Growth in industrial property sales has been lagging in Indonesia. Are things likely to stay that way going forward or is there hope for improvement?
The Indonesian property market can be divided into a number of subsectors, i.e., the office, retail, landed residential, condominium, rental apartment, and industrial estate subsectors.
According to the latest report by Procon Indah, Jakarta experienced 15 percent growth in retail property and condominium supply, while office supply is predicted to quadruple in 2007.
Meanwhile, sales in the industrial estate subsector (despite the growth) are still at the bottom of the property cycle, lagging behind the rental apartment and even office subsectors.
For those wishing to invest in property, the question has long been, what's down the road for industrial property?
Compared to Thailand, industrial property prices in Indonesia are low, averaging US$42 per square meter versus approximately $74 per square meter in Thailand's industrial heartland, which is not too far from Bangkok.
How big is the potential for catching up?
A look at other figures suggests that the industrial estate subsector is not one of the brightest stars.
A Bank Indonesia survey shows the rate of sale for industrial sites in Jakarta and other cities, such as Depok, Bogor, Tangerang and Bekasi, only reached 72 percent in 2006, up less than two percent from the previous year.
Meanwhile, the apartment and retail property subsectors recorded rises of approximately five and six percent, respectively.
What factors actually help to boost demand for industrials? The fact is that if a country has a prospective investment climate, investors will be interested in investing their capital, leading to increased FDI, and, eventually, demand for industrial property.
However, comparing industrial property sales with FDI does not reveal any significant correlation. For certain industrial property companies in Cikarang, Bekasi (West Java), industrial property sales are quite volatile and not significantly in line with FDI levels.
Therefore, FDI may not be the most important factor in determining demand for industrial sites. Demand from SMEs has rebounded a long way since the aftermath of the 1997 economic crisis, and they are now contributing significantly to industrial property sales, cushioning the effects of drops in FDI levels.
Another determinant is the state of the infrastructure in the area, the closeness of the area to air and seaports, and the ease of transporting goods to warehouses, markets and stores.
Infrastructure, such as water treatment plants, electricity generators and roads, is an essential factor for any industrial area. The production process not only needs power, but also waste treatment facilities.
Hence, unless infrastructure is available in an area, industry will not grow. The closer a production center is to a transportation port, the more efficient and less time-consuming it will be for a company to convey export goods and import raw materials.
Industrial areas outside Jakarta are located an average of 60 to 75 kilometers from Soekarno-Hatta Airport and Tanjung Priok Port. If an industrial area is closer to these ports, the demand for sites in the area will increase and eventually prices will also rise.
An uninterrupted flow of goods is also needed to support the distribution process. This involves how the goods are transported and how secure the distribution lines are. The availability of transportation does not only refer to road transportation -- especially in the light of the crippling floods that hit Greater Jakarta in February. New railway lines and even new seaports would be a great boon for industry.
In this regard, the discrepancy between industrial property prices in Indonesia and Thailand may in part be due to the fact that Thailand's high-tech industrial areas are located in strategic areas with modern infrastructure. Meanwhile, Indonesia's industrial areas are mostly located outside of the capital and have only rudimentary infrastructure.
Hence, to cut things short, the demand for industrial property in Indonesia depends greatly on the investment climate (though not necessarily FDI), the supporting infrastructure and the security of tenants.
If one is convinced that substantial improvements will be forthcoming, then the industrial property outlook may seem appetizing. If not, it may be wiser to stick with the other subsectors.
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