Economic Update

Government efforts to loosen regulations banning foreigners from directly owning property in Indonesia promise to bolster tax revenues and spur greater investor interest.

In May the government revealed plans to give non-Indonesians the right to purchase luxury real estate. Under the new rules, expected to come into effect by the end of the year, foreigners will be permitted to buy, own, inherit and trade luxury apartments with a minimum value of Rp5bn ($371,000).

At present, foreigners are barred from purchasing property directly, though many circumvent these regulations by using local proxies or structuring purchases as long-term leases of up to 100 years.

The new rules will grant non-Indonesians legitimacy under the “right of use” category: this differs from “right of ownership”, which is reserved for Indonesians.

Knock-on effects

The new measures come on the heels of a raft of regulatory reforms issued by President Joko Widodo in a bid to improve Indonesia’s investment climate and attract international investors.

Increased foreign ownership is also expected to have a positive effect on the Indonesian economy, boosting luxury tax revenues, generating local spending and reinvigorating the property market.

“If people from developed nations want to retire here or spend their winters here, then that will create jobs and boost spending power,” Sofyan Djalil, coordinating minister for economic affairs, told local press in July.

Pent-up demand from regional buyers is projected to drive sector growth as the new regulations are introduced, with local experts forecasting strong interest from China as well as from ASEAN member nations like Singapore.

“Asian buyers are no doubt a sleeping giant for Indonesia,” Nathan Ryan, owner of Bali Realty, said to local media in July. “These buyers have plenty of money, but they are turned away by the leasehold property options, as they would prefer to be able to buy freehold.”

Ready for recovery

The real estate industry is in need of renewed growth after cooling measures were imposed in 2013 on fears that a property bubble was forming. That year saw Bank Indonesia (BI) raise the minimum down payment for property purchases and curb mortgages on second homes to prevent an excessive build-up of housing debt. BI also progressively raised its benchmark interest rate to 7.5% in the six months to November 2013, driving up the cost of borrowing.

Residential property prices and sales declined as a result, with BI’s residential property price index easing to 6.3% year-on-year (y-o-y) growth in the fourth quarter of 2014, compared to an 11.5% increase the previous year. 

Sales remained muted into the first quarter of 2015, with y-o-y residential sales growth falling from 40.1% in the fourth quarter of 2014 to 26.6%. BI attributed the decline to weaker bank credit growth to the property sector, with mortgages increasing by just 0.12% in the first three months of the year.

Balanced growth

Signalling a renewed openness to property market growth, in June BI loosened its loan-to-value requirements, which will allow houses to be purchased with smaller deposits.

However, concerns over the formation of another property bubble remain, and the government is looking to tailor the regulations to avoid pricing locals out of the market.

By setting the minimum threshold for foreign ownership at Rp5bn ($371,000), the government aims to keep the affordable housing market safe for Indonesian buyers. Jakarta has also limited the policy to one apartment per foreigner, which should cut down on speculative property trading.

While the move brings Indonesia in line with regional counterparts like Singapore and Malaysia, some industry observers say the new regulations should contain more explicit restrictions, such as the delineation of certain zones for foreign purchases. However, government officials told local press in July they did not see the merit of geographical restrictions.

On the whole, the measure is expected to be a boon for the property market and high-rise developers in particular. According to ratings agency Standard & Poor’s (S&P), property developers in Indonesia could see sales growth of 10-15% for the year.

Strong fundamentals are also poised to reinforce growth. S&P said that the sector was in a “high-growth stage” in a report from July, citing rising household incomes, a large population and a growing middle class.