Property market severely hit by economic crisis

JAKARTA (JP): The excessive depreciation of the rupiah and high interest rates have made the local property market significantly vulnerable, an analyst and an industry executive said yesterday.

"The property market has been dealt a triple blow," property consultant PT Procon Indah, in cooperation with Jones Lang Wootton, said in a statement yesterday.

The first blow came from the sharp depreciation as foreign denominated debt affected many large developers, Bayu Utomo of Procon Indah said.

Developers with large foreign debt, but with revenue in rupiah, faced a 50 percent increase in principal and interest costs, he said.

The second blow, he said, was from high interest rates; they penalized rupiah-financed developers as banks automatically adjusted their lending rates, even to existing debtors.

And the third blow came from a weakening demand for property, Bayu said.

"Occupants and buyers, feeling the effect of higher inflation, higher interest rates and an erosion of wealth, have begun to curb their acquisition or expansion plans," he said.

He projected that the new property supply would decline in coming years because developers had delayed or canceled their projects altogether.

"This is a positive factor as it will potentially avoid what was to be a more serious oversupply problem due to current economic uncertainty," he said.

Agusman Efendi, secretary-general of the Indonesian Association of Real Estate Developers (REI), said many property firms, especially small and medium-sized ones, had been forced to cease operations this month.

"And if the high (interest) rates continue over the next two or three months, some property companies may collapse," Agusman told Reuters.

The association currently groups around 2,000 property companies, with 80 percent of them engaged in the construction of low-cost housing.

Agusman said most REI members depended on bank loans to finance property projects, particularly state-owned PT Bank Tabungan Negara (BTN) which specializes in financing low-cost housing projects.

Agusman said with most banks charging more than 35 percent for construction loans and 30 percent for mortgages, most property companies -- especially small and medium-sized firms -- would find it difficult to continue to develop.

He said the gloomy outlook was exacerbated by the rising cost of construction materials, particularly imported items paid for in U.S. dollars.

The value of the dollar has risen by more than 50 percent against the rupiah since the beginning of the year.

It stabilized at about Rp 3,550 to the U.S. dollar on Thursday after the government said it would seek assistance from the International Monetary Fund and other organizations to steady the currency and restore market confidence.

Agusman said some large publicly listed property companies were expected to weather the monetary crisis better than smaller ones because listed companies could generate cash from shareholders.

But property analysts in Jakarta said most investors were staying away from property stocks.

They also said some listed property companies faced serious cash problems from high interest rates and a large foreign currency exposure because of the dollar's gains.

An analyst with a foreign securities firm said property stocks on the Jakarta Stock Exchange were the hardest hit after banking stocks. Property share prices had fallen around 50 percent since early July.

Analysts said property companies had also been hit by the recent government regulation prohibiting public banks from providing loans for land purchases.

The regulation followed concerns that banks might suffer overexposure in the property sector. (rid)