A favourable environment: Strong fundamentals are driving market expansion

Rising capital values, favourable interest rates and strong demand have created a favourable environment for Indonesia’s real estate sector, which posted impressive expansion numbers in 2013. While the US and EU have struggled with the lingering effects of the global financial crisis, South-east Asia has powered on, with Indonesia topping the list of the world’s fastest growing luxury real estate markets in terms of price. Though GDP growth fell slightly below 6% for the first time in four years, it remains steady and middle-class wealth is expanding rapidly. According to Anton Sitorus, the head of research for Jones Lang LaSalle (JLL) in Indonesia, “Property investment continues to increase at a high level and there is strong purchasing capacity. We expect the sector to continue to experience strong growth and it will start to accelerate at full speed by 2015.”

Rules & Regulations

To address the potential for a property bubble, Indonesia’s central bank introduced a new loan-to-value (LTV) ratio in autumn 2013. While some developers and the Indonesian Real Estate Association (REI) fear that the new regulation will stifle demand in the sector, other experts suggest that this will allow the market to experience a much-needed cooling period. The new LTV ratio will require a firsttime home buyer to make a 30% down payment at the time of purchase, while those purchasing a second home will need to make a 40% down payment and a third 50%, reducing banks’ exposure (see analysis).

While sector experts expect the new LTV ratio to lower risk by limiting dependence on borrowed money, many are concerned about a second regulation introduced in 2013 that will make it difficult for developers to finance projects. “After issuing a regulation on LTV for a second and third house, the government also issued a new law prohibiting banks from providing loans for unfinished residential projects in an effort to curb speculative buying. Now, bank loans can only be disbursed once the house is completed. This is difficult for the market overall, because, until now, developers had been able to sell residential projects off-plan and sales and purchase agreements were usually done prior to the completion or through an indent procedure,” Sitorus told OBG.


Since many buyers rely on bank loans, the new law makes it difficult for developers to sell unfinished projects. Thus, developers must have significant capital upfront, which is a challenge, particularly for small to medium-sized developers. “This has also affected sales, which are likely to decline overall, as we have seen in the past few quarters,” Sitorus told OBG. The Fitch Ratings’ 2014 outlook noted that new regulations could stifle the growth of mortgages and property sales and purchases. This will likely encourage developers to delay project launches until they can adjust to the new regulatory environment and subsequent impact on the market. Projects and sales will likely gain momentum in late 2014 once the wait-and-see period around the new regulation and impending national elections passes.

Residential Real Estate

Home prices in Indonesia, particularly in Jakarta and Bali, continue to rise along with demand, though the central bank has made efforts to cool the market. In the coming years, many Indonesians will look to purchase their first homes, considering that more than half of the country’s 250m-strong population is under the age of 30. The middle class is growing rapidly, meaning the number of citizens able to buy homes is increasing as well.

With Jakarta seeing 1300 new motorcycles and 300 new cars on its roads per day, little relief from traffic is in sight. The city’s only option is to build up, until the government can tackle the transport and infrastructure overhaul that the area desperately needs. In the meantime, a growing number of Jakarta’s workers will look to buy property in and around the city centre in order to avoid the bumper-to-bumper commute. This is causing landlords to raise rents, as supply cannot keep up with demand and land values have risen to around $10,000 per sq metre in the area.

Great Gains

Jakarta and Bali, two of the world’s most expensive luxury real estate locations, came in number one and number two, respectively, on the Frank Knight list of price growth at the close of 2012. Jakarta topped the list at 38% year-on-year (y-o-y) growth, while Bali came in neck-and-neck with Dubai at 20% y-o-y growth. Indonesia, Taiwan, Brazil and Turkey were the top emerging markets to boost the global house price index of 2013, with Indonesia experiencing a 13.5% rise.

JLL noted that in the fourth quarter of 2013 strata condominium sales totalled approximately 2250 units, with only a slight decrease between the third and fourth quarters of the year. In 2013 sales reached 13,260, a 4% increase overall from the previous year, and 10,800 new properties were launched by the close of the year’s fourth quarter. JLL projects that some 42,000 additional residential units will enter the market over the next three years. “It has been a great year for the industry and prices are going up. The industry is actually growing so robustly that for the first time construction workers are in such short supply that projects are being delayed,” Harun Hajadi, managing director of Ciputra, told OBG.

Downward Pressure

Looking at 2014, Fitch Ratings predicts that the government’s new mortgage regulations and higher average selling prices will cause a decrease in the number of new projects, especially in the luxury housing sector. New developments are likely to be put on hold until after the 2014 elections. Although the previous two elections did not have a major effect on the real estate market, with President Susilo Bambang Yudhoyono reaching his two-term limit, many sector players are expected to wait until the new administration’s regulatory plans are revealed before moving forward.

New Means

Meanwhile, the Jakarta city administration has taken strides to address the lack of housing for the area’s poorest residents. Governor Joko “Jokowi” Widodo announced a plan to build 38 new vertical apartment “villages” (kampung) in 2013, which are owned through strata title and will include public and commercial space along with inexpensive flats. The villages will be funded by private investment through corporate social responsibility programmes. While building new elevated villages, the Housing and Administrative Buildings Agency also plans to oversee an effort to revitalise an average of 100 kampungs per annum, with Jokowi promising to see the completion of 360 by the time he leaves office.

Critics worry that the project’s aim of aiding impoverished areas will be counteracted by the fact that some homeowners may rent out their properties to other tenants for a profit. Furthermore, the city will still need to address the lack of employment opportunities, which contributes to the state of poverty in these communities. Overall, however, this is a step in the right direction that should help to address the issue of housing for Jakarta’s poorest residents, who will greatly benefit from an expanded public housing scheme, while also giving the congested capital an opportunity to reduce its urban sprawl.


The retail sector experienced significant growth over 2013, due to high consumption and the increased spending power of Indonesia’s middle class. David Cheadle, managing director of real estate firm Cushman & Wakefield Indonesia, told OBG, “We continue to see new international retailers coming into the market; as well as ongoing expansion by existing operators, so this sector clearly remains a focus for international businesses. There is a growing middle class consumer market here and other locations in the greater region, like India and China, are more expensive. In Asia, Indonesia remains an affordable market with a growing middle class consumer base.”

Although Jakarta gives the impression that it has a surplus of malls (it currently has just over 130), compared to other cities in the region, it actually has a low per capita ratio of mall space. The retail sector saw y-o-y growth of about 10% over 2012 and demand in the market is strong. However, due to a moratorium on shopping malls construction in Jakarta, which was enacted in 2011, the only new projects that can be completed are those that received approval before the ban was put in place and which can be opened in the next two to three years. As such, competition for retail space is expected to intensify and rental rates will increase in the coming years. Currently, however, rates remain stable at between Rp492,000 ($49.20) and Rp650,000 ($65) per sq metre per month.

Lay Of The Land

According to JLL, as of the third quarter of 2013 Jakarta had a total of 2.4m sq metres of retail space and the retail vacancy rate reached 6.4%, thanks to expansion by international retailers. Lotte Department Store, H&M and Uniqlo opened branches in Jakarta in 2013, a first for all three firms. Lotte Shopping Avenue and Pondok Indah Street Gallery opened their doors in the second quarter of 2013; combined, the two properties added 93,000 sq metres of retail space to the capital, bringing Jakarta’s total prime retail space to 1.37m sq metres. In 2013 fashion and food and beverage remained the biggest drivers of demand, which was also supported by cinemas, supermarket chains, fitness clubs, department stores and other large-scale outlets.

Despite additions to Jakarta’s retail space in 2013, demand is still high and vacancy rates continue to fall. Some 75% of space in the Lotte Shopping Avenue and Pondok Indah Street Gallery, along with the St Moritz Mall, which opened in west Jakarta in 2013, was prerented, and rates will likely rise once the properties reach maximum occupancy. Rents in the retail sector grew 2.5% quarter-on-quarter (q-o-q) in the second quarter of 2013 and remained stagnant through the fourth quarter of the year.

According to JLL, total net absorption in the shopping mall sector reached 179,000 sq metres in 2013 and occupancy was 93% at the year’s end. While demand remains strong, the supply of retail space is increasing, reaching 2.6m sq metres as of the fourth quarter of 2013, and an additional 500,000 sq metres is expected to become available by 2016.

Office Segment

Indonesia’s office market remains concentrated in Jakarta and Java. A third-quarter 2013 report by JLL found that tenant demand, rental growth and investor interest are still on the rise in Jakarta’s office segment. A major new project, DBS Tower at Ciputra World Jakarta, opened in the second quarter of 2013, and, as tenants began to fill the office space, Jakarta’s vacancy rate increased slightly, to 4.7%. The opening of DBS Tower brought an additional 1.3m sq metres of grade-A space to the city’s office segment.

“If you had signed an office lease contract in Jakarta three years ago and were looking to renew it in 2013, operational costs, in percentage terms, will be increasing at the highest rate of anywhere in the world – by ($30) and Rp400,000 ($40) per night. The luxury hotel sector also continues to expand, with Hilton, SwissBelhotel and Best Western aiming to take advantage of Indonesia’s tourism market in Balikpapan, Tangerang and Jakarta. Hilton’s first Indonesia properties will be its five-star Waldorf Astoria, as well as its DoubleTree and Hilton Garden Inn brands, which will primarily cater to business travellers in the capital.

Best Western is also looking to expand its local footprint with an additional seven properties in Jakarta over the next few years, following the opening of its property in Tangerang, West Java in the fourth quarter of 2013. Swiss-Belhotel’s newest property in Balikpapan will bring the number of the group’s hotels in Indonesia to 34. Between 2014 and 2017 34 new hotels are slated to be built; 16 of these will have fivestar ratings. With the election cycle in full swing, hotels can look forward to a bumper year as journalists, candidates, campaigners, non-governmental organisations and foreign election observers drive up occupancy rates nationwide.

Foreign Ownership

While foreigners can own real estate in Indonesia, property laws, which are influenced by colonial policy and traditional law, are a challenge to navigate. “Legal certainty and the regulatory efficiency remain primary bottlenecks. Even if a company takes all precautions and completes all due diligence, there is still significant risk of delay and even non-completion,” Marcellus Chandra, the president director of Prioritas Land, told OBG.

The 1945 constitution, created during the postcolonial transition, said that land was owed entirely by the state and was to be used solely by the people of Indonesia. While legal scholars interpret Article 33/3 as a strict prohibition of foreign ownership, there are a number of ways for foreigners to purchase property legally. Building title rights, referred to as hak guna bangunan, can be obtained by corporations, including foreign ones. The building title rights can be owned for 30 years, with an option to extend to an additional 20, and allow developers to build property on land that is owned by someone else. It is also possible for hak guna bangunan to be sold or transferred to another holder. Hak pakai is a right to land use, granted for a 25-year period, and foreign nationals as well as foreign-owned firm are eligible to receive it. The current laws are suitable for manufacturers and other buyers, but not for those interested in condominium ownership. A regulation was passed in 1990 to allow foreign residents to purchase apartments and offices, but only if the title is hak pakai. More often than not, these types of property are built using hak guna bangunan, because hak pakai is often perceived as less valuable. New regulations have been discussed, but the government has yet to make new legislation. Reform would make it easier for foreigners to own property in Indonesia, and could also generate further competition in the sector. “In Malaysia, a resident’s permit comes with a condominium purchase. In Indonesia, titles are leasehold for foreigners. To stimulate positive foreign investment in real estate at the private individual buyer level, the government should get to the point where it grants ownership title to foreigners for condominium purchase which is the same given to Indonesians, but unfortunately some foreign buyers have gone down that route because of poor advice,” Cheadle said.


While interest rates rose slightly in 2013, the benchmark currently rests at 7.5%. Keeping the loan rates below 10% has driven demand in the sector, which would be badly affected if the benchmark were set higher. The US Federal Reserve’s tapering of its quantitative easing programme could mean less investment in emerging markets, but private investment from local and foreign firms remains high.

Indonesia’s young population and growing consumer class will provide growing demand for property in the years ahead, and, as the country continues to strengthen its appeal as a location for doing business, the real estate market should remain an appealing option for investors over the longer term.


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The Report: Indonesia 2014

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