Small-scale developers losing property war

JAKARTA (JP): A scarcity of long-term finance, coupled with an oversupply in the property market, is the bane of small-scale housing developers, a property executive says.

Nugroho Suksmanto, the chairman of the Jakarta chapter of the Indonesian Real Estate Association, said the current credit squeeze, although not as bad as that in the early 1990s, was felt particularly harshly because housing developers were now encountering an oversupply of products by 14.7 percent.

Speaking at a seminar on housing organized by the Indonesian Real Estate Association, Nugroho said the oversupply had raised the costs of investment in the property sector, so that only large-scale developers can afford to invest.

"Large developers have the economies of scale needed to survive competition, and this will eliminate smaller developers," he said.

Nugroho said that in the early 1990s, when the government announced a sudden tight money policy, lending rates went as high as 30 percent per annum. Current rates range between 20 percent and 22 percent.

Merger

Nugroho said that in such a situation, small-scale developers should merge in order to strengthen their capital structures and survive competition.

He said the current credit squeeze has caused a number of small developers to operate below feasible levels.

For example, a developer may ask for a credit of Rp 10 billion from a bank but is given only Rp 7.5 billion.

"If the developer is respectable, it must admit that it cannot operate on Rp 7.5 billion. But because it is determined to do the project, it will go ahead anyway," Nugroho said.

In the end, the developer will have to rely more on its prospective customers to finance a project which has not been developed yet.

Such cases have led to "fictitious housing projects", which have been the subject of complaints of many customers in the last couple of years.

According to previous reports, the Indonesian Real Estate Association has admitted that out of 13 developers known to be involved in "fictitious projects", 10 were its members.

Nugroho said that large companies would emerge as the winners because they have the access to finance.

But these companies left to compete will have to do so under pressure, with price wars and cut-throat competition, he said.

Nugroho predicted, however, that the government may loosen its tight money policy with the nearing of next year's general elections.

"Hopefully we will see things getting better," he said. (pwn)