Lending ban seen to hurt small, medium developers

JAKARTA (JP): Businesspeople and analysts said yesterday that the government's move to ban new loans for land acquisition and development would severely hurt small and medium property developers.

Panangian Simanungkalit, chairman of the Center for the Study of Indonesian Property, warned that the ban would result in the collapse of many small and medium developers.

"The number of developers going bankrupt could possibly be higher than predicted this year," he told The Jakarta Post yesterday.

He estimated last year that about 25 percent, or 625 of Indonesia's 2,500 developers, would go bankrupt this year because of mounting debts, legal problems and a weakening market.

"The big ones will survive, but they will at least be stopped from accumulating more land in Greater Jakarta," he said.

Big developers control about 96,000 hectares or 79 percent of Greater Jakarta's 121,631 hectares of residential land.

He said developers had acquired more land than they were able to develop. "Their capacity to build is only 60,000 units a year. For that they need only 15,000 hectares of land," he said.

Preventing developers from accumulating land would force down the cost of owning land because developers usually bought land on credit, the interest of which increases land prices, he said.

He said that if the cost of land could be reduced then the price of housing would in turn decrease, which was good for customers.

The ban on loans is part of the new package of deregulation measures announced by the government Monday. Other measures include a cut in import tariffs on 1,600 items and a reduction in the number of local taxes collected by provincial administrations.

Yopie S Batubara, a Medan-based developer who is also chairman of North Sumatra's Chamber of Commerce and Industry, said the policy would paralyze the property sector as many developers would cease operations.

Expenses incurred by developers for land acquisition, processing of land documents and land clearing make up 40 percent of the total cost of developing a housing complex, he said.

Under the current practice, Yopie said, banks finance 60 percent of all phases of housing development, including land acquisition.

Problem loans

He said the new policy should apply only to developers with problem loans and not to developers who performed well.

"If the policy is applied to all developers, none will dare to build housing, and this, in turn, will increase problem loans," said Yopie.

The president of PT Pemeringkat Efek Indonesia (Pefindo), Farid Harjanto, said the ban would force property companies to seek other financial sources such as bonds to finance their projects.

"The property companies will switch their financing sources from bank loans to other instruments," he said.

Publicly listed Bank Tamara's vice president Hendrik Suhardiman shared Farid's view, saying the ban would force property companies to switch to alternative sources such as bonds.

"Bonds will become an alternative financial source for property companies in the future," he told the Post yesterday.

A senior economist from the Centre for Strategic and International Studies (CSIS), Pande R. Silalahi, said the ban was the last resort for the government to prevent the collapse of the banking industry such as in Thailand recently.

The government had no choice but to impose the ban because the central bank's measures to persuade banks to reduce lending to the property sector were ineffective, he said.

He warned that the regulation should be temporary and should be lifted as soon as the property market picked up.

Economist Sjahrir, however, saw the cap on new loans to land acquisition and development as already too late because almost all land in strategic locations for property development had been controlled by certain business groups.

"Land ownership has now been so concentrated in the hands of a few large groups that the restrictive ruling is no longer effective," Sjahrir noted.

He wondered why the credit ruling was included in the latest reform package because the credit cap was not related to the deregulation measures.

Bank Indonesia (the central bank) Governor Soedradjad Djiwandono said that loan growth in the property sector reached 50 percent over the past three years.

He said that total credit allocated to the property sector reached Rp 65 trillion (US$27.08 billion) as of July, or 18 percent of the total bank credits outstanding.

"Excessive credit allocation for the property sector causes problem loans," Soedradjad said. (jsk/bnt/pwn/aly)