macro and micro analysis on construction, property and real estate in Indonesia

MACRO AND MICRO ANALYSIS

CONSTRUCTION, PROPERTY AND REAL ESTATE IN INDONESIA

Stock markets around the world have been stimulated by ultra loose monetary policy. The response of property markets-the biggest assets class of all has varied. Whereas the housing boom before the financial crisis was remarkable for its global reach, the recovery after the bust is patchy. Property markets are generally strong in developing world. Prices have forged a head by 11.1% in South Africa. They have also been buoyant in two emerging economies included in our compilation for the first time: Brazil (up by 12.8%) and India (10.7%). China’s house prices have increased modestly, by 3.3%.

The contrasting performance of property markets both reflects and reinforces the broader trend towards a “three-speed” global economy. Markets are generally strong in the fast-growing emerging economies. America’s housing-market upturn will help sustain its wider recovery. The blight affecting many European property markets is more reason why the euro area is bringing up the rear.

The previous paragraphs is discussing the property growth as a global point of view, next discussion will focus more in Indonesia market. In the first five months of 2013, Indonesia’s main stock index (IHSG) rose 16.2 percent to near record high level at 5,068.63 points on Friday (31/05/13). Initially, both analysts and investors were concerned that Indonesia would experience its traditional ‘May Cycle’, the term which refers to the usual fall of Indonesia’s index in the month of may. However, reality proved different as the index recorded a small gain of 7.71 points (0.15 percent) last month.

Property&constructions and consumer stocks will form the main pillars of support for Indonesia’s index. The property sector in particular posted spectacular growth this year. During the first four months of 2013, Indonesia’s property sector grew 73.11 percent. And according to analysts, the end is not in the sight yet as domestic demand for property remains robust and Indonesia property developers are expected to post net profits that rise by around 30 percent in 2013. As such, the property sector can grow up to 90 percent towards the end of 2013.

Due to the recent exceptional growth in Indonesia’s property market, these have been concerns about the emergence and burst of a property bubble. Most analysts, however, believe that this is not the case for Indonesia in the foreseeable future. In the past two or three years, property prices have indeed grown steeply, but they come from a low base. Prices are now reaching levels as were seen before the Asian Financial Crisis of 1998. Moreover, most newly built property is sold. For example, about 95 percent of this year’s newly built apartments in Jakarta have been sold, mostly to end users, despite a new policy of Indonesia’s Central Bank (introduced in June 2012) that aims to curb Indonesians demand for property. This new policy stipulates a new (and higher) minimum down payment of 30 percent for residential property that is larger than 70 square meters. However, it did not cause a significant fall in sales. Furthermore, based on IDX 4^th quarter 2012 statistics was shown property and real estate PER and PBV (15.56X and 1.77X) lower than property, real estate and building construction PER and PBV (17.34X and 2.08X) as well as the building construction PER and PBV (25.55X and 3.64X) which means there are possibility for the property and real estate share price to increase.

Another and perhaps more real concern with regard to Indonesia’s property sector is the possible hike in the price of subsidized fuel. The government intends to raise this price in June 2013 to relieve the budget deficit. This step will subsequently result in higher inflationary pressures and is most likely to be followed by a higher central bank interest rate (BI rate), making it more expensive for Indonesians to buy a mortgage.

Indonesia’s residential property price index (14 major cities) rose by 7.4% during the year to end Q1-2013, the highest year on year price increase since Bank Indonesia began publishing data in in Q1 2008. However adjusted for inflation property prices increased by just 2.04%.

Yet demand is rising strongly. In the fourth quarter of 2012, residential property sales in Indonesia soared by 26.7% from the previous quarter. Small house saw the highest sales growth, about 41% quarter on quarter in Q4 2012. In December 2012, the total outstanding housing loans in Indonesia rose a stunning 21.74% year on year, to reach IDR222.35 trillion (US$22.79 billion).

The reason for strong demand? Four years of strong economic growth. Indonesia’s economy grew by 6.2% in 2012, after real GDP growth of 6.5% in 2011, 6.2% in 2010 and 4.6% in 2009. And Indonesia’s strong economic growth is expected to continue-real GDP growth of about 6.2% to 6.6% is projected in 2013.

Makassar was estimated to have seen the highest annual increase in property prices in Q1 2013, at about 15.6%. About 8% of Indonesia’s total population lives in historic port city. Makassar was followed by Palembang area (10.57%) and Denpasar (9.97%).

Poor recent housing market performance. In recent years, the Indonesian property market has seen very weak real growth (if any) relative to its neighboring Asian countries.

Over the past five years:

·         Property prices rose by 2.56% (-7.68% inflation-adjusted) in 2008

·         Property prices increased by 2.3% (-0.28% inflation-adjusted) in 2009

·         Property prices rose 2.91% (-3.21% inflation-adjusted) in 2010

·         Property prices rose by 5.05% (0.89% inflation-adjusted) in 2011

The relatively poor price performance of residential property in Indonesia had been something of a puzzle. There is tremendous pent-up housing demand. Indonesia has the world’s fourth largest population of 245 million people. Despite strong economic growth and high levels of investment, some factors that have hampered the growth of Indonesia’s housing market are:

·         High mortgage interest rate

·         Foreign ownership restrictions

·         High costs of building materials

·         High tax rates

·         Red tape in governments

Foreign ownership is difficult in Indonesia. Land titles (hak milik) can only be held by Indonesian citizens. Foreign land ownership is against the constitution.

For apartments, the 1996 regulation (no. 41/1996) states that foreigners who reside in Indonesia, or visit the country regularly for business purpose, can purchase a home, apartment or condominium as long as it isn’t part of a government subsidized housing development.

However, foreigners can only hold land use (hak pakai) deeds, and most developments hold right to build deeds (hak guna bangunan). It is not possible for someone to have a land-use deed for a sub-unit of a right to build deed. The length of these titles varies as well. Therein lie some of the difficulties and unclear ownership issues.

So foreigners can effectively only lease, and not truly own an apartment for up to 70 years, but not free standing houses. Within this 70 years period, foreigners must also periodically renew their right to use. The initial hak pakai period is for 25 years, then renewed for an additional 25 years and finally 20 years.

Additionally, the threshold or minimum property sales price that a foreigner can purchase is 1.5 billion Indonesian Rupiah, which is around USD168,388. This minimum “purchase” price is quite high in the Indonesian context.

Foreigners may purchase a house on freehold land by written consent from the landowners, for 25 years and extendable to a further 25 years. A mooted change in in the law on foreign property ownership would extend the leasehold period to a full 70 years as opposed to 25 years followed by subsequent renewals, was expected at the end of 2010, but is yet to be passed in the House of Representatives and has encountered opposition, particularly in Bali.

While the passing of this law will be a high welcome change, investors will still find it coming up short when compared with the regulation in other countries in the region such as Malaysia and Singapore.