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Property | Indonesia’s Residential Property Sector: Remaining Sluggish Despite Incentives

Indonesia’s residential property sector recorded a meager growth rate in 2017 despite rising optimism at the prospect of various incentives and policies launched by the government a year earlier to boost development of low income mass housing.

Nevertheless, many investors are still bullish on the sector and expect improved an performance in 2018 as more of the government’s infrastructure projects complete construction and commence operations. Furthermore, a joint effort from state-owned enterprises and the private sector to provide access to home ownership loans (KPR) for informal workers is also expected to help the housing sector record improved growth in 2018 and beyond.

Indonesia’s Residential Property Sector: Remaining Sluggish Despite Incentives
High mortgage rates, down payment requirements, taxes, and the increase in building raw material prices have made it even more difficult for middle-low income consumers to own a home in Indonesia

Disappointing growth

Despite rising optimism and bright forecasts following the introduction of various investment-friendly policies by the government to drive the growth of the property sector a year earlier, the sector’s performance in 2017 was rather disappointing for the property industry and the government as well (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic).

According to the Residential Property Price Survey (SHPR) by Bank Indonesia, the sales volume of residential property throughout 2017 tended to weaken from 4.16% (qtq) in Q1, 3.61% (qtq) in Q2, to 2.58% (qtq) in Q3, respectively. Likewise, the growth of the Residential Property Price Index (IHPR) continued to decline from 1.23% (qtq) in Q1, 1.18% (qtq) in Q2, to 0.58% (qtq) in Q3, respectively.

Similar decline also occurred in the absorption of existing and under construction apartments in Jakarta. Based on the data compiled by Colliers International Indonesia, during the first semester of 2017, both were down by 0.1% and 3.5% respectively to 179,380 units and 21,167 units compared to those in 2016.

This came as a surprise since the Indonesian government has prioritised boosting the property sector by offering a number of incentives since 2016. These include the easing of LTV (loan-to-value) ratios required for buying a home from 20% to 15% which resulted in lower down payment requirements, the reduction of final income tax to 0.5% and the cap of duty on the transfer of land and building rights (BPHTB) to a maximum of 1%. In addition, the Indonesian government also introduced permit simplification for low-income housing which reduced costs by 70% and time from 769 – 981 days to just 44 days (See Spurring Indonesia’s Property Sector through Lower Down Payment Requirements).

With a plethora of incentives and supportive measures, the government initially expected the property sector to grow robustly and to contribute to the overall economic growth target in 2017. The sector is deemed important as it will affect the growth of 177 other sectors (See Indonesia’s Mass Housing Sector: The Rise of Vertical Housing).

In reality, however, the government’s lavish spending on infrastructure development, including housing which was one of the key priorities of the Joko Widodo administration, has backfired on the very sector it is supposed to support (See High Stakes for Indonesia's New Infrastructure Push).

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To keep the state budget deficit below 3% and to finance national strategic projects, the Indonesian government was forced to cut the budget of several programmes including those allocated for housing subsidies in the revised 2017 state budget. The budget allocated for the Subsidised Mortgage Liquidity Facility (FLPP) scheme suffered the biggest cut of 6.6 trillion IDR, from 9.7 trillion IDR to only 3.1 trillion IDR. As a result, Bank Tabungan Negara (BTN), one of the largest providers of home ownership loans, will no longer provide loans under this scheme throughout the rest of 2017.

This was disproportionately compensated for by the budget increase for the Interest Rate Buy-Down Subsidy for Mortgage (SSB) scheme from 312 billion IDR to 615 billion IDR and maintain Down Payment Assistance Loan (BUM) scheme at 2.2 trillion IDR. Consequently, the proportion of government subsidies for home ownership loans (KPR) has changed from 375,000 units to just 40,000 units under the FLPP scheme, 239,000 units from previously 225,000 units under the SSB scheme, and 550,000 units under the BUM scheme.

The budget cut has made it even more difficult for the government to achieve the ‘one million homes’ programme target. Under this initiative, the Indonesian government is determined to build one million units of accommodation every year until its term ends in 2019. The implementation of this programme has always missed its target in the last three years, i.e. 699,770 homes in 2015, 805,169 units in 2016, and an estimated 765,120 units in 2017.

The tax amnesty programme, which was initially expected to boost financing in the property sector, turned out to have little to no effect at all on the property sector despite its tremendous success. During its implementation from 1 July 2016 until 31 March 2017, the amount of declared assets reached IDR 4,865.77 trillion. (See Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall ).

Same old constraints remain

Aside from the decline in the consumer purchasing power, the government’s fiscal and tax policies are considered ineffective in encouraging the purchase of property especially in the middle-up segment due to their high rate.

Another obstacle is the poor implementation of deregulation policies initiated by the central government at provincial and regency/municipal level. Some local governments still complicate or delay the permit application process and impose illegal levies on housing projects.

Moreover, land availability remains a constraint too despite the launch of an equitable economic policy. This was expected to help low income families and individuals maintain a residence in urban areas through asset redistribution and land consolidation with the relevant stakeholders (See Indonesia’s Land Acquisition Laws; On Paper Only?).

A further problem is the tendency of the millennial generation to delay purchasing their first home until their income reaches a certain level. High mortgage rates, down payment requirements, taxes, and the increase in building raw material prices have made it even more difficult for the middle-low income demographic to own a home in Indonesia (See Indonesia’s Construction & Building Materials Sector On the Up & Up).

Another challenge is the low quality of subsidised homes. Many developers hastily constructed subsidised homes without paying adequate attention to their quality and location. As a result, a large number of potential customers complained about the lack of quality and supporting facilities of subsidised homes which discouraged them from buying such homes despite their affordability.

Prospects in 2018

Overall, investment opportunities in the residential property sector in Indonesia are still promising given the country’s housing backlog of 11.4 million units and its huge youthful population. Some analysts predict that the demand for residential property, both landed houses and vertical housing, will spike again after the government’s infrastructure projects, i.e. mass rapid transit (MRT), light rail transit (LRT), TOD (transit-oriented development) in commuter line stations, and new toll roads that are due to be completed in 2018 or 2019 (See Indonesian Infrastructure: Tremendous PPP Opportunities).

In addition, Bank Indonesia’s plan to further reduce the LTV ratio based on the condition and development of the property sector in each region is expected to encourage the purchase of new homes thanks to lower down payment requirements and mortgage rates. This will in turn drive housing demand and encourage banks to disburse more loans in the property sector (See Indonesia’s Banking Sector; Under Pressure But Staying Strong).

Furthermore, the Indonesian government’s policy to help informal workers access home ownership loans through a special scheme dubbed as Saving-based Housing Financing Assistance, is expected to create new demand for housing; especially in the middle-low segment. Currently, the number of workers in the informal sector reached 72.67 million or 58.35% versus 50.81 million or 41.65% of formal workers. A similar initiative by state-owned enterprises such as BPJS Ketenagakerjaan and the private sector, most notably Gojek, will further increase demand for housing in years to come.

That being said, to achieve this, the government still needs to increase its spending on sectors that will help boost overall purchasing power as well as as creating a conducive business and economic climate through tax and fiscal reforms. Moreover, the Indonesian government also needs to come up with a new plan to compensate for the reduction of the FLPP budget allocation which was cut by nearly 70% in 2017 and will be further cut by 22% to 2.2 trillion IDR in 2018.

Global Business Guide Indonesia - 2nd 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.