Indonesia's increasing urbanisation creating demand for retail space

The retail real estate sector is fast becoming one of the most intriguing property segments within Indonesia as the industry continues its evolution away from traditional markets and towards modern retail outlets. The increasingly affluent and globally minded population is creating growing demand for contemporary shopping experiences. Indonesia’s large population continues to migrate to urban areas at an average rate of 4.4% per year, with 53.7% of the country’s inhabitants settling in cities as of 2015, up from 49.9% in 2010, according to World Bank data. As a result, Indonesia’s retail property sector has become one of the most attractive in the world, with consultancy AT Kearny ranking the country as the fifth-most attractive retail market in the world behind only China, India, Malaysia and Kazakhstan in the firm’s 2016 Global Retail Development Index.

Changing Trends

This increasing demand in centralised areas has driven a sustained demand for new, modern retail space, which is being amplified by the transformation of the shopping preferences of urban consumers. No longer satisfied with sprawling, informal wet markets or the inconsistent offerings of traditional neighbourhood shops, these consumers are increasingly choosing to buy from the newer, well-lit, uniform modern retail outlets across the spectrum, from conveniences stores and minimarts to shopping malls and hypermarkets. This trend crossed its inevitable tipping point in 2015 when the market size (excluding cigarettes) of modern retail outlets consisting of supermarkets and minimarts surpassed those of traditional markets for the first time.

Research by Frost & Sullivan valued the modern retail market at Rp189.5trn ($13.8bn) in 2015, compared to Rp181.4trn ($13.2bn) for the traditional segment, in stark contrast to 2008, when the modern retail market was valued at just Rp70bn ($5.1m), compared to Rp119.7trn ($8.7bn) for the traditional segment. Convenience store chains are the largest driver of this revolution, with the segment surging to capture an estimated 18.6% of retail trade distribution in 2015, compared to just 8.8% in 2008.

Rental Rates

Despite a steadily increasing stock of retail real estate, the majority of it in urban areas, rental rates for the segment continue to increase on the strength of a positive economic climate. According to a report from US-based real estate consultancy Colliers International, the average asking price for rent in Jakarta was Rp566,087 ($41.30) per sq metre per month in the second quarter of 2016, with around 20% of Jakarta malls seeing an increase in rents, which drove up the cumulative asking price 6% year-on-year (y-o-y) on average in the city. This figure is significantly greater than rental prices just six years ago, when the average asking price was around Rp400,000 ($29.20) per sq metre per month.

The most substantial rent increases took place in North Jakarta, which saw rents rise Rp50, 000-200,000 ($3.70-14.60), a roughly 25% y-o-y increase driven by limited space in large, well-known shopping centres, according to Colliers International.

The central business district (CBD) contains by far the most expensive retail real estate, with the average asking rent for retail occupation pegged at Rp855,965 ($62.50) per sq metre per month in mid-2016, compared to an average of Rp476,009 ($34.80) for retail property outside of the CBD.

Outside the CBD, the most expensive retail areas are located in South Jakarta, followed closely by West Jakarta, with the North Jakarta market rapidly gaining ground, while Central and East Jakarta remain the most affordable areas. As of mid-2016, the range for the average asking price for rent for upper-class shopping centres stood at Rp550,000-1.2m ($40.20-87.60) per sq metre per month, while the middle classes were recorded at Rp300,000-600,000 ($21.90-43.80) and the middle-lower segment saw a rent range of Rp200,000-400,000 ($14.60-29.20).

While real estate rents have exhibited significant growth in recent years, occupancy has remained relatively stable and was hovering at 86-87% in the second quarter of 2016, according to Colliers International. As evidenced by its premium pricing, the CBD retains the highest occupancy rate in Jakarta at 92% as of mid-2016, while average occupancy outside the CBD has been recorded at below 85% since 2014. Outside of this wealthy enclave, South and East Jakarta maintained the next-highest occupancy rates at 88% each prior to the 2016 launch of a new mall in East Jakarta, which subsequently caused the area’s occupancy rate to decrease significantly to 82.2% by the second quarter of the year.

Prime Locations 

Much of the surge in retail property over the past decade has been centralised in the country’s urban centres due to the concentration of wealth in these areas, as well as the ongoing urbanisation of the population as a whole. This movement has been most notable in the country’s political and economic centre of Jakarta and its outlying suburbs. As a result, the amount of cumulative retail real estate in Jakarta has expanded from less than 4m sq metres in 2010 to nearly 4.5m sq metres at the end of 2015, according to Colliers International. The greater Jakarta region contributes another roughly 2.3m sq metres of retail real estate, an increase of around 1m sq metres from 2010 levels, and it is projected to exceed 3m sq metres by the end of 2019.

New Additions

Much of this growth can be attributed to the opening of no fewer than 15 new shopping centres in the greater Jakarta region since 2011, with nine of these constructed as part of integrated residential developments, according to Colliers International. Most recently, these include Lippo Mall Puri, which opened its doors to the public in 2014, One Belpark Mall, which was completed in 2015, and Bassura City Mall, which opened in the first half of 2016 and added 21,000 sq metres of prime retail property.

This expansion is expected to further increase in the coming years as the amount of retail real estate is projected to surpass 4.5m sq metres by the end of 2016 and 5m sq metres by 2020. While a moratorium on new retail development in certain areas of the city was still in place as of September 2016, the restrictions could be lifted in the future once a number of transport infrastructure projects are completed, easing congestion in these targeted areas.

Three more major retail centres are also under construction and expected to hit the market by the end of 2016. The largest is the Neo SOHO Mall, which is part of the SOHO Podomoro City project, located in Slipi, West Jakarta. Developed by Agung Podomoro, the new mall will deliver an 40,000 sq metres of net leasable area (NLA). Agung Podomoro is also constructing a second, smaller mall, SOHO Pancoran, which is part of the larger SOHO Pancoran complex in South Jakarta and includes 346 residential and office units. The new mall will contain 8000 sq metres of NLA. The third mall scheduled for completion in 2016 is the Pantai Indah Kapuk Mall being built by developer Agung Sedayu. Located in North Jakarta, the mall houses 30,000 sq metres of NLA.

Outside of Jakarta proper, the expanding suburban ring is also set to add new stock, starting with two malls that are set to open by the end of 2016. These consist of the 69,000-sq-metre Q Big project, which is being built by Sinarmas Land in BSD City, and the 56,000-sq-metre Bekasi Trade Center 2 being developed by Gapura Prima at Bulak Kapal in Bekasi.

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The Report: Indonesia 2017

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