Indonesia's residential market on the rise

 

A growing middle class and rising levels of urbanisation have supported rapid real estate growth in Indonesia, and there remains substantial room for expansion in the coming years.

While the government has moved to prevent a real estate bubble, and a commodities price crash and macroeconomic slowdown weighed on growth between 2013 and 2015, the sector began to regain its footing in 2016, with property sales forecast to rise for the first time in six years in 2017.

Bank Indonesia (BI), the central bank, kept interest rates low during the first half of 2017, after a series of rate cuts the previous year, with home ownership forecast to increase on the back of new government lending and affordable housing initiatives. Recent reforms to property and real estate investment trust (REIT) tax regimes should boost foreign direct investment (FDI) inflows significantly in the coming years.

Although demand in the office market has flagged in recent years due to increasing supply, a growing pool of entrepreneurs, start-ups and tech-oriented businesses operating in Jakarta are expected to transform the market, even as rents and occupancy rates fall across the traditional office segment. Industrial property is also well-positioned for rapid future growth, driven by rising demand in the logistics segment, while land sales in Jakarta also showed promising growth during the opening months of 2017.

RECENT GROWTH: Indonesia’s real estate sector appears poised for a turnaround in 2017, with sales set to rise for the first time since 2013.

Market research firm Mordor Intelligence has reported that between 2012 and the second half of 2013, 26 out of 45 property companies listed on the Indonesia Stock Exchange (IDX) posted a net profit growth of more than 50%.

Fears of a real estate bubble led the BI to tighten its monetary policy during the second half of 2013, boosting interest rates and introducing new rules that increased the minimum down payment required to purchase property, and curbed mortgage issuance for the ownership of second homes. Banks were also forbidden from lending to investors in properties that were still under construction.

The sector also felt the impact of a global commodities price crash, with a broader macroeconomic slowdown weighing on sales growth. Indonesia Property Watch (IPW) reported that the total value of property sales fell by 35% in 2014, 26% in 2015 and 49% during the first nine months of 2016.

Despite recent fluctuations, the sector’s economic contribution has expanded steadily since 2011. According to Statistics Indonesia (BPS), the real estate sector’s total contribution to GDP at current prices rose from Rp218.8trn ($16.5bn) in 2011 to Rp237.91trn ($17.9bn) in 2012 and Rp264.28trn ($19.9bn) in 2013. Growth surged again in 2014, and the sector’s GDP contribution increased by 11.5% to Rp294.57trn ($22.2bn) and a further 12% in 2015, reaching Rp329.8trn ($24.9bn).

FOREIGN INVESTMENT: FDI inflows to Indonesian real estate have also recorded strong recent gains. BPS reports that FDI realisation in the sector based on capital investment activity fell sharply from $1.05bn in 2010 to $198.7m in 2011, before rebounding to $401.8m in 2012, $677.7m in 2013 and $1.17bn in 2014. FDI surged by 108% to hit a high of $2.43bn in 2015, before moderating to $2.32bn in 2016. The number of realised projects in the sector has also risen sharply in recent years, from 71 projects in 2010 to 109 in 2011, 131 in 2012, 285 in 2013 and 255 in 2014. Total projects realised in the sector jumped to 858 in 2015, and a seven-year high of 1151 in 2016.

Meanwhile, international media reports that FDI inflows in the real estate sector reached at least $2.8bn in 2016, which would be an all-time high, supported by an investment in one of the largest planned commercial properties in the country – a $1bn tower under development by the China Communications Construction Company (CCCC). Other foreign firms including Mitsubishi, Tokyu Land, Hongkong Land and Sime Darby also moved to invest in the sector in 2017.

PRO-GROWTH: In the years since 2014, the Indonesian government has increasingly shifted its real estate policies towards attracting new investment and increasing property borrowing and purchasing, thus supporting a gradual turnaround in the sector.

In June 2015 BI raised the loan-to-value (LTV) ratio for home mortgage loans to reduce the obligatory minimum down payment for first-time homebuyers. The LTV ratio for the purchase of a first home rose to 80% from 70% previously, while the maximum LTV ratio for the purchase of a second home was raised from 60% to 70%. LTV ratios for third homes were also raised to 60% from 50% previously, and LTV ratios were raised again in June 2016, when BI announced a 5% across-the-board increase.

BI has also maintained accommodative growth policies since 2016, when it cut its benchmark interest rate three times, or a total of 150 basis points, to end the year at 4.75%. In July 2017 the bank decided to leave rates unchanged, which should support the growth of home ownership.

AFFORDABLE HOUSING SHORTAGE: Increasing home ownership, particularly in the lower and middle property segments, will be important for future real estate growth. Real estate consultancy Savills Indonesia reports that affordability remains one of the most important considerations for home buyers in Indonesia, and the country’s affordable housing shortfall has expanded significantly in recent years, although President Joko Widodo’s recent launch of the “One Million Houses” (OMH) programme should significantly mitigate the challenges.

In 2014 business and investment portal Global Business Guide Indonesia reported that Indonesia required an additional 800,000 new housing units annually, while the World Bank put the shortfall at 1m units annually in 2017. Ratings agency Fitch reported in September 2016 that the country’s affordable housing shortfall stood at 13.5m.

Urbanisation is also impacting residential demand, and JLL reported in February 2017 that around 200,000 people move to Jakarta each year, while the country’s population of young, middle-income families stood at 55m, supporting rising demand in the rental and mid-range housing markets.

“With the improvement of infrastructure and public transportation in Jakarta, some suburban areas will see accelerated property development in the near future,” Budiawan Lebar, president director at Gading Development, told OBG.

MORTGAGE MARKET: In its second-quarter 2017 Residential Property Price Survey, BI reported that 75.54% of homebuyers in the country preferred to use housing loans to purchase property, with lending rates offered at commercial banks ranging from between 7.99% and 15.18%. Although mortgages grew to comprise 46% of the banking sector’s total loan portfolio by May 2013, the mortgage-to-GDP ratio stood at an estimated 3.5% in 2015, one of the lowest ratios in the region.

BI reports that total disbursed housing loans contracted to 0.55% quarter-on-quarter (q-o-q) in the second quarter of 2017, compared to 1.84% q-o-q expansion in the second quarter of 2016. Home loan growth has been irregular since 2015, with BI reporting that the total value of home loans in the country rose from Rp15.62trn ($1.2bn) in the second quarter of 2015 to Rp21.14trn ($1.6bn) in the final quarter, moderating to Rp18.45trn ($1.4bn) in the first quarter of 2016 and hitting Rp27.73trn ($2.1bn) in the fourth quarter of that year, then falling to Rp26.4trn ($2bn) in the second quarter of 2017.

BUYER SUPPORT: The government has rolled out several policies aimed at boosting home ownership and reducing the country’s affordable housing shortfall in the last few years. Most recently, a new subsidised mortgage scheme for first-time home-buyers was unveiled in January 2016. Applied to purchasers with a maximum monthly income of Rp7m ($528), against previous limits of Rp4.5m ($339), the scheme enables first-time buyers to obtain a subsidised mortgage lending rate.

The scheme is part of the Housing Loan Liquidity Facility programme (FLPP), which was launched in 2010 and uses government funds to cover 70% of the total mortgage amount for low-income homebuyers. The government also covers 70% of the credit risk, with mortgage insurance provided by state-owned insurance company Askrindo at a 0.37% premium, which is included in the final 7.25% interest rate.

In April 2015 President Widodo also announced the OMH programme, which aims to provide housing for low-income Indonesians, as part of an effort to build 10m new affordable homes between 2015 and 2019. Some Rp10trn ($753.8m) of the 2015 state budget was allocated to implement the programme.

Housing facilities can be purchased using government-subsidised mortgages offering a 5% interest rate – compared to the FLPP’s 7.25% – and 20-year tenor. Down payments have also been set as low as 1% of the purchase price, while Indonesians who do not have a payroll wage, which is required by most banks, will be able to use the government’s smallholder business credit system. Further reforms came in September 2016 when the government loosened restrictions on affordable housing construction, which should facilitate improved levels of private sector participation in affordable housing development.

LUXURY INVESTMENTS: The government also moved to encourage foreign investment in the real estate sector with a 2015 decision allowing foreigners to “own” luxury apartments under a right-of-use scheme. Foreigners are not permitted to own property in Indonesia, although the government’s new right-of-use scheme for luxury properties does not have a fixed duration for long-term leases.

Although Indonesia Investments, a subsidiary of Dutch investment firm Van der Schaar Investments, reported in July 2016 that it was unclear whether the new policy would boost the property sector, as luxury apartments represent a very small portion of the broader real estate sector, Savills data shows just 1163 units of Jakarta’s apartment stock were classified as high-end in the first quarter of 2017, representing less than 1% of total supply.

Nonetheless, the measures are expected to support long-term expansion of the luxury property market and encourage inflows of FDI.

TAX REDUCTION: In November 2015 the Ministry of Finance announced plans to raise the threshold for a 20% luxury tax on property, from any property worth more than Rp2bn ($151,000) to any valued at more than Rp10bn ($754,000), a move that should further support expansion. Savills reports that high-end apartment stock in Jakarta will rise by 4.9%, or 57 units, in 2017 to reach 1220 units by the end of the year. High-end apartment stock is forecast to rise by 8.8%, or 107 units, in 2018 to end the year at 1327, and rise by 57.7% in 2019, with 766 new units added, bringing total high-end stock to 2093 units.

The government also announced in 2015 that it would allow foreigners residing in Indonesia to own houses under an 80-year right-of-use scheme, with the option to extend the original 30-year lease on the property by 20- and 30-year increments. As with luxury apartments, right-of-use ownership allows the owner’s next-of-kin to inherit the property, although the scheme only applies to residents of Indonesia.

REITS: Although the real estate investment funding in the form of collective investment contracts (DIRE) scheme established a framework for REITs in 2007, REIT development in Indonesia had been limited until recently by a complicated tax regime and investor preference for Singapore-listed REITs.

In October 2015, however, Ministry of Finance Regulation No. 200 of 2015 was passed, which removed a double taxation applied on both dividends and property sales. Indonesian conglomerate Lippo Group had already been involved in REIT development, having created two Singapore-listed REITs with total assets reaching around $2.3bn in 2015, although Indonesian REIT development had been quite limited in the country until these reforms were implemented, with only one small REIT listed.

Following the removal of double taxation on REITs, Lippo Group announced it would shift its two REITs from Singapore to Indonesia, with plans to boost the asset value of its REITs to over Rp100trn ($7.5bn) by 2020. International media reported that Ciputra Development and Bumi Serpong Damai were also considering shifting their REIT assets to Indonesia.

REIT REFORMS: In October 2016 President Widodo signed the Government Regulation No. 40 of 2016, or the New Tax Incentives for Indonesian REITS (NTIIR), which served to changed the property transfer tax rate for transactions made under the DIRE initiative.

Under the NTTIR scheme, the transfer tax applied to a property seller has been reduced to 0.5%, with the gross transfer value based on fair market valuation. Prior to this, any capital gains received by the seller from a property transfer were subject to a normal income tax rate of 25% for corporate sellers, or up to 30% for individual sellers. The buyer tax remains set at 5%, and in November 2016 international law firm White & Case reported that there have been discussions between central and local governments to lower it to 1%, in line with a policy announcement in March 2016.

In February 2017 Lippo Group announced it had launched its first REIT in Indonesia, DIRE Bowsprit Commercial and Infrastructure. Managed by Lippo subsidiary Bowsprit Asset Management, the IDXlisted REIT had a minimum purchase of Rp10m ($754) in its initial offering, with the company aiming to reach Rp2.45trn ($184.7m) of assets under management. It is expected to acquire four office towers and one distribution centre managed by Lippo Group.

HOUSE SALES: IPW reports that property sales are forecast to rise by at least 15% in 2017 as a result of mortgage and lending reforms, which would be the first year of growth since 2013. Property prices and sales recorded steady growth at the start of the year.

BI reports positive recent trends in residential sales activity, reporting in the second quarter of 2017 that Indonesian property developers witnessed a strong rise in property prices during the first three months of the year. Property prices increased across all categories of housing in the country, led by a 1.84% q-o-q expansion of small house prices, followed by 1.28% q-o-q growth for medium houses and 0.58% large homes. Small houses exhibited q-o-q growth of 2.61% in the second quarter of 2017; however, growth for medium and large houses decelerated to 0.55% q-o-q and 0.38% q-o-q, respectively.

Developers in Jabodebek and Banten reported the strongest increase in overall residential prices, at 2.04% q-o-q. On an annual basis, developers in Surabaya reported the highest price growth rates, at 7.75% in the second quarter of 2017, while Pontianak’s 0.15% y-o-y growth rate was the lowest. Total house sales rose by 4.16% q-o-q between January and March 2017, decelerating to 3.61% in the second quarter, compared to 5.06% q-o-q growth in the fourth quarter of 2016.

APARTMENT MARKET: Savills Indonesia reports that Jakarta’s apartment market is dominated by the lower-middle segment, which accounts for about 58% of existing strata-title – registered ownership of layers of space in a multi-storey building – apartment stock in greater Jakarta, followed by the mid-end segment, with 25% of total inventory. North Jakarta is home to the largest share of apartment stock, at 22% of the total, followed by West and South Jakarta, which are home to 19% and 18%, respectively.

In its first-half 2017 Greater Jakarta Apartment Briefing, Savills reported that 3406 apartment units were completed in Jakarta during the first quarter of 2017, including eight new towers from six separate projects. This brought the total existing strata-title apartment stock in the market to 128,407 units, with Savills reporting that the introduction of new, completed projects to the market had risen considerably since 2013. The company expects the trend will continue to the end of 2017. Completions in the first quarter of 2017 already equalled 29% of total finished units delivered in 2016.

Savills reports that total apartment sales rose by 46.9% y-o-y to hit 3058 units in the first quarter of 2017, from 2082 units in the same period of 2016, noting that the number of units launched in 2017 was more than twice the number in the first quarter of the previous year, although current monthly take-up remained 30-50% lower than in 2012 and 2013.

FUTURE SUPPLY: Savills expects an additional 32,000 new apartment units to be completed in greater Jakarta in 2017, the highest amount of new supply since 2012, while project completions in 2018 are forecast at 29,000, with total apartment stock rising by 50% between 2017 and 2019.

The company reports that 32% of new stock will be upper-middle-grade apartments, indicating potential for more diversified options moving forward. Indeed, Savills forecasts a distribution shift in the market, noting that upper-middle-grade projects have outperformed the broader apartment market in terms of sales performance, with purchase rates standing at 80% in the first quarter of 2017.

The firm also forecasts new stock will be concentrated in West Jakarta, where 33.5% of an anticipated 76,267 units are expected to come on-line between 2017 and 2020 followed by South and North Jakarta, at 23.5% and 14.3%, respectively.

RECENT ANNOUNCEMENTS: Projects such as CCCC’s superblock project, Daan Mogot City, should keep residential supply growth on an upwards trajectory beyond 2018. In June 2016 the CCCC, a joint venture (JV) between the China Harbour Engineering Company and China Road and Bridge Corporation, announced plans to develop a $1bn mixed-use real estate project in Jakarta. Reporting that recent government policies had been conducive to large-scale infrastructure developments, the firm stated that its project will include 30 tower blocks, with the first eight expected to come on-line by 2019. CCCC has also announced plans to expand its property business to Surabaya and Medan.

Japan’s Mitsubishi Corporation has also formed a JV with Bumi Serpong Damai, announcing in October 2016 that it plans to build 1000 housing and retail units in Tangerang, while Malaysia’s Sime Darby has partnered with Indonesian developer Hanson International to invest Rp11.3trn ($851.8m) in developing 500-ha of affordable housing projects.

“Secondary cities in the country are growing with the burgeoning middle class, but for premium material sectors to be affected, GDP per capita needs to reach $1000,” Hanafi Atmadiredja, president director of Surya Toto Indonesia, told OBG. “The current potential for smaller cities is big, but it has not reached its maximum peak yet.”

OFFICE RENTALS: The residential market has performed better than the office market, which has faced headwinds in the wake of falling demand since 2015. In April 2017 real estate consultancy Colliers reported that occupancy rates for offices in Jakarta have dropped continuously over the previous three years, and now stand at 83.8% in the city’s central business district (CBD), down from 85% in the fourth quarter of 2016, and at 81.9% outside the CBD.

The latter company reports that landlords have been pressured to reduce their asking base rental rates to less than Rp300,000 ($22.61) per sq metre per month in the CBD as a result, while the completion of 12 additional office buildings in the CBD – adding 731,164 sq metres of space to the market – will further weigh on rents in the remainder of 2017. Outside of the CBD, nine new buildings totalling 197,609 sq metres will come on-line in Jakarta in 2017.

“The market is still weak and oversupply is still a significant problem,” Anton Sitorus, head of research and consultancy at Savills Indonesia, told OBG. “Our forecasts show that 2m sq metres of new office space is coming on-line in the CBD by 2020. Vacancy rates have risen to over 30% in some areas, compared to an average of 16-18% three or four years ago.”

Meanwhile, JLL reports that rental rates of grade-A offices in the CBD fell by 4.7% q-o-q in the first quarter of 2017, with occupancy rates reported at 73%. Non-CBD office rents fell by 1.4% q-o-q, with occupancy standing at 76%. Both JLL and Colliers forecast office rents will continue to drop in 2017, although Colliers reports rents will stabilise at the end of 2017. Meanwhile, JLL forecasts rents will continue to fall in 2018, with the market set to pick up in 2020 or 2021.

“The reported occupancy rate for offices was around 84% in the first quarter of 2017,” William Bright, director of Jakarta Land, told OBG. “For premium offices, the figure was closer to 80%, and in all likelihood the rate will fall further in 2018 as new buildings reach completion.”

Although the office rental market has slowed significantly since 2013, Colliers reports that slow sales have not pushed landlords to reduce office prices. According to the company, office space prices in the CBD remained at around Rp55.5m ($4180) per sq metre per month in the first quarter of 2017, with some buildings offering starting prices between Rp40m ($3020) and Rp55m ($4150) per sq metre per month for spaces ranging from 600 sq metres to 2000 sq metres in the secondary market. Office prices outside of the CCBD range from Rp20m ($1510) to Rp42m ($3170) per sq metre, averaging Rp36.7m ($2770) per sq metre.

Pre-committed take-up rates for strata-title office supply reached 70% in the first quarter of 2017, with Colliers reporting that unsold space in existing office buildings, as well as the number of projected office spaces for sale in the TB Simatupang area, is limited.

DIGITAL IMPACT: Demand for traditional office space is unlikely to keep pace with new supply; however, growth in internet adoption, entrepreneurship, start-ups and e-services could profoundly impact Indonesia’s office property over the medium term.

In its April 2017 Market Trends report “Offices of the Future”, Savills reported that the number of start-up companies in Indonesia is forecast to increase more than six-fold by 2020 to 13,000 companies. Using projections based on the idea that each business with five employees requires 15 sq metres of space per person, Savills forecasts this segment of the economy will need 1m sq metres of office space by 2020, arguing that the “one size fits all” model for the country’s office market will not be able to capitalise on the demographic shift.

“Jakarta appears to have started the adoption of these trends, as we record about 18,000 sq metres of co-working centres, 30,000 sq metres of serviced offices and 200,000 sq metres of single-home, single office-type offices. It is anticipated that all of this combined will not be enough to accommodate the growing level of demand until 2020,” Savills reported.

The company went on to say that operators of these types of offices should be regarded as a new class of tenant, arguing that developers and investors must account for these trends as traditional office rentals and sales remain subdued.

INDUSTRIAL PROPERTY: Colliers reports that industrial land sales in Jakarta hit 116.94 ha in the first half of 2017, representing 67% of total transaction volumes recorded in 2016, as well as higher sales than in the first and second quarters of 2016 at 19.4 ha and 29 ha, respectively.

Industrial land prices in Greater Jakarta, including Bogor, Bekasi, Tangerang, Karawang and Serang, range from a low of $120 per sq metre to a high of $299.65 per sq metre, according to Colliers. Bekasi’s land prices are the highest on average, at $219.30 per sq metre, while Serang’s are the lowest, averaging $157.32 per sq metre. “There is a lot of potential for investment in the property sector in Bekasi (East Jakarta), given the infrastructural developments and the corridor formed in that area,” Kam Kettin, president director of Depo Bangunan, told OBG. “We can compare Bekasi today with what Tangerang (West Jakarta) was 10 years ago.”

Several industrial states in greater Jakarta offer land leasing, with rates in Karawang ranging from Rp50,000 ($3.77) to Rp60,000 ($4.52) per sq metre per month, which has been the set rate for several years. Other regional industrial estates lease industrial buildings for $7.25 per sq metre per month, while rental tariffs for industrial buildings at a development under construction in Kerawang are Rp40,000 ($3.02) per sq metre per month.

Industrial estates in Bekasi charge higher rental rates than Karawang, with Colliers reporting that rents in the region range from Rp40,000 ($3.02) to Rp100,000 ($7.54) per sq metre per month. Jakarta’s Kerawang Industrial City is expected to deliver 160 ha worth of industrial land parcels by the end of the year, with Colliers reporting that the industrial market should be strengthened as a result of strong projected economic growth.

INNOVATION DRIVEN: As in the office segment, rising internet uptake and growth of e-services, including e-commerce, could have a tremendous impact on the industrial property market in Indonesia in the coming years, especially after the government removed the foreign ownership restriction on e-commerce businesses in May 2016.

E-commerce sales in the country grew by 22.6% to $5.65bn in 2016 and are forecast to reach $10.34bn in 2019, according to market research firm Statista. The e-commerce segment is forecast to comprise 8% of total retail sales by 2020, up from 1% in 2016 (see ICT and Trade & Investment chapters). BPS further reports that the total value of the warehousing and delivery services segments increased from Rp45.34trn ($3.4bn) in 2011 to Rp93.37trn ($7bn) in 2015, representing a gain of 106%.

As investors like Lippo Group and e-commerce marketplace app developer Tokopedia move to expand their e-commerce operations in the country, demand for additional storage and logistics spaces could become an important factor when it comes to new industrial developments and sales.

“Logistics is forecast to become a major industrial growth driver,” Sitorus told OBG. “You see companies like Amazon and Tokopedia making major investment announcements, which we anticipate will help with driving demand over the medium term. It’s certainly something to keep an eye on.”

OUTLOOK: Although the country’s real estate sector has struggled with oversupply in the office segment, affordable housing shortages in the residential segment and flagging rental rates over the previous three years, a turnaround in many subsectors of the industry is expected in 2017.

The government’s tax and mortgage reforms offer significant support for residential sales and REIT investment, while FDI inflows and property sales volumes are forecast to continue on an upwards trajectory, which would mark the first return to growth since the period of 2012-13.

The country’s ongoing digital transformation and burgeoning e-commerce industry could also have significant, positive ramifications for the industrial land and office segments, leaving the real estate sector in a strong position to successfully capitalise on emerging demographic trends in Indonesia and supporting the sector’s expansion well into 2018.

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The Report: Indonesia 2018

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