The combination of rising purchasing power, rising demand and increasing supply is conducive to improving the contribution of the real estate sector to the national economy which remains low. The property sector contributed just 2.7% to GDP in 2010, however with the population in line to grow to 285 million by 2030; this figure is bound to increase. This presents prime opportunities for foreign companies with expertise and technology to partner up and penetrate the market as medium sized companies face a challenge in finding financing to improve their capacity. For investors, low property prices are still producing impressive rental yields and changes in the laws on foreign ownership will make such investments profitable on the long term.
Property developers outside of the major players in the market are confident in the future demand for their sector. Many are keen to form investment partnerships and joint venture operations with international companies to take advantage of new technology and access cheaper financing that cannot be obtained through local channels. With demand for retail, office and residential space growing; medium sized property developers catering to the middle and lower income bracket are a prime opportunity to enter the sector.
Real estate is very much an industry that requires a local partner considering the layers of government that need to be contended with for land acquisition and construction permits. Member of Parliament and former head of Real Estate Indonesia Enggartiasto Lukita spoke to GBG and reiterated the need for an established network for success in the industry; ‘when choosing a partner it depends on credibility, knowhow and networking capacity; the local should have a good experience and good relationship with the government and the people.’ Mr Lukita’s company Supradina Karya Multijaya caters to the low middle income market and is confident of continuing strong demand from the sector. Within the same market segment, Nusuno Group’s President Commissioner Cipto Sulistio sees both the potential and challenges for foreign investors in the sector and believes the obstacles do not outweigh the opportunities. ‘Indonesia has a huge population and demand for housing is high, so the country is a spectacular investment opportunity. From this other sectors others will follow, for example retail space around the residential areas’. Companies such as Nusuno Group are keen to establish partnerships on a regional and international basis for both technology and financing of future projects to contribute to the demand for 8 million new houses.
Sophisticated construction materials that offer more in the way of cost effectiveness, energy efficiency and aesthetics are another entry point into the market. For the large scale technology needed for low cost housing construction, Minister Monoarfa told GBG that he sees foreign companies as having a key role to play as low income housing projects are being offered under the PPP scheme ‘we want to incorporate the technology that will allow us to boost the cost, that is what we can tap from foreign expertise ... I think the problem is the materials [that we do not have in Indonesia], this is a further opportunity for foreigners’. The rising demand for housing within the main urban centres is tempered by the country’s pledge to move into being a low carbon economy and reduce greenhouse gas emissions by a minimum of 26% by 2020. For the low income sector this is particularly challenging as mass construction methods and materials cater to quantity over environmental concerns. However, the long term benefits of cheaper utility costs from technology such as solar panels is being taken into account in future regulations. Minister Monoarfa is planning on introducing incentives for environmentally friendly housing projects as well as encouraging local authorities of secondary cities to emulate the pioneering example of a garbage fuelled power plant in Bandung.
Environmental concerns and the potential reduction in running costs in the face of higher utility prices are influencing property developers from the public and private sector who are seeking out materials that conserve energy by keeping building cooler and reducing reliance on air conditioning units. Green building has been slowly entering the discourse of the property sector through the Green Building Council of Indonesia, although many have been deterred by initial high costs. Newly constructed state schools in Jakarta are using more ‘green’ and sustainable materials and technology while Ciputra Group’s development in Kuningan will use heat resistant glass and environmentally friendly paint. Pitoyo Suwanto of Eka Karya Konstruksi spoke with GBG about his plans to source materials for his projects that offer sustainable benefits ‘North America and particularly Canada have construction materials that we do not produce in the region that would be of great value in Indonesia’. Therefore, as the momentum of green building picks up, opportunities arise for manufacturers of technology such as solar panels, recycling equipment and smart home technology that can contribute to reducing energy consumption.
For investors looking specifically at the opportunities for purchase of real estate within Indonesia, prices are still very attractive and the sector remains an unexploited resource (see Law on Foreign Ownership). The passing of the law on foreign investment that would extend the leasehold to a full 70 years, as opposed to the current 25 years followed by subsequent renewals after 20 and 25 years, could have a far felt impact on the sector when it eventually comes into fruition. Minister Monoarfa predicts an inflow of $3-6 billion every year as a result of further opening up the sector to foreign ownership from not only purchases, but other taxes and consumption spending. However this will be dependent on investor sentiment towards the new law which is discussed in the section on foreign ownership. While the alluring property prices are extremely competitive for the region, the subtext to this has been the distinct lack of foreign investment and finance facilities available to domestic buyers. The constricting regulations regarding “Right to Use” for foreigners can make it a less attractive investment compared to other countries in Asia, therefore properties that are purchased continue to be for inhabitation as opposed to investment.
The rental market for residential apartments remains lucrative in Indonesia as bank lending for mortgages remains tight and bureaucratic procedures for purchasing a property turn the lower and middle income segment to the rental market. Property prices are the lowest in Asia even compared to Vietnam. Global Property Guide places the average apartment price in Jakarta at $1,381 USD per square metre; 89% lower than Singapore as per 2010. For the upper middle income segment, purchasing apartments to rent is a sound investment with average apartment rental yields at 11.4%. The taxes on income gained by rental remain quite high at 20% as well as a withholding tax at a further 20% for non residents and 10% VAT. For foreign investors seeking to enter the rental market, the proposed law on foreign investment limits ownership to the high end condominiums priced at $150,000 – $200,000 USD which accounts for only 7-10% of the total supply in Jakarta. Rental yields on such properties are also impressive at an average of 12.84%.
Global Business Guide Indonesia - 2012
Contribution to GDP: 2.79% (Q3 2015)
Mortgage to GDP Ratio: 3.5% (2015)
Housing Backlog: 15 million (estimated 2016)
Average Condominium Price: 48,100,000 IDR/sqm (CBD, Jakarta, Q3 2015)
Average Retail Space Rental Price: 500,00 IDR/sqm/month (CBD, Jakarta, Q1 2016), 545,968 IDR IDR/sqm/month (Jakarta, 2016)
Average Office Space Rental Price: 401,010 IDR/sqm/month (CBD, Jakarta, Q1 2016)
Average Industrial Land Price : $221.51 USD/sqm (Bekasi, Q1 2016), $144.16 USD/sqm (Tangerang, Q1 2016)
Relevant Law: Government Regulation No. 41 of 1996 on Housing or Residential Ownership for Foreign Citizens Based in Indonesia allows foreigners to own leaseholds of up to 70 years subject to renewals at 25, 20 and 25 year intervals.
Property in Indonesia: Overview
Challenges in the Construction Sector
The Rise of Modern Retail Outlets
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