Small-scale developers losing property war

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)