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A Giant Awakes – Indonesia

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There is a ring of excitement among property players in the real estate industry in Indonesia, which many real estate-related analysts agree signal the awakening of a giant in the republic.

Indonesia’s property market is not only chalking double digits growth this year, it promises to outperform many economic sectors as a key driver of economic growth.

Two recent developments – Indonesia’s promotion to investment grade status and real estate foreign ownership reform tabled in late October last year – will ensure a robust growth in Indonesia’s property market for years to come.

Achieving investment grade status means that Indonesia is recognized as a reliable and stable borrower of funds  while the strong lobby by both REI (Real Estate Indonesia) and FIABCI (International Real Estate Federation) Indonesia has resulted in Indonesia’s legislature relaxing restriction on foreign ownership of real estate.

A more relaxed foreign ownership ruling will certainly boost the overall property market in Indonesia where its property market, even in its capital Jakarta is still undervalued when compared to other major cities in Asia.

Other growth centers are in cities such as Medan in Sumatra, Pontianak in Kalimantan, Manado in Sulawesi and of course, touristy Bali.

Real estate analysts have predicted steady strengthening of the real estate market in Indonesia, which has a population of 240 million people. There are at least three factors driving this growth.

The first factor is the Indonesian economy, which is more likely to post another year of strong growth in 2011. Its GDP (Gross Domestic Product) had grown by 6.9% year per year in the 4Q 2010, the highest figure in the last  six years. This year’s growth is predicted to reach 8%.

Indonesia’s growing economy will very likely have a positive impact on the real estate market; higher incomes mean increase in the purchasing power of the middle and upper income groups, allowing them to invest in new residential properties.

Another positive impact of the high level of growth will be a higher demand for commercial real estate in the retail sector and the ever growing mall segment. There is also a strong demand for office space, particularly for Grade A property, which has historically been in short supply.

A high and stable growth at the rate of 6% to 7% will certainly make banks more confident to lend with requests coming from the demand for new development projects and the rising supply to boost the expansion of the Indonesian mortgage market.

A second factor is the government’s proposed land acquisition law submitted to Parliament in late 2010 that will speed up land price negotiation for acquisition, which usually can take more than a year. This impending law is expected to reduce by half the time needed to start infrastructure projects.

This law will facilitate the plan by the National Development Planning Agency (Bappenas), which has estimated in its Mid Term Development Plan for 2010-2014 that the government needs to spend Rp2,000 trillion (US$ 216 billion) on infrastructure development.

Over the next five years, the government is expected to work with private investors to build 20,000km of roads and 15,000MW of electricity through public-private partnerships.

The third factor that is expected to enhance the real estate market is the passing in December 2010 of a revised housing law that will allow low income home buyers greater access to financing.

There is a strong call for the government to consider allowing foreigners to own property in Indonesia in view of the fact that there are approximately 90,000 expatriates living in Indonesia.

Two months ago, conglomerate Ciputra Development reported substantial demand for property in spite of high rates for housing loans, at around 9% to 9.5%.

With its strong economy, expanding middle class, growing housing loan market and increasing demand for high-end real estate in the residential, commercial and retail segments, the fundamentals for the local property market are solid.

The government is putting in place the legal framework to support investment and acting to resolve issues related to land acquisition.These pro-active measures will give the real estate sector a welcome fillip and should help to maintain sustained growth over the long term.

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. He is the President of Realestat Indonesia Northern Sumatra 2008-2011, Secretary General of FIABCI International Asia Pacific Committee 2010-2011 and was recently elected as the Secretary General of FIABCI Asia Pacific Regional Secretariat 2012-2014.