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)