Mortgage facility needed to reduce investment risks

Mortgage facility needed to reduce investment risks

JAKARTA (JP): Indonesia urgently needs to set up a secondary
mortgage facility (SMF) to minimize funding risks in the property
sector, which at present is solely financed by the short-term
funds of financial institutions, a panel discussion concluded
yesterday.

"Long-term funds are increasingly needed to finance the
construction of houses, for which there has been a growing
demand. We need the SMF to provide such funds," said Bank Papan
Sejahtera's President Al Njoo, who was a panelist at the
discussion.

He noted that it is very risky to finance property projects --
which are long-term investments -- with short-term funds. But
most of the funds available here now are short-term.

"We are facing a mismatch here. On one side, most of banks'
funds are short-term. However, on the other hand, the property
sector needs long-term investments," he noted.

A. Edwin Kawilarang, the chairman of Real Estate Indonesia --
an association of Indonesian developers -- said that Indonesia
needs one million houses per year. If the houses are priced at an
average of Rp 10 million per unit, Indonesia needs a fund of Rp 1
trillion per year.

"The amount is growing in line with the demand for houses," he
said.

Edwin said that there were cases where developers were
canceling or even halting their housing projects due to financing
problems. "As a result, many of them went bankrupt," he noted.

He said that particularly now, as a result of the tight money
policy imposed by the central bank, Bank Indonesia, and the
government's effort to limit credits to the property sector,
developers are facing a shortage of funds.

"I think we need to establish the secondary mortgage facility
as soon as possible to tackle the financing problem," said Edwin.

State Minister of Public Housing Akbar Tandjung told the
meeting that preparations for the establishment of the mortgage
facility are now being finalized.

He cited the conclusion of a study on house financing in
Indonesia in June 1993 by the Ministry of Finance in cooperation
with the United States Agency for International Development that
the main obstacle in financing property development is the
shortage of long-term funds.

Dahlan M. Sutalaksana, an expert advisor to the minister of
finance for the development of the capital market, said that
basically the SMF is a reauctioning of property assets to
investors.

According to Dahlan, developers will sell their property
assets to the would-be SMF, which will in turn issue and sell
bonds to investors through the capital market.

He said that the SMF is different from the secondary mortgage
market (SMM) in the United States. The SMM buys and sells bonds
issued by financial institutions which will use the proceeds to
provide property credits. The SMM is autonomous and bigger in
scope.

The SMF, he said, is an initial development toward the
formation of the SMM.

To accelerate the development of the SMF, the president of
Bank Negara Indonesia, Widigdo Sukarman, noted that the
government should tie up the banks' reserve requirements with
their purchases of the SMF's bonds.

Currently, Bank Indonesia requires banks to put up 3 percent
of their deposits as compulsory reserves at the central bank.

He said that the government should also give tax incentives to
the SMF's bond buyers. "Their earnings from the bonds should be
taxed lower," he said.

The one-day panel discussion -- led by the chairman of the
Association of Indonesian Economists, Marzuki Usman, and Susiyati
B. Hirawan of the Ministry of Finance -- was also addressed by
Bank Indonesia's Monetary Supervision Chairman Harinowo, Erman
and Associates' managing director Erman Radjagukguk and the
president of PT Pefindo (a rating company), Farid Harianto.(13)