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A fillip to boost Indonesia residential market

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Rusmin Lawin

Text : Rusmin Lawin

The Indonesian government may have shelved a recent proposal to relax restrictions allowing foreigners to buy properties in the country but all is not lost yet.

Real Estate Indonesia (REI)/FIABCI Indonesia together with stakeholders are lobbying to push for a revised proposal. The revised proposal seeks to allow foreigners to buy long-term leases of up to 70 years and to have the lease on the properties granted extensions. Perhaps the current weak property market in Indonesia may see a change of fortune with this latest collective action for change.

This revised proposal is currently being debated with government officials who have expressed concerns insisting on safeguards to prevent speculative purchases to avert price spiral that may undermine the real estate industry. One way of checking this is to limit ownership to permanent residents.

Removing foreign ownership limits is seen as the panacea to help revive the real estate sector at a time when the global economy is showing signs of recovery, save for the latest temporary snag caused by S&P’s downgrade of the credit rating of the United States.

In spite of this, many quarters still think the sheer scale of demand for ‘shelter’ by the world’s fourth most populous country, comprising 17,508 islands, with over 238 million people, will fuel and sustain the property sector in the years to come.

There is tremendous pent-up housing demand. Meeting a basic need – shelter – in the low-mid residential market is huge with a shortfall reaching eight million units this year. In general, the relatively poor performance of residential real estate prices in Indonesia has puzzled many. Despite strong economic growth and high levels of investment, the demand for luxury residential property – both purchases and rentals – has continued to weaken since the end of 2009, and remained stagnant throughout 2010.

Real estate analysts have attempted to explain what hampered the growth of Indonesia’s property market. Most agreed that the major contributing factors are: high mortgage interest rates, foreign ownership, high costs of building materials, high tax rates, red-tape in government and insufficient infrastructure developments.

President Susilo Bambang Yudhoyono has officially launched the Master Plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI) some time ago. It was marked by the commencement of a number of infrastructure development projects in six Indonesian corridors – Papua – Maluku, West Nusa Tenggara – Bali, Sulawesi – North Maluku, Kalimantan, Java, and Sumatera.

The giant project is projected to swallow a budget of Rp 3000 trillion until 2014, through planned investments of state-owned enterprises (BUMNs) and national private companies. An economic Master Plan represents a lighthouse for the future of this nation and, of course, it becomes crucial in its implementation stage. Therefore, a number of challenges and obstacles must be addressed with wisdom. This extraordinary program  is expected  to boost the country’s economic growth.  

According to the latest Central Bank of Indonesia Residential Property Survey, residential property prices rose by 4.48% during the year until the end of Q1 2011. But prices dropped by 2.2% over the same period when house prices were adjusted for inflation.

Indonesia enjoys good economic growth but it is never translated to strong house price increases. The economy is expected to grow by 6.6% in 2011 with high domestic consumption and investment, and healthy export revenues. One possible reason for the slide is Indonesia’s highly unpredictable inflation rate, typically outpacing economic growth. 

Small-type houses, measuring 36 sq meters and below, experienced the most notable price increases of 5.2% (-1.5% in real terms) year-on-year to Q1 2011. On the other hand, medium-type houses, measuring between 36 sq meters and 70 sq meters, had the smallest increase of 3.9% (-2.8% in real terms) over the same period.

Large-type houses, measuring more than 70 sq meters, saw average price increases of 4.4% (-2.3% in real terms) over the same period. Property sales rose by 4.5% year-on-year to 17,714 units in Q1 2011. In 2010, there were about 67,707 units sold, up 13.8% from 59,498 units in 2009.

Jabodebek-Banten in Greater Jakarta led among regions, with property prices up 5.74% over the year to Q1 2011.  However, in inflation-adjusted terms, prices were down by 1% over the same period. It was followed by Manado, the capital of North Sulawesi and Makassar, the capital of South Sulawesi and home to several prominent landmarks including Fort Rotterdam with price increases of 5.47% (-1% in real terms) and 5.32% (-1.4% in real terms), respectively.

On the other hand, Pontianak, the capital of West Kalimantan, which is also known as the Equator City, has the smallest nominal price increase of 1.6% in the year to Q1 2011. When adjusted for inflation, property prices also dropped by 5% over the same period.

Residential property prices are expected to continue rising (in nominal terms) albeit at a slower pace, according to Bank Indonesia. In the year to end-Q2 2011, residential property prices were projected to have risen by 4.8%, with Greater Jakarta expected to have experienced the highest price increase of 6.6% over the same period.

From 58% in 1998 and 20% in 1999, inflation was wrestled down to 3.8% in 2000. In 2001 and 2002, inflation soared to more than 11%. Then it eased to 6% in 2004.  Then the consumer price index jumped again to 10.5% in 2005, and 13% in 2006. Inflation dipped back to 6.2% in 2007 before rising to 9.8% in 2008.  Then, it eased again to 4.8% in 2009 and 5.1% in 2010.

High inflation with its subsequent effect on economic growth, wages and interests increase the level of uncertainty over the economy. This tends to discourage people from borrowing to finance house purchase. Another possible reason for Indonesia’s lackluster residential prices has been the massive amount of real estate construction when the economy grows.

The overhang of apartment is expected to reach 120,000 by 2011, according to Colliers International. This massive rise in the number of apartment units has impacted prices – and some say the downward pressure is likely to continue.

At best, relaxing foreign ownership will promote inflow of investment in the property sector, the government has still to intervene to curb high inflation, reduce red tape, introduce fiscal policies to keep prices of building materials down and hold interest rate at a sustainable level.

RUSMIN LAWIN, born and raised in Medan, North Sumatra, holds various roles in business, political and social organizations.  He is recognized as one of the well-respected young leaders within Indonesia and the ASEAN region. Rusmin was recently elected as the Secretary General of FIABCI International Asia Pacific Committee for the term 2012 to 2014. An apt choice, in view of his entrepreneur background, motivation, organization and leadership skills.