Property analyst warns of tougher times

Property analyst warns of tougher times

By Stevie Emilia

JAKARTA (JP): Panangian Simanungkalit predicted as long ago as
1991 that the local property sector would collapse. His
prediction, which went largely ignored, has proven correct this
year.

He was off on the timing, though, forecasting it would happen
in 2001.

A property analyst by profession, 37-year-old Panangian says a
collapse was bound to happen on the back of the huge glut and
mounting number of offshore debts of developers.

Despite extensive media publicity given to his gloomy
prediction, it was disregarded by the government and even more so
by the industry, which went ahead at full steam in building more
property and taking on greater loans.

"My prediction happened sooner than I had thought. It was
triggered by the plunge in the rupiah exchange rate and soaring
lending rates," says Panangian, a staff lecturer at the Center
for Indonesian Property Studies and owner of PT Pro Realtor 2001.

The currency crisis, in which the rupiah has lost 35 percent
in value against the U.S. dollar since July, proved too much for
most developers, he says. The property sector is highly sensitive
to interest rate fluctuations, he adds.

Due to the long-range nature of the business, property
projects should really be financed by long-term funds, he says.
But the construction boom in Indonesia was chiefly financed by
money raised from time deposits and foreign loans with short
maturity.

"Many developers -- overwhelmingly obsessed with building more
and more projects -- have been using short-term funds to finance
long-term projects," says Panangian, who is a member of the
Indonesian Society of Appraisers.

These same developers are swamped by problems repaying their
loans because the rupiah value of the debts has soared, he says.

As if that wasn't enough, developers cannot take out more
loans -- an old business practice in Indonesia is to borrow from
one bank to pay off a debt at another -- because of tight
liquidity and soaring interest rates, he says.

Large, medium and small developers have had to cancel or even
cease their projects. "Some 40 percent of the 2,500 developers
will soon be out of business," Panangian predicts.

The going interest rates now average 35 percent for property
loans, and 30 percent for mortgages, making it uneconomical for
any developer to continue with their projects.

There are also huge sums of money tied to neglected land which
they bought during the frenzied rush in the booming years. "About
Rp 16.8 trillion is tied to neglected land in the greater Jakarta
area," Panangian says.

Born in Tarutung, a town in North Sumatra, Panangian now
divides his time between teaching, running four companies that he
owns and family. The holder of a 1996 Master's degree from the
University of Technology Malaysia, Panangian is the proud father
of a son and a daughter.

He stands by his old assertion that the collapse could have
been avoided if developers had built the type of houses that were
in demand -- small and medium homes, instead of concentrating on
luxury houses.

Jakarta needs 70,000 new houses -- mostly low and medium size
-- each year. Developers build 25,000 units, but most are luxury
houses for which there is little demand, he says.

"There's a mismatch between what the market wants and what the
industry provides," he says, adding that there are now some
35,000 unsold new houses.

"Most people living in Jakarta, with a monthly income below Rp
900,000, could afford houses that cost not more than Rp 30
million," he adds.

Land prices have been slashed by 30 to 40 percent because of
the crisis, he says, noting that many properties close to the
strategic business district in Jakarta have been put up for sale.

House prices have also been cut, but even fewer people are
buying, he says.

This is the right time to buy for anyone with money to spare
because property is going at bargain prices, Panangian says. "But
be careful because there are always people who want to take
advantage of the situation."

He says that during his 12 years in the profession, he has
never seen the property sector as badly hit as now. "I don't
think the property sector will recover next year."

A member of the International Real Estate Institute based in
Scottsdale, Arizona, Panangian believes not all the blame should
be laid on developers.

The Indonesian economy is highly susceptible to global and
regional economic fluctuations, including the currency contagion
that broke out in Southeast Asia, he says.

"We can't predict when the situation will return to normal.
It's still a question mark for us," Panangian says.