While overall momentum has slowed in Indonesia's real estate sector, high growth segments such as retail present opportunities for investors

Although investment in the sector is still on the rise, Indonesia’s real estate sector is cooling in 2016 after several years of rapid growth, as muted economic expansion impacts consumer purchasing power and new project development. Despite recording moderate recent increases in sales and prices, residential growth has slowed from the double-digit heyday of 2011-13, while oversupply in the office market is beginning to weigh on prices and rental rates, particularly in Jakarta, which saw a record amount of new space come on-line in 2015. A few bright spots stand out, however. The booming retail segment is expected to perform well in 2016 on the back of growing demand, while Indonesia’s secondary cities hold considerably high potential across all segments.

The government is also doing its part to support the sector, rolling out a number of new policies aimed at boosting the expansion of real estate investment trusts (REITs), increasing mortgage lending and opening the sector up to foreign ownership for the first time in late 2015. Over the longer term, an ongoing infrastructure development programme will have a significant impact on land and property prices, ensuring a sustainable growth trajectory beyond 2016.

Boom Years 

A number of factors supported the real estate sector’s recent expansion, including low lending rates, strong GDP growth in the years to 2012 and rising purchasing power within Indonesia’s young and burgeoning middle class.

Indonesia’s real estate sector grew rapidly in the years following 2009, with Statistics Indonesia (BPS) reporting that its sector’s total contribution to GDP rose from Rp198.2trn ($14.5bn) in 2010 to hit Rp218.8trn ($16bn) in 2011, Rp237.9trn ($17.4bn) in 2012 and Rp264.3trn ($19.3bn) in 2013, for a compound annual growth rate (CAGR) of 11% during the period. Indonesia Investments, a subsidiary of the Netherlands-based Van der Schaar Investments, reported in 2015 that out of 45 property developers listed on the Indonesia stock exchange in 2012, 26% posted net profit growth of more than 50%, while property prices also rose by nearly 30% between 2011 and 2013. In July 2015 DBS Vickers Securities, a Singapore-based brokerage firm, reported that aggregate property marketing sales recorded a 35% CAGR between 2009 and 2013, to reach roughly Rp40trn ($2.9bn).

Although prices have risen in recent years, with the Special Capital Region of Jakarta as one of the world’s most-populous urban centres with 10.2m people in 2014, Indonesia’s property market offers a significant cost advantage over many of its regional neighbours. According to a 2015 report published by Global Property Guide, houses and apartments in the country are among the least expensive in South-east Asia, with a 120-sq-metre property in Jakarta priced at $2692 per sq metre in 2014, putting it below similar urban markets in Malaysia, Cambodia, Thailand and the Philippines. A similar property in Bangkok, for example, would have been priced at $3638 per sq metre in 2015.

However, the sector’s rapid double-digit growth has since slowed, and a number of factors have weighed on Indonesia’s residential property market since 2013, including slowing GDP growth, rising interest rates and Bank Indonesia (BI) measures to prevent excessive market speculation. The residential sector accounted for 60% of the total property sector as of 2015, according to Indonesia Investments, while roughly 46% of banks’ total credit was allocated to mortgages in 2013.

Residential Slowdown 

The sector’s slowdown began during the second half of 2013, when BI first became concerned about a growing property bubble developing as the property sector surged despite an economic slowdown. As a result, it implemented a tighter monetary regime.

The bank raised minimum down payment requirements for purchasers, limited mortgages for second home ownership and prohibited banks from providing loans for the purchase of properties that were still under construction. The higher loan-to-value (LTV) ratio implemented for down payments was applied to any property measuring over 70 sq metres, reducing middle- and upper-class property purchasing, and despite having set the benchmark interest rate at a historic low of 5.75% from February 2012, the bank began a series of rate hikes culminating in a rise to 7.5% in November 2013. The move was also aimed at halting a sharp domestic currency depreciation, which saw the rupiah hit a 17-year low in July 2015, and which has also weighed on export and credit growth (see economy chapter).

More recently, the government moved in December 2015 to roll out a new 20% luxury tax on houses with a sales price of more than Rp20bn ($1.5m), as well as apartments priced at or above Rp10bn ($730,000), which dampened investor sentiment in the luxury segment.

These developments had an impact, and BI later reported that growth of its residential property price index (RPPI) – which started from a baseline of 100 points in 2002 and covers the Jabodebek-Banten region including Jakarta, Bogor, Depok, Bekasi and Tangerang in Banten – fell from 11.5% in 2013 to 6.3% in 2014. The RPPI slowed once again to 4.15% year-on-year (y-o-y) in 2015, ending the year at 188.65, with the Greater Jakarta region being particularly hard hit as it has become increasingly saturated due to heavy property development in recent years.

Recent Growth 

These challenges are exacerbated by an ongoing macroeconomic slowdown, with developers anticipating that growth will remain sluggish during the first half of 2016, before picking up as the government’s infrastructure development programme accelerates. Although Indonesia’s economic expansion averaged nearly 6% annually in the five years to 2012, collapsing oil and commodities prices, slowing growth in China, falling export revenues and the rupiah’s rapid depreciation drove GDP growth to a nine-year low of 4.8% in 2015.

The RPPI returned to third quarter 2015 growth levels of 1% in the first quarter of 2016 to reach 191.1, while residential property sales slowed from 6% quarter-on-quarter in the fourth quarter of 2015, to 1.5% in the first quarter of 2016, dampened by economic moderation undermining demand for residential property. Housing price growth also continued to decelerate during the first quarter of 2016, rising by 4.2% y-o-y, from 4.6% during the fourth quarter of 2015. Large houses recorded the slowest gains, at 2.5% y-o-y, while small houses saw growth hit 6.1%.

Residential Rentals 

The rental market forecast is also subdued, with real estate consultancy Cushman & Wakefield reporting that although the supply of condominiums for lease rose significantly in Jakarta in 2015, no new supply of purpose-built rental apartments was planned or delivered during that year. Three new serviced apartment projects – Havenwood Residence Simatupang, Fairmont Sky Suites and Ra Residence – added 257 units to the serviced apartment segment in 2015, bringing the total number of units to 4665, a 5.5% expansion over 2014, while serviced apartment supply outside of Jakarta, including in cities Cikarang, Karawang and Bekasi, rose by 9.4% in Q4 2015.

Rental rates remained stable during the fourth quarter of 2015, fluctuating in line with the rupiah as new government regulations stipulate that the currency must be used in all rental transactions. Average rental rates in the apartment sector fell by 0.2% y-o-y in 2015 to $21.70 per sq metre, according to Cushman & Wakefield.

Projects including Fraser Setiabudiand Somerset Kancana were delayed in 2015 and now are expected to open in 2016, helping occupancy rates in the rental apartment sector rise by 5.4% during the fourth quarter of 2015, and 4.2% y-o-y in 2015 to 67.1%. In Jakarta the residential occupancy rate rose by 0.5% to 69.5% at the end of 2015. However, Cushman & Wakefield reported that occupancy rates are expected to fall in 2016 as a large number of new condominiums come on-line, even as demand rises in the serviced apartment subsector. Rental rates, which have been high as a result of the rupiah’s late-2015 resurgence, are therefore expected to remain flat throughout 2016.

Second Cities 

BI data shows that by region, the slowest gains in property prices were recorded in Pontianak, while developers in the high-potential Batam area reported 16.8% y-o-y price growth. This was driven in large part by the government’s infrastructure agenda, which includes plans to construct the country’s first high-speed rail project connecting Jakarta and Bandung in West Java, as well as a mass rapid transit and light rail transit system in the Greater Jakarta area, Surabaya on East Java and Palembang on Sumatra. These developments, particularly, the high-speed railway, are projected to lead to a number of new residential developments located near new transit hubs, with existing properties in close proximity to the project also expected to benefit from rising property prices as a result. “Infrastructure will be the main catalyst for property development in Indonesia. Supply used to be concentrated in Jakarta, but over the next three to four years we will see it expand to greater Jakarta, especially in areas around train stations. The middle class will buy apartments close to these stations to facilitate their morning commute,” Anton Sitorus, head of research and consultancy at Savills, told OBG.

Centre Of Attention 

As such, secondary cities including Bogor, Depok, Tangerang and Bekasi have been identified as holding particularly high potential for real estate investment and expansion. “Infrastructure projects such as the high-speed train can be positive for the real estate sector, but only if the land around the train stops is not controlled or monopolised by the train operator only,” A.H. Marhendra, president director of property developer Springhill Group, told OBG. “If this does not happen, the prices will not be competitive enough to boost property development.”

Toto Bartholomeus, president director of developer Lippo Cikarang, also underlined the importance of infrastructure. He told OBG, “Investing in a township is very capital intensive; infrastructure is the biggest part of the investment. We strive to make our city and environment liveable for generations to come. For example, to ensure sustainable water supply, we build water treatment plants. Changes in socio-demographic and economic standards also impact directly on the development of townships. We have to constantly push for a higher standard to fit the changing lifestyle of Indonesians and foreigners living in Indonesia.”

At the same time, rising credit and investment within the property segment could also see it regain some traction in 2016, bolstered by ongoing legal reforms loosening restrictions on foreign property ownership, as well as new tax incentives for REITs. In January 2016 property group Real Estate Indonesia reported that property sales growth is expected to hit between 10% and 12% in 2016 on the back of new government stimulus packages and accelerated infrastructure spending, up from 7-8% growth in 2015.

Credit Growth & Investment 

Investment and lending growth are already on the rise in the country. According to BPS data, domestic investment in the real estate and business services sector leapt by 509% in 2014, from Rp2.2trn ($161m) to Rp13.1trn ($956.3m). FDI inflows have also recorded impressive gains in recent years, with BPS reporting that total FDI realisation in the real estate and business services sector hit $401.8m in 2012, rose by 69% to reach $677.7m in 2013 and increased by a further 73% to $1.2bn in 2014.

Credit to the sector is also on the rise, after the central bank, state-owned lenders and private banks each moved to cut rates in late 2015 and early 2016. Approved credit to the finance, real estate and business services sector rose by 14.7% between 2013 and 2014 to hit Rp125trn ($9.1bn), from Rp109trn ($8bn), according to the BPS, although this likely does not include mortgages and property development lending, with BI reporting that property lending rose by 11.8% y-o-y in December 2015 to hit Rp620.4trn ($45.3bn).

Real estate lending, particularly mortgage lending, is set to soar in 2016 after BI moved to cut its benchmark rate three consecutive months in a row between January and March 2016, bringing it to 6.75%, while a number of major lenders have also announced plans to cut mortgage lending rates from current levels of some 10-11%, to support growth-driving consumer lending (see analysis). Promisingly for potential buyers, BI also issued ruling No. 17/10/PBI/2015, which raises the LTV limits for most categories of property by 10% effective January 18, 2015, with LTV ratios now ranging between 60% and 90% depending on the size and type of property. DBS Vickers Securities reported that this should benefit developers with larger exposure to buyers who take out a mortgage to purchase properties.

Foreign Ownership 

Until recently, Indonesian law had severely restricted foreign ownership of residential property, and stipulated that foreigners could not hold land titles and could only lease properties for up to 25 years, although this ownership period was eligible for two extensions.

However, in a bid to bolster the struggling property market and push foreign investment, the government has increasingly sought to loosen restrictions on foreign ownership. In May 2015, for example, authorities announced foreigners would be permitted to purchase luxury apartments worth a minimum of Rp5bn ($365,000), supporting growth in the high-end residential segment.

More recently, Indonesia’s Cabinet Secretary announced in January 2016 that it had further loosened restrictions on foreign ownership. The new regulation, No. 103/2015 on House Ownership of Foreigners Residing in Indonesia, will allow foreigners to own landed houses in the country for up to 80 years. The regulation, which was designed by the government to provide more legal certainty to foreign buyers regarding foreign ownership, is also expected to bolster mortgage growth in an under-penetrated market. The regulations came into effect on December 28, 2015, and will allow expatriates to own either a landed house or apartment for an initial period of 30 years, after which ownership can be extended twice, by 20 and 30 years, respectively (see analysis).

REIT Reforms 

Although REITs have been regulated in Indonesia since 2007 under the “real estate investment funding in the form of collective investment contracts” (DIRE) scheme, and are permitted to raise funds from investors for real estate and related assets, as well as cash equivalents, they have been historically unpopular in the country due to high property tax rates and issues pertaining to double taxation.

Until recently, central and local government regulations stipulated that property tax sales comprised a 5% tariff on the land and building transfer, or seller tax, and the buyer tax, a 5% tariff on land and building acquisition.

In October 2015 the government moved to address this issue, with the Ministry of Finance (MoF) Regulation 200, which exempts dividends received by a REIT from a special purpose company owned by the REIT from income tax. The reforms also remove the seller tax in the event of sponsors transferring property tax to a SPC, although it simultaneously imposed a capital gains tax on sponsors, which some have argued will result in adverse tax consequences and diminish the incentives provided by the reform.

Second Wave 

REIT development received another boost in March 2016, when the Indonesia Investment Coordinating Board (BKPM) unveiled its 11th out of 12 economic stimulus packages aimed at boosting economic growth, with the latest one including a number of policy changes aimed at improving REIT investment.

Under the changes, the government lowered the tax rate for property acquired by REITs, replacing the 5% rate with a personal final income tax rate of 0.5%. Earlier that month, the government and Indonesia’s property business lobby, Real Estate Indonesia, also announced plans to lower the tariff on land and building rights acquisitions from 5% to 1%, although this will require cooperation with local governments and the issuance of new local regulations, as this tax is not applied at the federal level. Although law firm White & Case noted in an April 2016 report that this demonstrates “a clear and strong intention on the part of Indonesian policymakers and lawmakers to boost the competitiveness of the domestic REIT market and to encourage Indonesian REITs to be listed domestically,” it also stated that the 11th stimulus package provides not information as to whether the new regulations will replace MOF Regulation 200 and its corresponding capital gains tax.


The impact of these reforms was almost immediate. Days after the October 2015 announcement, Indonesian conglomerate Lippo Group announced plans to shift two REITs with a cumulative Rp35trn ($2.6bn) in assets from Singapore to Indonesia in 2016 in order to benefit from the new tax incentives. Officials from Lippo said that the group plans to boost the asset value of its REITs to more than Rp100trn ($7.3bn) over the next four years, building on the success of its two Singapore-listed REITs, Lippo Malls Indonesia Retail Trust and First Real Estate Investment Trust.

According to an October 2015 Reuters report, Lippo’s move is expected to be followed by at least two other property companies that are considering spinning off hundreds of millions of dollars of assets into REITs, and which could potentially create a REIT market rivalling Singapore’s. PR Cipitra Development, an Indonesian property developer, told the news agency that it is considering placing up to Rp7.5trn ($548m) in assets into a REIT, while Hermawan Wijaya, director of property developer PT Bumi Serpong Damai, also said that Indonesia will be able to compete with Singapore as a REIT destination if the Indonesian government successfully executes these policies.

Office Market 

The office market is struggling, with an anticipated surge of new space over the next five years expected to exacerbate the present challenge of oversupply, particularly in Jakarta. According to Cushman & Wakefield, the capital city’s office market softened in 2015, with a positive net take up of 56,800 sq metres during the year, of which 36,650 sq metres was recorded in the fourth quarter. Average occupancy rates fell from 94.5% on average in 2014 to 85.6% in 2015, as a record-breaking 563,000 sq metres of new space came on-line, which represented an 11.8% increase – cumulating in 5.2m sq metres. Average gross rentals for office buildings fell to hit Rp345,500 ($25.20) per sq metre at the end of December, a 2% y-o-y increase, although in dollar terms rents fell by 6.3% y-o-y to hit $25.40 per sq metre as of December 2015.

Cushman & Wakefield forecasts the office market will record higher transaction volumes in 2016, but wrote that the market will be much more tenant-favourable as a result of enormous new supply coming online. The segment’s vacancy rate is also expected to rise, and rental rates concurrently fall, although service charge levels will also rise as utilities costs increase and as a result of a new system for calculating regional minimum wage levels.


The retail segment holds considerable promise for 2016, with property consultancy Savills reporting in May 2016 that Indonesia’s ongoing positive economic performance and robust household consumption have continued to support demand for retail space in Jakarta, while BI’s prudent monetary policy has enabled the rupiah to rebound, improving consumer purchasing power.

Jakarta’s current retail mix is dominated by mid-and high-end shopping centres, which comprise 41% of the total, followed by high-end shopping malls (30%). Roughly 40% of existing inventory in the city is concentrated in South Jakarta, followed by North Jakarta at 21% (see analysis).

Savills reports that in the first quarter of 2016, net take-up of retail space in Jakarta’s shopping malls reached 16,400 sq metres, roughly 43% of total net take-up in 2015. This indicates economic stabilisation and strong growth potential in the retail market, as retailers including Zara Homes, Cath Kidston, Sephora, Under Armour and New Balance have flocked to the market in recent years, while difficulties in obtaining permits for new high-end developments has further bolstered demand (see retail chapter), driving occupancy rates in high-end malls to the lowest in Jakarta, at 1.4%, compared to 6.6% in upper grade shopping malls. However, competition to attract new retailers and retain existing tenants kept rental growth flat in the first quarter of 2016, with Savills reporting rents average around Rp363,000 ($26.5) per sq metre per month across the sector, while rents at high-end shopping malls stand at about Rp794,000 ($57.96) per sq metre.


Although Indonesia’s real estate sector is unlikely to return to its pre-2013 highs in 2016, the sector’s growth outlook is positive. A host of policy reforms are set to boost investment and lending in the sector, while foreign ownership could also rise as the government moved to loosen ownership restrictions, even if work permit requirements for non-Indonesian mortgages remain a challenge. Although the office market outlook is subdued over the near term, a retail resurgence should support growth in 2016, while the government’s infrastructure agenda will ensure long-term expansion, particularly outside of the metro Jakarta region, keeping domestic and foreign investments on an upwards trajectory.

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The Report: Indonesia 2017

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