of recovery, with cranes once again dotting the skyline and wolf whistles ringing from construction workers at every corner?
Much like the statements that pour out of President Abdurrahman Wahid's mouth, who knows what's coming next. But there are some things one can look at for guidance.
For example, what will the Indonesian Bank Restructuring Agency (IBRA) do with all the property under its control. For the property sector to recover, foreign investment is needed. And foreign investors are interested in the property controlled by the agency.
But the two parties seem to have trouble coming together. IBRA doesn't want to sell because it doesn't think it can get an optimal price, and thinks if it continues to hold onto the property the economy will pick up and then they can get more money from the sale. Well, good luck with that plan.
And foreign investors want to buy the property on the cheap so they can optimize their profits, which is the goal of all investors everywhere. So will the two sides get together and start moving these IBRA assets into the private sector, where they can generate money and help spark some economic growth?
Well, IBRA did sell Wisma BCA. Discussing this sale, Jay Smith said: "This is good news, a sign of going in the right direction. You can't call one sale a benchmark, but it's a start. Foreign investors monitor the Indonesian market, and they are driven by earning high returns so they want a low sale price."
Then there is the question of the rule of law and the integrity of the courts in enforcing the law that has some investors hesitant. Nobody wants to plunk down a large piece of change for that oil palm plantation, only to have the local residents then lay claim to the land.
And then you have city councillors in Jakarta questioning the license obtained by the Carrefour hypermarket chain from the city administration. It makes investors nervous when the councillors come out and wonder if the license is valid, if their outlets are legal or if they should be closed down.
Then, when the councillors tell the papers they plan an "impromptu visit" to one of the outlets, it is no surprise, given the country's track record, that one imagines they will be visiting not to ensure the hypermarket is not unfairly crowding out smaller retailers in the city, but rather they are coming with hands out looking for a piece of the action.
Fair or not, that is the assumption many people will jump to, and this does nothing to encourage investors. They need to know the law is king, and they will not be constantly squeezed from all sides. Will this happen?
It is difficult to say, just as it is difficult to predict whether the political situation and the security concerns in the country will be addressed to the point where investors will be confident about putting their money into the country. And where is the comfort zone for investors? At what point do political turmoil and security scares pass from being merely worrisome to actively keeping investors out of the market?
Given all of these questions without answers, the outlook for the property sector remains vague. It is showing signs of recovery, but it has not yet reached recovery. True recovery to some extent depends on the country's political and security situation, the certainty of law for investors and any number of other factors. Or, for the sake of brevity, more of the same.