Thu, 25 Dec 2003

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.