Land ownership limits prevent bank recovery

JAKARTA (JP): Offshore capital is giving crisis-hit Indonesia a wide berth partly due to uncertainties over foreign ownership of property in the country, according to a property consultancy firm.

PT Procon Indah said in its latest report that Indonesia's outstanding property loans stood at approximately Rp 69 trillion (US$7.6 billion).

The major proportion of these loans were obtained to finance the development of large offices, hotels, apartments and shopping malls.

"The impact of a single $100 million loan for a city complex has a far greater impact on banks' total outstanding loan balance than thousands of individual houses and apartments," the report said.

The report said that the key step needed to recapitalize the country's ailing banking sector was to liquidate these large nonperforming loans.

Indonesia has not seen any major property investment since the crisis began while Thailand and South Korea are to receive hundreds of millions of dollars from foreign investors through liquidations of distressed banks' assets, the report said.

Besides political uncertainties, Indonesia had other problems, including property ownership restrictions, land titles, high taxes and unclear bureaucratic procedures, it said.

"Foreigners are still uncomfortable with the property ownership process and restrictions in Indonesia. They are aware of regulations such as No.41/1996 and a relaxation of restrictions on foreign investment (PMA) companies owning property. However, these processes have yet to be tested adequately and investors are not prepared to risk being the test case with $50 million or $100 million at stake," Ian David, Procon Indah's technical advisor, said.

Regulation 41/1996 gives foreigners the right to own title of houses or apartments of more than 150 square meters. Despite recent improvements to regulations extending the right to 20 years, this form of title is seen as inferior to the right to build title under which most major property is held. Converting right-to-use certificates would incur additional costs.

"The market applies a discount to the right to use title as it is seen as a lower form of ownership," the report said.

System

The Indonesian land tenure system remains a problem for expatriates as a 20-year to 25-year initial term is considered inadequate compared to those available in other markets.

The report said that the length of term was important because expatriates wanted to own property in Indonesia for more than the initial period.

"Besides that, it will reduce the value of the property if they wish to sell it with 5 to 7 years remaining," the report said.

Procon Indah said the success of the recapitalization of the country's banking sector would be greatly enhanced by an overhaul of the land title system and foreign ownership regulations.

"As this will be a longer-term process, the government should consider a special purpose company such as Thailand's property funds to be set up in the near term," the report said.

The report said that these companies would be granted status to acquire major properties in order to recapitalize banks.

In the case of Indonesia, the report said that these companies should be given favorable tax concessions, at least in the early years.

"These companies could then be listed on local bourses, enabling Indonesians to own shares in these substantial properties," the report said. (aly)