With the economy likely to post another year of strong growth in 2011, and a positive and stable outlook beyond, the Indonesian property sector, according to analysts, looks set to continue its steady advance.
The Indonesian Chamber of Commerce and Industry is forecasting 7% growth this year, just up on the 6% estimate for 2010 made by the International Monetary Fund (IMF), the government and various other analysts. The IMF and Wold Bank forecast a slightly more modest 6.2% for 2011, but there is little doubt that, give or take a percentage point, the economy will perform well.
The robust growth is likely to have positive consequences for the real estate market, as rising incomes increase purchasing power for middle- and upper-income groups in particular, allowing them to invest in new residential properties. Growth is also feeding into demand for commercial real estate as Indonesians’ disposable incomes rise, supporting the retail sector and the country’s growing mall segment.
Furthermore, domestic and foreign companies are again looking to expand after slowing corporate growth during the global downturn, pushing up demand for office space, particularly for Grade A property, which has historically been in short supply. High and stable growth is also helping to boost banks’ balance sheets and making them more confident of the security of lending. For some time after the global economy returned to growth, many businesses and analysts suggested that liquidity still remained tight internationally as banks wound down from pre-crisis positions. It now seems likely that liquidity and confidence are returning, and Indonesia is in a fortunate position to benefit. Its financial sector, much-reinforced since the 1997-98 Asian financial crisis, was relatively underexposed to the global crisis of 2008-09 and is well-capitalised. Rising lending should feed through positively to the real estate sector on both the demand and supply side, by making capital more readily available for construction projects and corporate investment, and by supporting the growth of Indonesia’s mortgage market.
In February, Artadinata Djangkar, a director at Ciputra Property, part of property conglomerate Ciputra Development, told the local press that the housing market was still seeing decent demand, despite high rates for housing loans – at around 9% to 9.5%, considerably above the base rate at the central bank, Bank Indonesia (BI). It is a view shared by Lauren Sulistiawati, director of retail banking at Bank Permata, an Indonesian bank owned by Astra International and Standard Chartered Bank, who told the local press that recent moves by the BI to raise its base rate to head off inflation had not had an adverse impact on the market. Indeed, Permata expects its mortgage loan book to grow by 20% this year, thanks to burgeoning domestic demand. The bank forecasts that it will issue IR5trn ($555.5m) in housing loans this year, with this likely to boost its earnings from real estate lending.
Meanwhile, big-ticket real estate projects continue to rise as developers and their clients capitalise on the economy’s growth. On February 8, the local press reported that Indonesia’s largest listed integrated property developer and mall operator, Lippo, had secured a deal for space at two of its malls with Mitra Adiperkasa (MAP). Lippo agreed to lease 44,500 sq metres of retail space to MAP, one of the country’s leading retailers, for its Kemang Village Mall and St. Moritz Shopping Mall, which are due for delivery in 2012 and 2013 respectively.
“It makes a lot of strategic and commercial sense when two of the largest firms in the industry – landlord and retailer – are in partnership. The synergies are enormous and we need to leverage on each other,” said Michael Riady, CEO for Lippo Karawaci’s mall division.
MAP will take more than 20% of the malls’ leasable area. Both firms, like their competitors, are looking to position themselves to tap into the long-term prospects of Indonesia’s market of more than 240m people.
Another development, and one that has the potential to reshape the sector, is the government’s proposed land acquisition reform bill, which was submitted to parliament for approval in late 2010. The bill is designed to address several issues currently hampering government projects, particularly those relating to infrastructure. The Trans-Java toll road, for instance, has been delayed significantly due to problems with land acquisition, with only 24% of the land required for the 650-km highway purchased as of August 2010.
The proposed bill will expedite land acquisition for public purposes while ensuring that these procedures conform to international best practices, put in place a comprehensive system for compensating landowners (with prices based on independent appraisal) and limit opportunities for speculation – at present speculators often buy land targeted for public projects, only to flip it to the government at a healthy mark-up.
According to Wijaya Seta, chief of the land acquisitions subdirectorate at the Ministry of Public Works, the bill, if passed, would cut the time needed to start infrastructure projects in half. “Currently land price negotiations can last for more than a year,” he told the local press in September 2010.
If it is enacted soon, as is widely expected, the bill should help to spur investor interest in public-private partnerships for infrastructure development. With the National Development Planning Agency estimating that the government needs to spend some $216bn on infrastructure between 2010 and 2014, private sector involvement will be crucial going forward.
With its strong economy, expanding middle class, growing housing loan market and increasing demand for high-end real estate in the residential, commercial and retail segments, the fundamentals for the local property market are solid. If the government can put an enabling legal framework in place to support investment and resolve issues related to land acquisition, this will give the sector a welcome fillip and should help to maintain sustained growth over the long term.