Is there a new property boom?

Is there a new property boom?

Lini Djafar
Director,
Head of Research &
Consultancy
PT. Procon Indah
Jakarta

Tower cranes are swinging, concrete mixers are churning out
concrete and Jakarta's roads are once again dirty from the
clearing of new development sites. Though without doubt the last
18 months has witnessed increasing activities in the property
sector, with 15,000 new condominium or strata-title apartment
units offered for sale "off-the-plan"(equivalent to over 70 new
tower blocks); several retail shopping malls opening their doors
for business; and even certain developments, which were put on-
hold during the crisis, re-launched, does all this add up to
clear signs of economic recovery and the early indications of a
property boom?

Selling like hotcakes

To judge from the strong market response to all these
projects, you might say yes. Since the launch of the first
condominium project on a pre-sales basis in the 2nd quarter of
2002, approximately 73% of these units have been pre-committed,
and of the 2,700 offered on a pre-sales basis this year, 89% have
also been sold. In real terms, it is estimated that
conservatively some Rp 10 trillion has been transacted in this
sector since mid 2002 with 70% of these buyers being investors
not end users.

Certainly for the condominium sector, the existence of pent-up
demand and strong liquidity, especially that of the middle-upper
segment, have been the two main drivers of transaction activity
in the market. Coupled with the recent low interest rates,
property has increasingly become one of the attractive investment
options for investors, perhaps explaining the fact that full cash
installments have been the most preferred payment method for
condominium purchasers.

Retail shopping malls are another area to have experienced
impressive activity during 2003. With Indonesia's economic growth
mainly driven by private consumption, the retail sector was the
first area of the property market to show recovery and since its
return to positive demand take up in 1999 the retail sector has
climbed back to 80% of its pre-crisis level (in terms of prices
and occupancy). Annual demand in 2002 logged a record figure of
some 173,000 square meters (sq.m) and with new supply following
at a lower pace, overall occupancy and rentals correspondingly
improved.

With only limited availability of development loans to the
property sector following the economic crisis, recent retail
sector supply has been dominated by strata-title retail centers,
which are effectively self-financing. Of the 770,000 sq.m of
retail space projected to enter the market in the next three
years, about 65% of this supply will be strata-title centers.

With the property sector traditionally being a barometer of
the overall health of the economy, in the absence of the return
of foreign investment confidence in Indonesia there has been only
very slow movement within those property sectors relying on
foreign investment, such as offices, rental apartments, and
industrial land. So with no new factories, many multi-national
company office tenants on the "wait-and-see" list, and no net
influx of new expatriates requiring housing, these 3 sectors are
still on the "starting blocks" of recovery. In keeping with the
country's driver of economic recovery, property activities have
occurred mainly in those sectors targeting the domestic market,
such as condominiums and retail.

So what's the outlook?

Despite strong demand in the condominium market, sales prices
have remained relatively stable, with a price increment in Rupiah
terms over the last 12 months of only 3.6%. This implies the high
sensitivity of the market to pricing, as investment remains the
main reason for purchase in this sector, with buyers directly
comparing property investment with other investment
opportunities. What has also been identified, is that demand is
now growing at a slower pace than supply. This potential
"scissors effect" should be an early warning to developers on the
increasing competition and the potential for condominium buyers
to migrate to alternative investment products. Demand and
potential for project success undoubtedly remains, however the
right quality product at "value-for-money" pricing will be the
key for continued success in this sector.

Similarly, the high levels of future supply of strata-title
retail centers may temporarily hold back the growth in the
average occupancy levels of the retail market. This does not mean
that the retail market has reached its peak yet, and improvement
in both occupancy levels and rentals, even though at lower rates
of growth, are still anticipated. Strategically located shopping-
mall projects with a strong retail concept, and an attractive
tenancy mix -- including overseas retailers -- are yet to be seen
in Indonesia. The country still has high potential for success in
the market in the coming 2-3 years, as their remains excess
consumer capacity to support these centers.

It is too early to conclude that the property market is
booming again, as strong demand exists but only in certain
sectors and it has not been followed yet by any significant
growth in sales prices and rental rates. Whilst the market is
clearly already in recovery -- and some developers can sleep
soundly at night in their condo units, and others can go shopping
with confidence -- strong economic foundations underwritten by
renewed foreign investor confidence, will remain crucial to push
the growth of the overall property market, particularly the
commercial sectors. So, perhaps, a "mini" boom can be
anticipated.