Rental business surges despite lack of FDI

Sudibyo M. Wiradji, The Jakarta Post, Jakarta

While industrial estates are facing tough times due to a lack of foreign direct investment (FDI), those involved in the rental business can still do well.

Amid lingering security concerns, investors, both local and foreigner, now prefer to rent ready-to-occupy factories rather than buying industrial sites to accommodate their business activities.

This situation has consequently changed the business pattern of the existing industrial estates. Many of them now focus on building ready-to-occupy factories to take the advantage of the growth in rental demand.

Those industrial estates that are involved in the rental business can still produce good results. "We enjoyed good growth in 2003 thanks to the growing demand for rental factories," said PT Bestland Pertiwi's marketing general manager Irwan Makinto

The tenants of rental factory units are mostly small and medium enterprises (SMEs), most of which are engaged in supplying large companies, such as automotive and electronics producers. The expansion of an automotive producer has the potential, for example, to attract spare parts or tire producers to a particular industrial estate.

Large companies generally require large sites for their business activities. Usually, they buy these. Unlike large companies, SMEs only need small or standard factories. Renting a standard factory already provided by the industrial estates is normally enough for them.

PT Bestland Pertiwi, which operates 2,000-hectare industrial estates in Karawang and Purwakarta, West Jakarta, has 70 tenants, mostly engaged in producing car parts and electronics products. Foreign investors, of which 50 percent are from Japan, account for almost 85 percent of their tenants. Other investors come from Germany, Italy, Hongkong, Taiwan, Korea and Singapore.

Another industrial estate that has benefited from offering ready-to-occupy factories is PT Industrial Estate Pulogadung (JIEP), which is located in Pulogadung, East Jakarta.

"In 2003, we saw 95 percent of our standard factory units occupied," said Asrul Waryanto, who is in charge of legal affairs and public relations at the company.

"By focusing on rental factory units, we have made good profits despite the sluggish growth in industrial estates around the country in general," he said.

Currently, about 400 small and large firms owned by local and foreign investors, including investors from Japan, Taiwan and Korea, are taking advantage of JIEP's facilities. Many tenants produce garments for export.

"To accommodate the increasing demand for factory buildings and warehouses, JIEP will set aside more land for constructing factory units in 2004. We also plan to build two more warehouses this year," Asrul of JIEP said.

Most of the industrial estates which still focus on selling industrial sites are doing poorly due to the continued sluggish demand from foreign investors.

For instance, PT SuryaCipta Swadaya, which operates a 2,400- hectare industrial estate in Karawang, West Java, has seen only 30 percent of its industrial sites occupied since its started marketing in 1995.

However, despite the declining trend in demand for industrial sites, the company can survive thanks to its diversified business. "We do not only focus on the sale of land, but we also provide overall maintenance services to companies operating in the estate. These services include a water treatment plant, fire prevention services, power supply capacity and telephone lines," said the company's marketing director Singgih Pratista.

Singgih said that the company was conducting a study on the possibility of offering industrial sites with factory units for rent. "We will have to identify the market first, but hopefully, we will decide this year," he said.

Currently, PT SuryaCipta Swadaya has 31 tenants, of which 26 are active. Most of the tenants are engaged in producing automotive, electronics and chemical products.

Meanwhile, PT Kawasan Industri Jababeka, which operates 3,000- hectare industrial estates in Cikarang and Bekasi, saw a slight increase in land sales to existing investors in 2003.

"Most of the buyers are existing investors who want to expand their businesses. They are not new investors," said PT Jababeka's general manager for marketing Agus H. Canny.

Even though its policy on offering industrial sites for rent, which it adopted last year, has received little response, it will continue with the policy pending an improved business climate following this year's general election.

Jababeka's industrial sites range from 3,000 square meters to 5,000 square meters.

PT Jababeka has attracted leading national and multinational companies to set up factories in the estate. Investors include those from the United States, Japan, Korea, China, Singapore, Malaysia, Norway and Sweden.

Although there has been a slight increase over the past two years, the flow of FDI generally remains low.

According to data issued by the Investment Coordinating Board (BKPM), the value of new foreign investment rose slightly to US$4.62 billion in the January to November period last year from $4.21 billion in the same period of 2002. But the number of foreign investment projects dropped to 773 from 976.

The value of foreign investment made for the expansion of existing factories declined to $3.31 billion from 3.63 billion in the same period last year.

In the domestic investment sector, approvals for new projects rose to Rp 40.87 trillion during the January to November period in 2003 from Rp 12.37 trillion in the same period of 2002. But the number of domestic investment projects during the period dropped to 144 from 158.

The country's economic situation is showing some improvement as indicated by an increase in economic growth, the strengthening of the rupiah and the low inflation rate. Economic growth is expected to increase to five percent this year from about 4.5 percent last year. The inflation rate is also projected to continue to decline to between 5 percent and 6 percent this year from between 6 percent and 7 percent in 2003.

However, economic analysts estimate the inflow of FDI will remain low despite the improvement in the economy. Many people fear that the general and presidential elections that will be held during the year might incite social unrest. If this comes to pass, it will not only discourage foreign investors but also reverse the current positive economic trends.