IN THE HOUSE

Indonesia 2018 | CONSTRUCTION & REAL ESTATE | REVIEW

As strong economic growth, an optimistic political outlook, and a partially successful tax amnesty to repatriate offshore wealth continue to drive up housing prices in Indonesia's major urban centers, demand for new housing and shares in developers plummeted in 2017.

Fast on the verge of becoming the world's largest city with 40 million inhabitants by 2030, it is hardly surprising that Jakarta's property market occasionally overheats. While GDP per capita across Indonesia stands at USD3,400, it is a whopping USD12,236 in Jakarta: the nation's most expensive property market. The average going price is USD2,250 for a square meter across the capital, but hovers around USD3,645 per sqm for strata title apartments at the city's higher end. With the cost of buying a home in Jakarta around 12 times annual take-home pay (the traditional measure for American homeowners throughout much of the 20th century was that a house should cost 2.5 times annual household income) and mortgage rates in the neighborhood of 10-11%, this has pushed home ownership out of reach for many would-be new buyers.

As a result, the Indonesian housing market faired relatively poorly in 2017, with shares in some of the largest property developers tumbling at somewhat precipitous rates. Shares of PT Modernland Realty dropped 23% in 2017, and PT Lippo Cikarang and PT Intiland suffered drops of 19% and 16%, respectively. Aware that rising costs are squeezing would-be millennial buyers, half of whom are now at a ripe age to purchase property, the government has been taking steps to ease the pain, though mostly in vain. Bank Indonesia, the country's central bank, lowered rates six times throughout 2016, and it currently stands at 4.25% as of February. The Jakarta Construction, Property, and Real Estate index still dropped by 5.8% through the first half of 2017, the worst showing of all nine industry gauges on the country's equity benchmark. This comes in comparison to a 15% gain in financial stocks over the same period, the strongest performer of the said benchmark.
The slouch in demand has been driven by consistently high and disproportionately rising housing prices; over the past decade alone prices have gone up by 58% in Indonesia's largest 14 cities, but they were surging at annual rates of 30% and even 40% in Jakarta, Surabaya, the country's second-largest city, and Bali between 2011-2014, after which the central bank hiked up interest rates in an attempt to cool things down. After all, as any glance across Jakarta's horizon will show, the wounds of the 1997-98 financial collapse and housing implosion have yet to fully heal, as the halfway abandoned projects dotting the skyline quietly attest. Does this mean there is another bubble in the waiting?

While much of this growth can be attributed to a broader rising middle class in Southeast Asia's largest country, a vast nation of some 260 million souls whose GDP increased by 72% between 2006-2016 from USD1.6 to USD2.8 trillion, another important factor has been at play since President Joko Widodo took office in 2014. Running on a reform campaign, the young former governor of Jakarta began his term by instituting a flagship tax amnesty reform program aimed at encouraging Indonesians to repatriate some of the estimated USD303 billion they have stashed abroad without fear of prosecution. Repatriated funds were then supposed to fund a vastly ambitious USD327-billion infrastructure project meant to revamp much of the country's crumbling or non-existence transportation system. Though the amnesty program only saw USD10 billion repatriated from what initial government estimates thought would be closer to USD85 billion, much of this was subsequently pumped into the country's housing stock, only causing property values to go up all the more.
Despite the relative failure of Widodo's tax plan, as the president is colloquially and endearingly known, it was still part of a broader wave of optimism with the president's policies that has been another key factor is bolstering property prices in the past five years. And though Bank Indonesia has been issuing warnings of a crash since 2013, it has also been acting as strenuously as possible to prevent just such an occurrence, issuing new regulations to curb speculation and increasing down payments on second homes and apartments to 40% in the process.

Nonetheless, 63% of respondents told surveyors in September 2017 they were happy with the general real estate market in the country. Though down from 66% in the same poll a year earlier, this satisfaction was driven in part by collective efforts of the tax amnesty, overall economic growth of 5.3%, and a still very modest KPR-GDP rate, which measures the percentage of mortgage loans to national GDP, of 2.8%. Compared to 45.9% in Singapore, 37.8% in Malaysia, and 22.3% in Thailand, Indonesians' mortgage debt-to-GDP is extremely low and suggests that, despite the current lull, it will only move up in the medium to long term.

Whatever the status of the current lull in demand to purchase residential housing in Jakarta, the government is still going ahead with huge infrastructure plans as per Widodo's stated intentions upon being elected in 2014. Approving a USD353-billion infrastructure budget through 2019, the government is trying to act quickly on promises to upgrade the country's urgent need for better and more roads, bridges, public transportation, wells, dams, and irrigation across the country, particularly in less-served areas in the east. Prominent among these will be the Indonesia-Malaysia border road in Kalimantan, the Trans-Papua road across the Wamena, Hatem, Kenyam, Batas, and Mamugu regions, and the widening of the Manokwari-Maruni road in West Papua. Yet since Jakarta has so far only allocated 37% of said budget, local governments, state-owned enterprises (SOEs), and the financial services sector—banking and capital markets—are expected to come up with the rest. Experts say that local governments will be expected to pony up 11%, SOEs 22%, and the private financial sector the rest.
Though it remains unclear whether the state will be able to raise 37% of its infrastructure budget from the financial markets, as Widodo intends, it is still a hugely ambitious undertaking, given that only 9% of such funding came from them between 2011-2015. Even trickier will be the conjuring act needed to take the steam out of SOEs' share of investment financing, which the president is hoping to reduce from 33% in 2011 to 22% in 2015. Andi Rukman Karumpa, Secretary General of the National Construction Services Association, laments, SOEs are nowhere near that goal; Karumpa estimates that SOEs still handle 80% of public projects. In its October 2017 economic review, the World Bank suggested that Indonesia needed USD1.7 trillion in public infrastructure just to catch up with comparative emerging economies. Even if the government invested at the rate promised in its most recent budget, the bank warned, it would still take 20 years to match the average infrastructural stock of other emerging markets.

That being said, signs of hope abound. The China Development Bank recently agreed to help a consortium of Indonesian SOEs build a USD4.5-billion high-speed rail link from Jakarta to Bandung, and Japanese firms, including the massive Obayashi Corporation, are working with state-run Indonesian builder Wijaya Karya and private PT Jaya Konstruksi Manggala Pratama to build Jakarta's much-needed MRT system, slated to be finished by 2019.