As the largest economy in Southeast Asia and the fourth most populous country in the world, the prospects for Indonesia’s construction and real estate sectors are enhanced by sustained urbanization and a demographic dividend that is expected to continue to stimulate demand for housing and leisure attractions. At the same time, large-scale government-backed infrastructure projects are providing a wealth of opportunities for construction companies to participate in the country’s ongoing development.
Structure
The Ministry of Public Works and Public Housing (PUPR) is the primary government body responsible for public infrastructure and social housing projects. This includes the development of roads and bridges, water resource management and social housing. The National Construction Services Development Board is an independent body under the PUPR to help improve the quality and competitiveness of the industry. The construction sector is regulated under Construction Service Law No. 2 of 2017, known as the New Construction Law, which seeks to enhance construction safety and quality standards.
The Ministry of Agrarian Affairs and Spatial Planning (ATR) – formerly the National Land Agency – is tasked with the management of real estate land ownership rights as well as the issuance of land titles. ATR collaborates with Real Estate Indonesia, a real estate entrepreneur association that is key for the development of commercial housing. The real estate sector is governed by Law No. 5 of 1960, or the Basic Agrarian Law (UUPA), which regulates land ownership rights. The UUPA’s implementing regulations include Government Regulation No. 18 of 2021 on management rights, land rights, strata titles and land registration. An additional noteworthy regulation is Law No. 26 of 2007 concerning spatial planning, which provides the legal framework governing land use as well as construction activities.
While there are several national bodies involved in regulating and overseeing the construction and real estate sectors, local governments also set their own rules and regulations, which can add further approval procedures for projects. Developments taking place in more remote areas of the country often face less oversight and enforcement.
Regulation
Indonesian property law recognizes various land titles for Indonesian citizens, such as hak milik (the right of ownership), hak guna (the right to build) and hak pakai (the right to use). While foreign nationals are not permitted the right of ownership, they may purchase property under certain conditions. Although foreign investors are typically not permitted to own freehold real estate, there are still ways to invest in real estate indirectly – such as through long-term leases or local partnerships. In order to purchase real estate in Indonesia, foreign investors frequently form limited liability companies. Investors are permitted to hold properties for business use under this legal entity.
“Although there are provisions in place in Indonesia that limit foreign ownership, the country’s real estate sector has generally been open to foreign capital,” Syahzan Kudus, general manager of Jakarta Land, told OBG. In October 2020 President Joko Widodo, better known as President Jokowi, put forth Law No. 11 of 2020 on Job Creation, referred to as the Job Creation Law, to boost economic growth by increasing foreign direct investment, easing business processes and broadening job opportunities for Indonesian workers. The law was declared conditionally unconstitutional by the Constitutional Court on procedural grounds in November 2021, and the government was given two years to rectify the law in line with the ruling. As a result, the law was reissued as an emergency government regulation, or perpu, in 2022 and commenced in 2023 with its key provisions largely intact (see Legal Framework chapter).
Along with the Job Creation Law, the government relaxed foreign ownership laws – notably through Government Regulation No. 18 of 2021, enabling foreigners to own apartment units under certain conditions and facilitating electronic land registration to improve transparency and efficiency. This development is part of the most notable changes to Indonesia’s property laws in recent years, aimed at attracting foreign investment and simplifying the purchasing process for foreigners.
Transport Infrastructure
Indonesia has reached the final year of its National Medium Term Development Plan (RPJMN) 2020-24. The roadmap defines 41 strategic projects of national priority with an investment value of around $500bn. This includes developments in the metropolitan regions of Palembang in South Sumatra, Banjarmasin in South Kalimantan, Makassar in South Sulawesi and Denpasar in Bali. Infrastructure development is a key pillar within the RPJMN. Of its eight goals for 2024, a heavy emphasis was placed on the further development of infrastructure. Within this goal, transport connectivity is a major focus in order to enhance trade and investment opportunities for previously underserved regions and islands.
One of the most significant transport projects completed in recent years is the Jakarta Bandung highspeed rail line. Jakarta – the country’s largest city, which will soon lose its capital status to the new city of Nusanatra – is located on the island of Java. The island represents 7% of the country’s land mass and possesses over 50% of the population. With three of the country’s top-five largest cities by population located in West Java, the new rail line has significantly eased travel between the urban centres.
The Jakarta Bandung line was opened to the public in October 2023 following Covid-19 pandemic related delays and represents the first high-speed railway project in South-east Asia. The track extends 142.3 km and has an operating speed of 350 km per hour. Travel time between Jakarta and Indonesia’s fourth-largest city, Bandung, has been reduced from between three and five hours to 40 minutes. The line was developed by Kereta Cepat Indonesia-China, a joint venture between Indonesian government-owned companies, and Chinese state-owned company, China Railway International – with Indonesia controlling a 60% share in the project and China holding 40%. The total cost for the Jakarta-Bandung route was estimated at around $7.3bn, exceeding the initial $6bn estimate.
New Capital
A notable construction development under way in Indonesia is the new capital project. Jakarta is home to more than 10m people, with an additional 20m living in the greater metropolitan area. Jakarta is physically sinking – with 40% of the city below sea level, creating flooding risks. These concerns led to the announcement in August 2019 that the capital would be moved to east Kalimantan on the island of Borneo, some 800 miles away.
The new capital city is to be named Nusantara, the Javanese word for archipelago. The goal of this urban centre is to be sustainable, smart and have a reduced carbon footprint. It will do this by utilising smart technology and renewable resources. The project is expected to be finished by 2045 and cost approximately Rp466trn ($30.3bn). Upon completion the new capital is projected to house 1.9m inhabitants (see analysis).
Size & Performance
Indonesia’s construction sector is the country’s fifth-largest industry by economic contribution, and constituted approximately 10% of GDP in 2023 after experiencing 4.9% growth that year. The real estate sector, meanwhile, contributed 2.4% of national GDP in 2023 following an annual increase of 1.4%. The real estate market is projected by Indian market research firm Mordor Intelligence to expand at a compound annual growth rate of 5.8% between 2023 and 2028, with the market size rising from $61.2bn to $81.2bn during that period. The residential property segment is expected to be a major driver of this development due to ongoing urbanisation, fast population growth, government assistance, foreign investment and a growing middle class with rising disposable income.
Strategy
Incoming President Prabowo Subianto, who won the election in February 2024 and will take over when President Jokowi’s second term expires in October 2024, has pledged to build 3m affordable homes during his administration – with 1m in rural areas, 1m in coastal areas and 1m in urban areas. Such an initiative would build on the efforts of President Jokowi’s administration to expand home ownership. In October 2023 President Jokowi announced the suspension of value-added tax (VAT) as well as the suspension of the Rp4m ($260) administration fee for low-income home buyers. The VAT waiver was made available for property transactions under Rp2bn ($130,000) between November 2023 and June 2024, before changing to a 50% VAT reduction between July and December 2024. In March 2024 the government identified the Pantai Indah Kapuk (PIK) 2 and Bumi Serpong Damai (BSD) City developments as national strategic projects. With an investment value estimated at Rp83.5trn ($5.4bn), these initiatives are set to stimulate economic growth, create job opportunities and boost regional connectivity.
The PIK 2 project, to be developed as a collaboration between the Agung Sedayu Group and the Salim Group, consists of the development of a green area and eco-city within Banten Province. This venture, with total investment of around Rp65trn ($4.2bn), offers the potential to address environmental challenges while stimulating economic development and creating jobs.
Meanwhile, the BSD City project is being developed by Sinar Mas Land, one of Southeast Asia’s leading property developers, with an investment value of Rp18.5trn ($1.2bn). This initiative is set to transform BSD City into a centre of biomedical innovation and digital entrepreneurship. When completed, the urban centre is expected to cover 6000 ha.
Building Materials
Developments in Indonesia’s construction industry have resulted in an increase in demand for materials, particularly cement. Between 2017 and 2023 Semen Indonesia – which commands the largest share of the domestic cement market – witnessed its cement production capacity jump by around 50%, which helped position the country as the sixth largest cement producer in the world as of 2023.
In 2023 Indonesia led the world in nickel production and reserves, accounting for 40% of global output. Nickel is crucial for making steel, which is an essential input for infrastructure projects. In 2021 Indonesia was the top exporter of stainless steel, with exports valued at $3.7bn that year. The following year Indonesia exported stainless steel ingots worth $4.2bn.
Meanwhile, the country ranked as the seventh largest copper producer globally in 2023, with production of 840,000 tonnes that year. Much of this came from the Grasberg block cave mine in Papua, which is the second-largest copper mine in the world. The country’s vast timber production supports its need for products such as plywood and veneer for construction, and employs a significant workforce in wood manufacturing.
However, ASEAN’s largest construction market nonetheless faces some challenges in the production of building materials, including high raw material costs and a preference for cheaper imports. To counteract this, the country has limited the import of construction material such as cement and aluminium to bolster the domestic market, aiming for self-sufficiency and industry expansion through governmental support.
Residential Real Estate
High borrowing costs amid the global monetary tightening cycle have constrained growth in the country’s residential real estate market in recent years. It is projected that 20,000 units will be finished in Indonesia’s condominium segment in 2024, mostly in South Jakarta, Bekasi and Tangerang. This represents a gradual but continuous increase in the number of housing units available, impacted by developers’ cautious approach in light of the 2024 presidential election and high interest rate environment. The middle and upper-middle market segments are predicted to become increasingly dominant in 2024, particularly in places such as South Jakarta, East Jakarta and Bekasi.
The serviced apartment market is set to receive a boost with three new projects – Parkroyal Serviced Suites opened its doors in January 2024, Oakwood Fatmawati City Center is expected to open in the second half of 2024 and Ascott Menteng is slated to launch in 2025. The Jakarta market is anticipated to receive an additional 611 units from this subsegment, while the subsegment of condominiums for lease will add 12,300 units, or 95% of the total new supply.
The net takeup rate in the serviced apartment and rental condominium markets is set to rise by around 8000 units during 2024, with rental condominiums making up 91% of this absorption. This growth in demand is especially apparent in the serviced apartment market and is being driven by a revival of short-term business travel. Despite the fresh influx of units, the vacancy rate across both sub-segments is expected to decline as demand rises in 2024, though a full return to pre-pandemic occupancy levels may not be immediately seen. Rental rates for apartments are predicted to remain stable throughout the year, reflecting steady demand.
Hospitality Real Estate
Infrastructure improvements have made it easier for tourists to visit more remote destinations in the country that had previously been underdeveloped, raising demand for hotels. Tourism real estate is expected to continually grow in popular destinations like Bali for investors and property buyers as foreign ownership and development laws have been relaxed. Other high potential tourist destinations include Lombok, which has seen visitor growth following the November 2021 launch of the MotoGP Mandalika circuit, and Labuan Bajo, which is benefitting from the popularity of nearby Komodo National Park.
The inventory of three-star to luxury hotel rooms in Jakarta stood at 42,922 at the end of 2023. For 2024 the pipeline includes approximately 1354 rooms in Central Jakarta and the Sudirman Central Business District, with a mix of 27% three-star, 48% four-star, 12% five-star and 14% luxury accommodation. Vacancy rates by the end of 2023 in hotels sat at 33% for three-star, 36% for four-star, 34% for five-star and 4% for luxury hotels.
At the end of 2023 the average daily rate (ADR) had reached pre-pandemic levels in Jakarta. Three-star hotels had an ADR of Rp461,000 ($29.97), while fourstar hotels had an ADR of Rp816,000 ($53.04), five-star hotels had an ADR of Rp1.8m ($117) and luxury lodgings had an ADR of Rp2.3m ($150). With an estimated ADR increase of roughly 16%, this growth trend is predicted to last through 2024, pointing to a strong recovery trajectory and growing demand in Jakarta’s hotel industry.
Leisure, Retail & Commercial Real Estate
In 2023 the Jakarta retail market saw the completion of one major project, adding 5000 sq metres of space. Three significant mall projects – Agora Lifestyle Mall at Thamrin Nine, Lippo Mall East Side at Holland Village and the Menara Jakarta shopping mall – are set to be completed in the second half of 2024, and will introduce nearly 100,000 sq metres of space to the market.
Despite positive net absorption of retail space, the average vacancy rate is expected to rise by 1.7% during 2024 due to the influx of new supply outpacing absorption. The third quarter of 2023 saw the overall occupancy rate at 77.2%. The retail sector’s recovery is attracting global brands looking to expand their footprint. Rental rates stayed mostly stable at Rp809,000 ($52.59) per sq metre per month in 2023. A small increase in service fees is anticipated during 2024 as landlords navigate the changing retail market landscape in Jakarta. As such, they are concentrating on retaining their tenants while looking for new growth prospects. Developers are shifting away from the strata title mall concept, focusing instead on enhancing retail experiences – particularly to appeal to the younger demographic. This shift is accompanied by an increased integration of retail facilities within mixed-use developments, which is becoming a preferred strategy, especially in the context of transit-oriented developments.
Industrial Real Estate
One challenge industrial developers are facing is locating suitable areas to expand. The industrial land market witnessed growth of 315 ha in 2023, with 145 ha set aside for the Jatiluhur Industrial Smart City in Purwakarta Regency and 100 ha for the Krakatau Industrial Estate Phase 2 in Cilegon.
According to forecasts by commercial real estate services firm Cushman & Wakefield, there will be 250 ha of available industrial land in 2024, with the majority coming from areas near Bekasi and Karawang. The chemical and automotive sectors are sources of demand growth due to their prioritisation in government industrial development strategies (see Industry chapter). It is estimated that warehouse rental rates will sit at Rp78,000 ($5.07) per sq metre per month for 2024. In addition, some 280,000 sq metres of warehouse rental space are projected to enter the market during 2024.
The introduction of new supply and the ensuing increased market competition in 2023 caused a slight uptick in the vacancy rate of rental warehouses in the Greater Jakarta area. In 2024 this vacancy rate is expected to stay mostly unchanged due to continued competition and the influx of new supply. It is projected that industries like automotive, fastmoving consumer goods and third-party logistics will continue to generate strong demand for warehouse space.
Outlook
Projections for Indonesia’s construction and real estate sectors remain strong, driven by the country’s large market, urbanisation and substantial government led infrastructure projects. Increased openness to foreign capital is shown by regulatory reforms like the Job Creation Law and initiatives to streamline foreign investment in real estate. Government initiatives like the construction of the new capital, Nusantara, and the Jakarta-Bandung high-speed rail project are examples of the ambitious infrastructure objectives outlined in the current RPJMN. Despite challenges such as elevated material costs and a preference for imports, the industry appears to have a strong future, aided by an increasingly enabling regulatory environment.
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