Many believe that Indonesia's property market has tremendous potential for foreign ownership, as property prices are some of the lowest and most attractive in the region. There are many expatriates working and living in the business centre of Jakarta and renting vacation and retirement homes in the holiday capital of Bali. To date, foreigners have been reluctant to purchase housing as they can only obtain a 25-year leasehold title, after which their properties must be sold or returned to the government. While the title is extendable twice, up to a maximum of 70 years, the extension process can be very complicated and burdensome. Conversely, neighbouring countries Singapore and Malaysia welcome foreign property ownership, placing no limitations and allowing full freehold titles.
Tuguh Satria, chairman of the Indonesian Real Estate Association (REI), told OBG that his association has been lobbying the government to allow foreigners a 75 year- title, and even better, the option to purchase property outright. The REI reckons that with a more liberalised regime, 10,000 new apartments could be sold each year.
Earlier this month, Indonesian President Susilo Bambang Yudhoyono made a public statement indicating that he would ask the National Land Agency, the Home Ministry, and the State Minister for People's Housing Affairs to conduct an in-depth study into granting foreigners full home ownership rights.
"The government has no objection to this, provided it will benefit the people and make the country's climate more conducive to foreign investment," said Yudhoyono.
Analysts and developers are in favour of the move, though some are warning that the government should make sure foreigners buy to live rather than rent to prevent speculative purchases. Some would also like to see the new regulations restricted to purchases of high-end properties so that the cost of middle to low-income housing remains affordable and accessible for the average Indonesian. The provision of affordable housing remains a major challenge in the country, and the Housing Ministry is calling for the implementation of a "136 programme" whereby every luxurious unit built should correspond to the building of three medium and six low cost units.
While the move would certainly boost interest from foreigners in the country's property market, it should be noted that despite the restrictions, many foreigners indirectly own property in Indonesia by using Indonesian nationals as intermediaries. This is especially the case in Bali, where foreigners have locals purchase property on their behalf, providing them with a direct loan agreement in which the house is presented as collateral.
Should ownership restrictions be lifted, foreign investors still hold reservations over the transparency and legal framework in the country. According to the most recent Global Real Estate Transparency Index survey produced by property advisors Jones Lang Lasalle (JLL), Indonesia ranks 55 out of 82 markets surveyed, compared with Singapore at 11 and Malaysia at 23.
One factor that should boost domestic demand for housing is the lowering of interest rates. With the country's inflation being kept in check in recent months, the central bank has lowered its key interest rate down to 8.75%. Analysts predict it could be further lowered down to 7% by the end of the year. Lower interest rates are a boon to the real estate sector as they not only ease borrowing pressures, and hence boost buyer confidence, but they also help developers in securing funding.
However, in the prevailing climate of economic uncertainty, banks are particularly cautious and have maintained lending rates far exceeding that of the central banks'. According to JLL, the effective loan rate for housing (KPR) and for apartments (KPA) stands between 14 and 16%. That said, many high-end properties in the country, especially in Bali, are paid for in cash. And without outstanding mortgage loans, the country should not witness a mode of panic selling as has been the case in mortgage markets like Europe and the US.
On the supply side, one factor benefiting Indonesia is that many of the country's top developers are owned by some of the country's leading business families, which rely less on borrowing. These include Ciputra Development, which belongs to the Ciputra family, and Lippo Karawaci controlled by the Riady family.
Nick Van Helden, country head for JLL in Indonesia, told OBG, "Indonesia is far less exposed to the financial sector, so the crisis impact on developer sentiment is far less than in other neighbouring markets. This means that construction of the majority of existing developments is not likely to stop. Developers will be focusing on meeting existing schedules and achieving sales on existing projects. Ultimately, it could be to the buyers' benefit as prices bottomed out at the same time as developers focus on providing greater quality."
Another trend that could help Indonesia secure a position as a global property hot spot has been the arrival of renowned Middle East developers into the market. Dubai's Eemar Properties has invested $600m into a resort in Lombok, and Dubai's Limitless has bought a 30% stake in an 800m superblock in Jakarta's Central Business District.
Harun Hajadi, managing director of Indonesian developer Ciputra Group, told OBG, "We welcome the arrival of top foreign players into the market. But for more to come, the government must improve the foreign ownership laws as these developers want to attract foreign buyers. This would help Jakarta to truly secure a position as an international city."