Sun, 02 Nov 1997

Property stung by monetary woes

Property has a dubious distinction as one of the first economic sectors to be badly battered by the currency crisis. The Jakarta Post reporters -- Budiman Moerdijat, Devi M. Asmarani, Dwi Atmanta, Edith Hartanto, IGN Oka Budhi Yogiswara and Stevie Emilia -- look at the shell-shocked sector. Related stories appear on Page 2, 3 and 9.

JAKARTA (JP): Early this year, 31-year-old private company employee Bimo and his wife decided to buy a house where they could raise their newborn daughter.

The couple was set to obtain a housing loan to pay for a medium-sized house in the Jakarta suburbs. Their plan seemed to be going smoothly -- with interviews set up with several banks -- until August.

Their hopes were torn asunder. The rupiah's value has dropped by over 35 percent against the U.S. dollar since July, causing the government to impose a tight money policy and credit crunch. Money became scarce and interest rates shot up almost overnight.

They are faced now with a situation in which getting a loan would be unwise -- if not unaffordable -- and credit allocation for housing has been slashed.

"I'll have to forget about buying a house for while, because there is no way we could afford paying back the loan now," Bimo says.

Many others share Bimo's bleak position, forced to postpone the best-laid plans as the crisis eats a big chunk out of their incomes.

Herman Tjahja, 28, has had to put off his marriage because soaring interest rates shattered his dream to buy a house in Bekasi, a township east of Jakarta.

Herman was told before the crisis that he could buy the house for Rp 80 million (US$22,857), with a 21 percent interest rate. That translated into paying around Rp 1.6 million every month.

The plan was dashed when the interest rate surged to 40 percent, raising the monthly payment to about Rp 2.8 million.

"That's crazy, I can't possibly afford it right now," he says.

"My salary is small and it does not look as if I will get a pay rise."

What is preventing them from getting one of their most basic needs -- a roof over their heads?

The answer is the skinning of the property sector.

Since the devaluation of the Thai baht in July triggered contagious speculative attacks on currencies across the region, the property sector in Indonesia has become the nervous talk of the town.

Simply put, it is an economic ulcer which has been well covered by many superficial stopgaps, but which has now become so acute that it can no longer be concealed.

The crisis has lifted the veil off the most recklessly managed industry in the Indonesian economy.

Property analyst Panangian Simanungkalit can reel off a list of the many problems plaguing the country's property sector.

Top of his list is the speculative tendency of developers, reflected in their irresponsible funding and investment structures.

Developers are notorious for their reckless habit of borrowing short-term loans for long-term investments.

Spending habits of the property sector in Indonesia, like in Thailand, can be compared to those of a grasping member of the nouveau riche.

"Developers felt they had to fulfill their insatiable desires by building more projects, not realizing the risky consequences," Panangian says.

When the loans, most of which are from foreign lenders, began maturing and increased by almost three times the previous value because of the rupiah's drop against the dollar, the companies began gasping for a breath of liquidity, which by now had become scarce because of the credit crunch.

Lavish spending, combined with the current monetary turmoil, is fanning fears a property crash is lurking around the corner.

"A property crash is inevitable even in big countries such as the United States, Japan and Thailand," he says.

He is careful to draw a distinction, believing the local property market has collapsed but has not crashed.

One of the indicators of a property crash is a nationwide free fall in prices of properties by 40 percent or more, which has yet to happen.

Even so, there are cases of drastic cuts in property prices.

In Jakarta, several houses and plots in the Bintaro suburb, South Jakarta, are being offered for less than 50 percent of their usual prices.

At a recent home exhibition conducted by the Indonesian Real Estate Association, many houses were up for sale at around 35 percent less.

But the huge markdowns do not necessarily send consumers rushing into the property sector.

The rupiah slump caused inflation and forced people to tighten their spending belts, while the credit crunch hiked lending rates and made housing and property credits scarce.

Senior marketing head at Bonavista Apartments, Jenny Jethnani, admits meeting sales targets has become tough.

"We used to sell about six to seven apartments a month before, now we can only sell two to three."

Expatriates are the most frequent residents of apartments, and Jenny says the crisis has made foreigners reluctant to work in the country, thus slowing sales.

Marketing manager of property brokerage Era Prima, Markus Suryawan, says his business has been severely affected.

"We have a lot of customers who have put off transactions because of the increasing interest rates."

He reports 10 to 15 transactions are delayed each month, with value between Rp 200 million and Rp 5 billion.

Shop-houses have not been spared. According to Home Property Trade owner and director Johan Bukit, sales of the units have dropped by about 30 percent since the crisis began, from around Rp 10 billion a year.

The only survival tactic is to sell the shop-houses below market prices, he says. "Now we negotiate on the spot, just like an auction."

Many of those who have bought property and are now making payments find themselves economically overextended, as some housing loans are subject to floating interest rates after the first year.

Housewife Sarah says payments on her house, located in a plush South Jakarta suburb, has swollen by an extra Rp 1.75 million to about Rp 6 million due to steep interest.

The property business follows a determined cycle.

At some point, developers invest excessively in property, sporadically building mega projects. This will lead to a glut.

Property consultant PT Procon Indah predicts the property sector will suffer from lower demand growth next year, as consumer purchasing power continues to decline.

Even property king Ciputra, owner of the Ciputra Group, admits the industry is beset by problems.

"Property... has cycles, and now it is facing an oversupply," he was quoted by Panji Masyarakat weekly as saying.

This is hampering further development of many projects. Plans for the new projects must be put on the back burners, and some current projects have been shelved.

Panangian forecasts about 40 percent of some 2,500 existing developers in the country will either go bankrupt or be forced into liquidation.

Many of these would be small to medium developers, but large developers would be hurt as much of their funding comes from foreign loans, he says.

Project delays and cancellations will cause high unemployment in property and construction.

Some 40,000 construction workers in Jakarta have reportedly lost their jobs due to postponement of projects. The Indonesian Real Estate Association estimates about 192,000 workers are threatened by unemployment because of the decline.

Others claim that as many as two million casual laborers -- mostly migrants -- who have relied on employment from construction projects in Jakarta have been without work for many weeks.

Along streets in West Jakarta, these workers, who commute from nearby towns daily to work at construction sites in the city, swarm in packs as they wait to be picked up for jobs. The harsh reality is that there are fewer trucks picking them up.

Property and construction-related sectors have also had to bear their share of troubles from the crisis.

Head researcher of independent social research organization Akatiga, Yuni Thamrin, says small-scale producers of bricks and roof tiles are suffering from declining sales, and many are anxiously awaiting late payments from cash-strapped developers.

"These companies have no way of getting capital to continue their business," Yuni says.