Economic Update

Jakarta’s property market is in the midst of a boom driving growth across both the sector’s residential and commercial segments. A combination of strong domestic demand, low interest rates and increased foreign investor confidence is thought to be behind the trend which is expected to continue during 2012, forming a key component of Indonesia’s economic growth.

While domestic demand for condominiums leads the residential segment, a move by foreign firms to expand business in Indonesia is boosting activity in office and retail space.

Todd Lauchlan, the country head for Jones Lang LaSalle-Procon international real estate services and investment management firm, said he believes Indonesia’s success in attracting interest from international firms is helping it to buck global trends.

“Many big foreign companies have expanded their businesses in Indonesia,” he said at a January 25 media briefing in Jakarta. “In contrast, some of them have reduced the size of their branches in the European zone and in the US due to the global economic crisis.”

Indonesia’s economic growth of 6.5% in 2011 marked its fastest expansion since 1996. Prospects for 2012 also look promising despite the global economic turbulence, with growth forecasted at 6.7%. Investor confidence has been buoyed further by the recent decision of Fitch Ratings and Moody’s Investors Services to raise ratings on Indonesia’s sovereign debt.

Anton Sitorus, Jones Lang LaSalle’s head of research, highlighted the healthy take-up of office space in Jakarta’s Central Business District (CBD) to local press, noting it had increased to 420,000 sq metres, marking a rise of 78% from 2010.

The CBD, one of Jakarta’s busiest areas, registered almost 90% occupancy in 2011, with Grade A buildings outperforming the Grade A and B buildings with a 95% occupancy rate. Grade A buildings also recorded the highest base rental rates at IDR154,000 ($17.1) per sq metre per month.

Sitorus said the figures marked the highest take-up in the history of Jakarta’s office market development, helping to bring about a rise of 20% in office rental fees in Jakarta’s CBD in 2011 compared to 10% in the non-CBD areas.

Demand in areas outside Jakarta’s CBD also increased significantly last year, up by 154% to 143,000 sq metres, although occupancy dropped to around 83% as new supply became available. Sitorus remains optimistic, however, that with businesses keen to expand in Indonesia, coupled with limits on new office space, demand should remain high this year and could outpace supply by 2014.

“Considering the global macro condition, there should be some slowing down, but I don’t see signs of it so far,” he said. “Both local and foreign companies still want to expand in Indonesia.”

Residential real estate is also moving fast, especially condominiums in the city, according to the firm’s residential project marketing group head, Luke Rowe.

Sales of units reached 8500 units in 2011, which was double the figure for 2010. “In 2012, there will be a higher demand for residences in the city, considering people’s current preferences to live not far from their work places,” Rowe told local press. “Jakarta’s worsened congestion contributes to this choice.”

Sitorus also expects demand from foreign retailers, attracted by Indonesia’s young middle class, whose high purchasing power should help drive up demand for space in shopping malls. “In the retail sector, Indonesia has a strong long-term appeal, just like China,” he said. “Indonesia has excellent population structure.”

Demand for industrial estate property also remained high last year, with prices rising above average levels as producers of consumer goods, automotive manufacturers and pharmaceutical factories expanded their production.

While the expansion of Indonesia’s property market shows no sign of slowing down, analysts highlight the restrictions on foreign ownership of property, which many view as a barrier restricting greater sector growth.

Under current laws, foreign investors are prevented from owning a freehold title and can only buy a leasehold (Hak Pakai) property for 25 years with a chance to extend the period up to a maximum period of 20 years.

Colin Dyer, Jones Lang LaSalle’s CEO, believes that over time, the government will have to change its policy on foreign ownership of property. “For a long-term measure, Indonesia will probably have to move away from it,” he told local press in February. “From an international investor’s perspective, it is disappointing because many of them would like to invest in real estate here.”