Indonesia has a significant and growing shortfall of affordable housing. Existing supply is in poor condition, with rising demand for new units set to push the deficit beyond 15m units in 2018. Rising urbanisation is exacerbating the problem, and more than one-fifth of the urban population is now living in slums, presenting a major challenge for President Joko Widodo’s Nawa Cita national development agenda, a nine-pillar strategy launched in 2014 that emphasises domestic development, increasing productivity and competitiveness, improving quality of life and inclusive growth.
The government has unveiled a series of policies aimed at significantly augmenting affordable housing supply in recent years, including a subsidised mortgage scheme – the “One Million Houses” (OMH) programme – as well as the National Affordable Housing Programme (NAHP) backed by the World Bank, which offers down payment and home improvement assistance schemes that should help boost home ownership in the country.
Construction of new affordable units will be the most important priority moving forward, as evidenced by recent reforms to regulations on affordable housing construction. As the government increasingly incentivises affordable development, the segment could become an important construction growth driver in the coming years, although land acquisition and development-cost inflation remain significant challenges and could weigh on future delivery of new units.
EXISTING SHORTFALL: According to the World Bank, Indonesia is facing significant demand for affordable housing, with the bank reporting in March 2017 that 1m new affordable units are needed annually and that 20% of the country’s existing 64.1m units are in poor condition. An estimated 22% of Indonesia’s urban population, equivalent to 29m citizens, live in slums, while global ratings agency Fitch reported in September 2016 that the affordable housing shortfall stands at 13.5m units.
Urbanisation is forecast to accelerate in the coming years, with real estate consultancy JLL reporting in February 2017 that an estimated 200,000 people move to Jakarta alone each year. Although property developers are subject to a 3:2:1 rule requiring them to build three low-cost and two mid-priced houses for every high-end home sold, Fitch reports that the rule has been weakly enforced to date.
ONE MILLION HOUSES: In April 2015 President Widodo officially launched the OMH programme, one of nine pillars that make up the Nawa Cita national development agenda. Through the OMH, the government plans to provide adequate housing for low-income Indonesians. The president had earlier announced plans to build 10m new houses in the country by 2019, while the government’s five-year National Medium-Term Development Plan, running from 2015 to 2019, includes plans for the construction of 5257 twin apartment block towers for 515,711 families, social housing subsidies for 5.5m households, improvements to 37,407 ha of informal or inadequate housing areas and the provision of state-supported credit facilities for 2.5m low-income households. In January 2017 WorldBuild 365, a digital platform for building, interiors and heating, ventilation and air conditioning exhibitions, reported that the government hopes to reduce the country’s housing backlog to 6.9m homes by 2019.
OMH is the first major policy of the new administration that specifically targets the development of affordable housing. It envisions construction of affordable housing and apartment units across 17 participating provinces. The units can be purchased using government-backed 20-year mortgages with a 5% interest rate – compared to the existing 7.25% rate under the Housing Loan Liquidity Facility Programme (FLPP) launched in 2010 to provide state-subsidised mortgages and mortgage insurance.
FINANCING SUPPORT: Bank Indonesia, the central bank, reports that loans under the FLPP scheme rose substantially from Rp285bn ($21.5m) in the first quarter of 2015 to hit Rp2.7trn ($203.5m) in the third quarter of 2015, dropping back to Rp373bn ($28.1m) in the first quarter of 2016 and Rp317bn ($23.9m) in the second quarter of 2016, before surging again to hit Rp3.02trn ($227.6m) in the third quarter of the year. FLPP lending stood at Rp1.92trn ($144.7m) in the fourth quarter of 2016, and then sank again, to a low of Rp268bn ($20.2m) in the first quarter of 2017.
Outside of FLPP, the government has sought to help first-time and low-income buyers to purchase property by partnering with the World Bank to launch the NAHP in March 2017. The first phases of the $1.2bn project saw the establishment of the Mortgage-Linked Down Payment Assistance Scheme (BP2BT), which provides assistance by matching the savings of the beneficiary to be used as a down payment, as well as a market-rate mortgage from participating lending institutions.
In addition, the government has launched the Home Improvement Assistance Programme (BSPS) under the NAHP, which targets the bottom 40% of Indonesian households. The scheme is aimed at individuals who require home improvement financing, rather than home purchase solutions. In March 2017 the World Bank announced it had approved $450m to support the BP2BT and BSPS programmes.
STATE IMPLEMENTATION: Indonesia Investments, a subsidiary of Dutch investment firm Van der Schaar Investments, reports that over half of the OMH programme’s new houses will be built using state funds. To this end, the government allocated Rp10trn ($753.8m) to OMH in the 2015 state budget and Indonesia Investments reports that state-owned housing developer Perum Perumnas was tasked with implementing new affordable housing builds under OMH and allocated a Rp1trn ($75.4m) capital injection in the same year.
Infrastructure spending rose to Rp387.4trn ($29.2bn) in the 2017 state budget, up from Rp317.1trn ($23.9bn) in the revised 2016 budget. The Ministry of Public Works and Housing, the government agency responsible for housing development, residential areas, social housing finance and building arrangements, received the largest portion, with Rp98.8trn ($7.4bn). Infrastructure spending in 2017 also included a Rp9.7trn ($731.1m) allocation to the FLPP, as well as Rp7.2trn ($542.7m) of capital injections to state-owned enterprises. Spending on the OMH project increased from Rp12.6trn ($949.8m) in the 2016 budget to Rp15.6trn ($1.2bn) in 2017.
PROGRESS REPORT: However, progress has been limited. Basuki Hadimuljono, minister of public works and housing, told local media in December 2016 that the government has only been able to complete between 400,000 and 500,000 units annually since 2015. Other estimates are lower: WorldBuild 365 reported that only 120,000 new affordable homes were built between the launch of the programme in mid-2015 and June 2016. Challenges related to land acquisition are part of the problem, with land prices in areas slated for major infrastructure projects often rising rapidly, which has been the case for the 2800-km Trans-Sumatra Toll Road.
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