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.