On the back of a massive infrastructure agenda, new real estate projects have driven growth in Indonesia’s property sector in recent years. A colourful mix of cultures has influenced the architectural layout of the capital city Jakarta, which is one of the many features that have attracted investors from around the world. However, while the government of Indonesia has pursued initiatives to bolster property investment, currency depreciation, political uncertainty and rising interest rates constrained growth in 2018.

The government’s infrastructure and pro-investment reform efforts bode well for future infrastructure expansion; however, Indonesia’s property segment remains somewhat dependent on the performance of other economic sectors. “Sustained expansion in the oil and gas and mining sectors should have a positive impact on the office rental segment,” Will Bright, director of local building management firm Jakarta Land, told OBG. “There is a partial issue of office space oversupply in Jakarta, although the emergence of co-working companies and tech-related firms has helped with take-up and eased the situation in 2018,” he added.

Meanwhile, a new wave of innovative real estate developments is on the horizon under the 100 Smart City Movement, an tech-based initiative spearheaded by the Indonesian Ministry of Communication and Information Technology to encourage the use of smart city technology to improve service provision (see analysis).

Liquidity Issues

Challenging conditions in the form of rising interest rates and a falling currency weighed heavily on property companies in 2018. In late 2018 Standard & Poor’s Global Ratings warned that the finances for real estate projects may deteriorate in 2019 due to risks associated with the upcoming presidential general elections and a weak currency. Additionally, a market report released by ratings agency Moody’s in September 2018 found that five of eight leading property companies lacked liquidity to repay their short-term debt that year. “Liquidity in the sector still constitutes a major challenge, as long-term instalments and payment delays are still quite common,” A H Marhendra, managing director of property developer Springhill Group, told OBG.

Furthermore, many big banks consider real estate a “negative” sector and avoid lending to them, making it very difficult for small and medium-sized enterprises to obtain financing. Although there are some banking institutions that support real estate lending, they offer loans at a much higher interest rate.

In an effort to improve cash coverage ratios, the Moody’s report noted that some of the companies had decided to replace short-term debt with longer-term debt financing. However, those that opted for longerterm debt were expected to weaken their leverage, potentially through early 2020 – a result of a surge in the cost of funding. The ratings agency also noted that, while most developers will generate operating cash flow in 2019, only three of the eight firms will generate free cash flow, while the remaining five may find it difficult to reduce debt and pay dividends to shareholders.

Size & Performance

Despite the report findings, Moody’s outlook for property demand in 2019 was largely positive. The property sector witnessed strong growth in 2017 and 2018, which was supported by increased foreign investment levels. According to a report released by the Indonesia Investment Coordinating Board (BKPM) in 2018, around 70% of investments in housing projects, industrial estates and office space developments came from foreign companies operating in Indonesia. Such firms were also responsible for 77% of investments in hotels and restaurants.

Despite significant developments, a lack of clarity in legal procedures has left untapped pockets of potential growth. While infrastructure and real estate development have constituted important pillars of the Indonesian economy in recent years, bureaucratic bottlenecks continue to delay project execution. According to data from the BKPM, cumulative investment commitments from 2015 to the first quarter of 2018 were valued at over Rp8trn ($567.3m); however, given the numerous administrative obstacles only 22% of committed investments were actually realised.

Despite numerous low-income housing initiatives, the housing sector has been unable to keep pace with population growth and urbanisation. According to market estimates in 2017, Indonesia needed 400,000 new homes every year to fill the housing backlog of 13.5m units. To address this, President Joko Widodo announced plans to build 1m homes per year via the “One Million Houses” (OMH) initiative. In support of these goals the government has launched a number of financing schemes, as a large portion of the population cannot afford to buy in urban centres (see analysis).

As of March 2019 the Property and Real Estate Index – which comprises all listed companies that are engaged in the property, real estate and construction sectors – had declined by 1.58% year-on-year (y-o-y), while the Jakarta Composite Index increased by 4.93% over the same period. According to an office index report published by real estate consultancy JLL, leasing activity in Jakarta’s Sudirman Central Business District (SCBD) witnessed moderate growth in the fourth quarter of 2018, which was underpinned by demand from flexible space operators and tech companies. Between May and September 2018 Bank Indonesia (BI), the country’s central bank, raised interest rates by 125 basis points. The rupiah depreciated by 11% against US dollar during the first three quarters of 2018, during which time the currency neared its lowest point in 20 years, almost breaching the Rp15,000:$1 mark. By the end of January 2019 the rupiah had outperformed most expectations reaching its strongest level since the end of June 2018, reaching Rp14,072:$1, a 2.82% rebound in the first month of 2019, before moderating to around 14,200:$1 in March. Given the fact that the Indonesian currency was among the worst performers across emerging markets in 2018, market analysts believe the strong start to 2019 may prove significant for wider economic growth and property investment.

New Tax Law

While property in Indonesia has proven to be a desirable asset for foreign investors – particularly from China – the performance of the real estate market continues to be influenced by political developments and fiscal reform, such as changes to the luxury property tax. In a bid to support property investments, policymakers announced plans in late 2018 to cut taxes on luxury properties and revise other tax rules associated with the real estate industry.

According to information released by the Ministry of Finance (MoF), the threshold for a luxury tax of 20% applied to houses and apartments would be raised from Rp20bn ($1.4m) to Rp30bn ($2.1m). While the sales tax for homes is only 2.5%, stamp and duty tax stands at 5%. There have been indications that the government would reduce the stamp and duty tax to 2.5%; however, as the tax falls under the autonomy of individual regions, the reduction is expected to take some time to be implemented.


Indonesia’s Residential Property Price Index (RPPI) increased by 0.35% in the fourth quarter of 2018, slowing from a 0.42% in the third quarter, according to the Residential Property Price Survey conducted by BI. The average price of small residential properties increased by 0.69% and 0.39% in the third and fourth quarters, respectively, while, growth in the average price of medium-sized houses increased 0.26% and 0.28%, respectively. Meanwhile, annual trends showed rises in residential property prices of 2.98% y-o-y in the fourth quarter. Developers report that Indonesian property seekers are becoming more discerning in line with rising incomes and greater exposure to international trends. “The typical Indonesian homebuyer prioritises affordability, reputation of the developer and comfort,” Alex Buechi, partner and head for Indonesia at Asia Green Real Estate, told OBG. “They are placing an increasing importance on green spaces, recreational areas, and health and gym facilities.”

Given the uncertainties surrounding the presidential election period, as well as a fluctuating currency and high interest rates, developers have had to contend with a contraction in residential property sales in the second half of 2018. Residential property sales contracted 5.78% in the fourth quarter of 2018. Sales of small and large-sized residential properties decreased by 12.28% and 24.16%, respectively. Although, medium-sized house sales experienced a surge of 13.46%.

Bali’s luxury real estate market has been an important recipient of investment over recent years, as booming tourist numbers have supported property developments. On the back of strong international visitor arrivals, the island has seen its property prices increase at unprecedented rates in recent years, with villas priced at around $1100 to $2300 per sq metre in 2017. Bali’s supply of villas grew by 7% in 2017, during which time the average asking price increased by 36%, despite a 69% decrease in the absorption rate.

Given the influx of foreign arrivals, around 80% of Bali’s economy is dependent on tourism. At the height of property investment, some popular areas such as upscale beach resort area Seminyak, saw prices increase by 10 times in only a few years. Estimates from the Global Property Guide suggest that a four-bedroom villa built on freehold land in nearby Berawa Beach in 2012 for $600,000 was worth $1.7m in 2018.

Real Estate Investment Indonesia

Retail Area

Home to a mixture of modern retail outlets, Indonesia’s growing economy has encouraged demand for a new wave of consumers eager to shop in high-end malls. As consumer spending patterns evolve, the demand for retail, dining and entertainment activities has increased. Despite this, the retail segment experienced fairly flat growth in 2018. “The retail sector was impacted by rising wages in China which, consequently led Indonesian retailers to raise their prices as well,” Kam Kettin, president director of building materials supermarket Depo Bangunan, told OBG. “Factories were also shut down in China, which led local companies to look for new suppliers.”

According to a quarterly report published by real estate consultancy Colliers International in September 2018, retail space across the Greater Jakarta area was expected to grow by 2.9% in 2018, while retail rental rates in the SCBD were expected to decline around 1% in 2019 on the back of increased supply. As of the second quarter of 2018 there was 3.21m sq metres of gross leasable area (GLA) in Jakarta, while total strata-title retail space was expected to reach 1.44m sq metres by the third quarter, driven by the opening of the New Harco Plaza in July. At that time, there were 129 shopping malls in Jakarta totalling 4.65m sq metres of GLA.

Office Space

As of November 2018 Jakarta had a flexible office space penetration rate of 2.7%, with total stock of 77,345 sq metres. To compare, Kuala Lumpur, Malaysia’s capital city, had 594,761 sq metres of office space. With the majority of flexible space operators often opting for lower-quality non-office space such as shop houses, an increase in demand within the segment may not create major new developments. Nevertheless, some stakeholders remain optimistic. “Chances for expansion are huge across the sector. Although the office market is facing an oversupply at the moment, the co-working space industry is very large and has great potential,” Sebastien David, project director of the Real Estate Investment Indonesia Conference, told OBG. “Developers need to be innovative and openminded in order to take full advantage of the market.”

Given supply and demand dynamics, Jakarta’s office segment has become a tenants’ market. Four major office buildings opened across the SCBD during the first half of 2018, adding 340,000 sq metres of stock, taking the total office supply to 6.32m sq metres, a 5.8% increase since the same period in 2017.

While demand for office space has remained fairly constant, a large supply of unabsorbed spaces that entered the market in late 2017 and early 2018 continue to squeeze rental rates. According to Colliers “Jakarta Property Market Report Q2 2018” report, in the first half of 2018 total office demand in the SCBD remained stable between June 2017 and June 2018. It also revealed that an additional 500,000 sq metres of office space was set to enter the market by end-2018, of which 320,000 sq metres were scheduled to be in the SCBD. During 2019 three office buildings are expected to come on-line in Jakarta, including Lippo Thamrin Office Tower with 16,500 sq metres for sale, the T Tower in Gatot Subroto with 24,000 sq metres and the Millennium Centennial Centre in Sudirman with 93,588 sq metres for lease. As of the first quarter of 2019 four additional office buildings were scheduled to open in 2020 with a total GLA of 166,000 sq metres.


Housing loans dominate financing for residential property purchases, accounting for 77.2% and 76.7% of home purchases in the third and fourth quarters of 2018, respectively. Cash payments and cash instalments accounted for 7.41% and 15.86%, of the total, respectively, in the fourth quarter of 2018.

Policymakers have adopted a number of initiatives to boost home ownership and reduce the affordable housing deficit. One example is the Housing Loan Liquidity Facility Programme (FLPP), which was launched in 2010 and uses public funds to cover 70% of the total mortgage amount for low-income homebuyers.

As part of the FLPP project, a mortgage scheme was launched in early 2016 targeted at first-time buyers, which allowed would-be homeowners with a maximum monthly income of at least Rp7m ($496) to obtain a subsidised mortgage lending rate. As part of the scheme, mortgage insurance is provided by state-owned insurance firm Asuransi Kredit Indonesia at a 0.37% premium, which is included in the final 7.25% interest rate.

As of December 2018 the highest mortgage rates in terms of location were listed in Bengkulu on the south-west coast of Sumatra at 15.03%, while the lowest mortgage rates were in Yogyakarta on the island of Java at 9.16%. This can be attributed to a moratorium on building new apartments in the latter – a move that has proved unpopular with some developers. “The number of students in Yogyakarta has increased significantly in recent years, which poses significant potential for real estate developers,” Achmad Setiadi, president director of local research and investing company Pardika Wisthi Sarana, told OBG. “The moratorium has constrained development, though it is currently being reviewed.”

During the fourth quarter of 2018, regional banks were offering the highest mortgage interest rates within the banking sector at 11.79%, while the lowest rates were available from foreign and joint-venture banks at 6.39%. Although government efforts to promote home ownership have gained traction, financing costs are still too high for large portion of the population. According to the Residential Property Price Survey, 18.84% of respondents could not afford existing mortgage rates, while 16.53% did not have the capital required for a down payment. By the end of 2018 the FLPP scheme had provided funding for 57,957 housing units totalling Rp5.9trn ($418.4m). In terms of location, Jawa Barat in West Java realised the most units with a total of 14,109 valued at a cost of Rp1.4trn ($99.3m).

Affordable Homes

For the first time since its inception, the OMH programme hit its goal of constructing at least 1m units per year, with 1.13m built in 2018 as part of efforts to reduce the country’s housing backlog. In terms of financing, the state’s housing budget covered 50% of the development costs in 2018, with 30% coming via financing assistance under programmes such as the FLPP, while the other 20% was directly funded by the state through physical development assistance. The remaining 50% of properties were funded with private financing. The Ministry of Public Works and Housing announced it would build 1.25m homes under the programme in 2019 (see analysis).


Given an increase in property assets on the market, investment opportunities and associated risks should continue to ascend alongside one another. With a young and burgeoning middle class becoming more influential, the sheer size of the population provides long-term real estate growth potential. By most accounts, an uptick in new property projects and lower property prices are expected to bolster market sales in 2019, while the removal of the minimum loan-to-value requirement for mortgage lenders will likely lead to an increase in residential property sales.

The market will continue to be driven by urbanisation, particularly at the low-income end of the spectrum. Demand for luxury units will depend on political stability and macroeconomic fundamentals. Over the medium and long term, increased competition coming from other emerging markets in the region are likely to impact foreign direct investment inflows.

As far as office space is concerned, landlords across Jakarta will continue to feel the squeeze of rental pressures as more supply comes on-line in 2019 and 2020, with an estimated 660,000 sq metres scheduled to open in that period. While flexible space stock in Indonesia is smaller than in some ASEAN counterparts, the continued expansion of ICT and service-related industries should increase demand in this segment.

In terms of addressing the housing deficit, financing assistance such as the government’s FLPP facility and the OMH programme will continue to play a crucial role, though private sector participation is greatly needed to achieve the ambitious 2019 target. With this in mind, policymakers should continue to pursue a financial system that provides long-term funds at affordable rates.