Indonesia’s property sector continues to grow in tandem with the country’s strong economic performance over the past few years. Strong demand for office space is supported by rapid corporate expansion on the back of a favorable business environment, triggering significant increase on prices of strata office space and office rents. A similar trend is being seen for retail space, as local and foreign retailers aggressively expand their presence in Indonesia as they compete to capture the increasing purchasing power and spending of Indonesian households. The residential market has also grown rapidly in response to increasing demand for mid-level and luxury property, supported by the expanding middle class and a low interest rate environment. Core inflation has remained steady at below 5%, which has helped to keep borrowing costs down. Starting in 2013, Jakarta's regional government plans to cut land and housing tax for houses and land plots with taxable sales value below 2 billion Rupiah ($206,000 USD) by 90% and 27%, respectively. Investor confidence has grown over the past several years as the Indonesian investment climate continues to improve. Indonesia’s property sector is expected to continue benefiting from these favorable conditions.
Bank Indonesia continues to prohibit lending to developers for land acquisition, which makes raising money and acquiring land for projects a great challenge for smaller scale developers without the capacity for large public offerings (See Making the Banks Work for the Real Economy). As such, several of the biggest developers continue to dominate Indonesia’s property sector. Key market players include Lippo Karawaci, Sinar Mas Land, Jababeka, Ciputra, Summerancon Agung, Bakrieland, Pakuwon Jati and Agung Podomoro. The residential business constitutes the largest portion of Indonesia‘s major developers‘ business and revenues. However, with strong demand and property values increasing across the board, major developers are steadily diversifying their portfolio by shifting their focus to commercial developments including offices, retail and hospitality facilities.
There is also increased activity in property developments outside of Jakarta in suburbs and secondary cities throughout Indonesia. Such projects include residential complexes, apartments and condominiums, mixed-use developments, shopping malls and townships taking place in the fast growing areas of Serpong, Tangerang in the South West corridor, Depok and Sentul in the South corridor toward Bogor, and Pondok Gede and Cikunir in the East corridor toward Bekasi. Developers and investors see investment potential in secondary cities such as Bandung, Surabaya, Yogyakarta and Semarang. Apart from those cities in Java, development is advancing in cities such as Medan and Palembang in Sumatra, Balikpapan, Pontianak, Makassar and Lombok, along with the property boom in Bali.
In Greater Jakarta alone, demand for new residential units is estimated at 200,000 per annum. Demand in the primary residential market is approximately 100,000 units per annum (Jones Lang LaSalle). The current supply being brought to the market represents only half of the potential demand. Half of the new units are directed at the mass market. In terms of demand, sales in middle-up and high-end housing projects are strengthening compared to the overall market, with luxury high-rises particularly in demand. Housing prices have soared in the Greater Jakarta area in the last few years, with more than 30% growth in 2012. Housing prices are expected to grow further by 15-20% in 2013-2014 (Bahanas Securities). The low mortgage-to- GDP ratio of 2.4% (Bahanas Securities) should provide more room for mortgage financing growth. Interest rates remain steady at 5.75% since February 2012, and Bank Indonesia is expected to maintain this rate, given the previous year’s depreciating Rupiah against the dollar, weak exports due to sluggish global demand and soaring oil and capital goods imports. Banks are expected to maintain their mortgage rates in line with this. Nevertheless, high rates for short terms keep financing out of reach for Indonesia’s lower income segment, leading to acute mass housing shortage which continues to pose a challenge for the sector and the country as a whole. Implementation of FLPP (Liquidity Facility for Low Cost Housing) regulation is expected on the subsidized housing front, increasing supplies from property companies in response to the huge housing backlog of 15 million.
With steady economic growth and robust business activity, companies continue to establish themselves in Indonesia, particularly in the Central Business District of Jakarta. Total net-take up of CBD office space in 2012 was 350,000 square metres, bringing cumulative annual take-up to 4.2 million square metres, representing a 9.1% growth yoy. Occupancy level increased to 92.9%, with Grade C offices enjoying the highest occupancy level of 96.4%, followed by Grade B and Grade A at 93.9% and 91.0%, respectively. With the completion of 88 Kasablanka, in 2012 total cumulative supply grew 6.5% yoy to 4.5 million square metres. 340,000 square metres of further supply is expected in 2013, of which 88.0% will be Grade A offices. Average gross rent increased 30.1% to 215,900 Rupiah ($22.52 USD) per square metre. Rent is projected to climb 10.0-15.0% in 2013, as service charges reflect electricity price hikes and parking fees following new regulations (Cushman & Wakefield).
As of the end of 2012, Strata title offices made up around 16.8% (Cushman & Wakefield) of total office space available.
Source: Cushman and Wakefield, Market Beat Q4 2012
Demand in the Jakarta retail market was robust in 2012, with annual net take-up of 229,300 square metres, the highest since 2005 (See The Rise of Modern Retail Outlets). Retail rents rose, albeit at a slow pace, due to tight competition among landlords of newly-completed projects. Current construction increasingly focuses on mixed use developments that combine aspects of residential, commercial and retail into a single setting. Such multi-use developments have become home to international brands, including H&M, Uniqlo, and Galleries Lafayette. With the completion of Cikini Gold Center, retail supply increased 7.4% to 3.8 million square metres. Combined with higher growth in cumulative demand of 8.0%, this led to an occupancy rate of 81.4% as at the end of 2012. Through 2013, a further 283,100 square metres is expected to be added, bringing total supply to 4.1 million square metres by the end of 2013. With strong competition in the retail market expected to continue, average gross rent is likely to remain at similar levels (Cushman & Wakefield).
In 2012, Indonesia revealed regulations that would allow foreigners to own property, though it would be restricted to condominiums worth at least 2 billion Rupiah ($206,000 USD). The regulation would provide foreigners with the right to apply for the purchase of a Building Ownership Certificate, which is completely detached from land rights. At the moment, foreigners may lease property for 25 years, which can be extended for further periods of 25 and 20 years, bringing the total to 70 years. Unlike the right to lease, the Building Ownership Certificate can change hands and can be traded.
In 2013 and beyond, residential property demand in the Greater Jakarta area and major cities is expected to remain robust, supported by record low interest rates and the increasing purchasing power of Indonesian households. Rising land prices should drive demand for city-based apartments, further increasing selling prices. For retail outlets, demand will come from both domestic and major foreign retailers. Growing purchasing power, brought on by the expanding middle-class and higher minimum wages should create demand for retail consumption. In the office space, rental rates are expected to continue its rise given limited supply and increasing demand, particularly as occupancy costs such as base rental rates and service charges soar in line with the government plan to increase electricity tariffs, parking tariffs, minimum wages and fuel price. Overall, Indonesian property prices remain relatively low in comparison to its regional peers, despite offering a similar standard of quality. This is likely to change going forward, as land scarcity, declining stock and developers’ playing catch-up increases take-up and occupancy levels, driving property prices up.
Indonesian operating conditions remain difficult, however, despite the improving investment climate. Bank loans could be expensive and hard to find. In 2012, Bank Indonesia introduced limits on the size of housing loans, capping mortgages at 70% of the home value, though properties measuring less than 70 square metres are not subject to the regulation. Identifying reliable local partners willing to work with foreign investors also remains difficult, as most do not require the type of cost of capital offered by foreign investment funds. Most challenging are Indonesia’s deep-rooted problems over establishing title to land and other rule-of-law issues, making development risk high for developers. There have been cases in which developers pulled out of Indonesia after repeated land title disputes. Still, with interest rates and inflation kept under control and FDI increasing at a much higher rate than GDP, Jakarta is viewed as a competitive place to invest within the ASEAN region, in comparison with major cities such as Shanghai, Kuala Lumpur and Singapore. Bolstered by the country’s solid macroeconomic fundamentals, Indonesia’s property sector presents good prospects for growth.
Apartment Price in Premiere City Centre (USD/sqm)
Source: Global Property Guide 2012
Apartment Rental Yields in Premiere City Centre (%)
Source: Global Property Guide 2012
Global Business Guide Indonesia - 2013
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.
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