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Property | Indonesia’s Commercial Property Sector: Oversupply and Slow Demand Affects Growth

Indonesia’s commercial property sector suffered one of the biggest setbacks in 2017 due to oversupply and slow demand. The vacancy rate of office space in the country's capital soared to 21,5%; significantly higher than that of 2016 at 15,7%.

An economic slowdown and the decline in the retail and energy sectors are mostly to blame for the sluggish growth of the commercial property industry in Indonesia. The situation slightly improved in the second semester of 2017, however, this trend is set to continue into 2018.

Indonesia’s Commercial Property Sector: Oversupply and Slow Demand Drive Sluggish Growth
The decline in the retail sector can be seen from the closing of all 7-Eleven convenience stores, two Hypermart stores, and several middle-upper class stores such as Lotus and Debenhams

Oversupply, slow demand

Similar to the residential property sector, Indonesia’s commercial property sector faced a challenging environment in 2017 due to the flood of new supply and slow demand (See Indonesia’s Residential Property Sector: Remaining Sluggish Despite Incentives). The widening gap between supply and demand has dramatically reduced the occupancy rate of office space and driven down the tenancy rate.

According to property consultant Colliers International, there will be 31 new commercial buildings operating in Jakarta from 2017 until 2019, most notably 11 of them will be located in the Sudirman area with the majority commencing construction back in 2011-2012 during a period of higher economic growth (See High Stakes for Indonesia's New Infrastructure Push).

As a result, another property consultant, Savills, reported an increase in the vacancy rate of office space in the Central Business District (CBD) area in the first semester of 2017 which reached 18,4% or up by 2,7% compared to the previous semester. Premium grade office space suffered the biggest decline while those of grades A, B, and C slightly increased.

The occupancy rate of office space in Jakarta has continued to decline in recent years, from 89,4% in 2015, 84,8% in 2016 to 79,5% in 2017. Many of the new buildings have an occupancy rate of below 60%. This has put pressure on the cash flow of developers who cannot cover basic operating costs such as electricity, tax, and services.

Consequently, the rent of some office buildings in Jakarta plunged by up to 30% while the tenancy rate fell even further to 60% for both new and old buildings.

In the first semester of 2017, the tenancy rate in the CBD of Jakarta was slightly down by 0.8% to an average of 213,000 IDR per m2 compared to the previous semester. Meanwhile, the tenancy rate outside the CBD area was around 116,000 IDR per m2.

Despite the lower rate, the absorption rate of office space in the CBD area of Jakarta in 2017 was only 85,500 m2 out of a total fresh supply of 515,000 m2. Meanwhile, the occupancy rate outside of the CBD area was 79,000 m2 out of a total new supply of 151,000 m2.
The demand mostly came from e-commerce and technology companies, tax consultants, and shipping, financial and insurance companies moving to higher grade office space attracted by a discounted rate. Grade A office space was the biggest contributor to the new supply with 57%, followed by premium grade at 40% and grade B with 3%.

Although there was a minor improvement in demand in the second semester of 2017, it has had little impact on the occupancy rate as there was a fresh supply of office space approaching the end of the year. To address this situation, developers were forced to offer discounted rates to new tenants and refrain from increasing the current rate applied to existing tenants.

The rise of co-working spaces and private offices

There are many factors that have led to the current situation in Indonesia’s commercial property sector, including the decline in commodity and energy prices which particularly impacted banks as well as oil and gas companies (See Indonesia’s Banking Sector; Under Pressure But Staying Strong).

Another major factor hampering the growth of the commercial property sector in 2017 was the decline of the retail sector. Based on the Global Retail Development Index published by ATKearney, Indonesia only ranked eighth in 2017 or down three positions compared to 2016. The decline in the retail sector can be seen from the closing of all 7-Eleven convenience stores, two Hypermart stores, and several middle-upper class stores such as Lotus and Debenhams. This has had a marked impact on demand for commercial property.

Furthermore, there has also been a change in attitude among local business players. Having an address in prestigious locations such as in the CBD area is no longer a priority for some companies. That is why, the demand for office space outside the CBD area, especially in Grogol, West Jakarta, where new supply was modest, remained high. For example, the occupancy rate of Podomoro City in Grogol with a total space of 70,000 m2 reached 100%. Moreover, rising minimum wages and increased traffic congestion in the capital have prompted some companies to relocate their offices closer to their production facilities outside of Jakarta to improve efficiency.

A reverse trend, however, occurred in the IT and e-commerce industry which dominated the demand for commercial property in 2017 (See E-commerce Incoming; An Industry on the Rise). An increasing number of IT and e-commerce companies have moved their offices to the CBD area in Sudirman, Thamrin, and Kuningan. In addition, this fast-growing industry also created new, substantial demand for warehouse space for their inventories (See Indonesia’s Industrial Property Sector: Rising Supply and Demand).

A further notable trend has tenants prefer newer buildings offering competitive rates and complete facilities (fit out) over vacant space to improve efficiency. Furthermore, there has also been a rise in co-working spaces and private offices throughout 2017.

The first co-working space in Indonesia, Hackerspace Bandung, was established in 2010. Despite a slow start, co-working spaces have grown exponentially in the last few years. Currently, there are around 150 co-working spaces in 30 cities across Indonesia which are mostly located in Java (See Indonesia's Economic Potential: A Look Beyond Java).

Co-working spaces have become an industry in and of itself as more companies, including state-owned enterprises (SOE), begin to develop co-working spaces to cater to the need of the country's growing number of startups and entrepreneurs.

Prospects and trends in 2018

The growth of Indonesia's commercial property sector is predicted to remain sluggish in 2018. The vacancy rate in the CBD and non-CBD areas is expected to continue its downward trend until early 2020 reaching as high as 25% as more new buildings complete their construction.

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These buildings will contribute around 1.5 million m2 to the current supply of office space in the CBD of 5.78 million m2, and 0.75 million m2 to existing supply outside the CBD area of 2.7 million m2 with demand predicted to stay below 200,000 m2.

Meanwhile, rising political tensions in the face of local elections in 2018 and the national election in 2019 will further limit demand for office space. On a positive note, technology companies, including co-working space operators, are predicted to absorb more office space in Jakarta; especially in the CBD area.

Going forward, there will be increasing funding and support from the government and private investors, both foreign and domestic, for the co-working space sector. Players in this sector are becoming more diverse, ranging from co-working space chains such as Rework, EV Hive, Spacemob, Block71; to hospital operators such as Bundamedik’s H Cube; to marketing consultant firm, MarkPlus’s Kolega; and to government bodies and SOEs such as Telkom’s Digital Valley in Yogyakarta and Bandung, Dilo in Malang, and the Smesco Co-working Space in Jakarta.

EV Hive, one of the largest co-working space operators, for example, recently launched EV Hive City with a total area of 6,700 square meters in Plaza Kuningan, Jakarta, which can host 1,000 SMEs, entrepreneurs and startups. The company currently has around 1,300 members spread in 10 locations and plans to build two new mega hubs that will be much larger than the current project.

Global Business Guide Indonesia - 18th January 2018

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Indonesia Property Snapshot - Real Estate

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.