Is Indonesia’s real estate set for a new chapter?

 —  Article by JLL Staff Reporter
Indonesia
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After a year in power, the Indonesia President Joko Widodo has begun rolling out hard-hitting economic reforms, and developers are sitting up and taking notice.

Big changes to Indonesia’s real estate investment trust (REIT) industry were highlighted in a raft of reforms announced in late October, with the government taking the sword to a heavy-handed tax regime that has been delaying growth in this lucrative financial instrument.

A few days later, real estate development giant Lippo Group said it planned to shift its two REITs, worth a total of almost US$2.6 billion, from Singapore to Indonesia.

The government hopes Lippo’s move is just the beginning. It sees the policy as a way to attract funds that have been invested abroad, mainly on Singapore’s bourse, to Indonesia’s domestic market.

“It will be a great move if it happens,” says James Taylor, JLL’s Head of Research in Indonesia. “It will open up real estate investment, allow local property companies to access the equities market, increase cash flows, enable foreign investors to enter the market without having to navigate complex ownership rights and offer good liquidity in the market.”

Importantly, Taylor says it will also increase transparency in Indonesia, a country known for its difficulty in accessing information. “Indonesia can be an opaque place, but this will help as REITs will make it easier to get information on rentals and yields.”

Opening the doors to foreign ownership

An impending law that will allow foreigners to own residential property is another positive development, Taylor says.

It is hoped the regulation will boost investor confidence and expand the market to international buyers. But home ownership will come at a price – the law will only apply to luxury residences costing above 10 billion rupiah ($723,000).

Taylor says demand in the luxury residential market improved in the third quarter, but is still “way off” first-quarter levels. In June, the government introduced a new super luxury tax (5 percent) that has increased the burden on purchasers of properties worth more than Rp5 billion ($362,000).

There is caution on the back of new tax regulations, and after a recent adjustment to luxury taxes, more changes in the short term are unlikely; this should restore some confidence to the market.

Office market blues

The office market, on the other hand, is seeing supply outstrip demand. In the third quarter of 2015, vacancy rates went into double digits.

“Demand in the office market is thin, with slow economic growth caused, in part, by low commodity prices and global uncertainty,” Taylor says.

With the massive supply of office space coming on-stream in the next five years, this has also left many landlords willing to compromise on rents in favor of maintaining or improving occupancy.

“Things will start picking up in 2017 and we should see significant improvements by 2020. So there is light at the end of the tunnel – only it’s a long tunnel.”

An emerging city with huge potential

For Indonesia’s capital city, it’s a time of rapid change. According to JLL’s Globalisation and Competition: The New World of Cities, Jakarta is making strong progress across key indicators and has been attracting real estate investment and outsourcing activities.

“The city’s middle class continues to expand, which carries big implications for the growth of the retail sector, and the demand and supply of different kinds of space,” the report says.

Low costs and huge consumer demand are giving Jakarta the edge – attributes that transnational firms find appealing as they expand their operations in Southeast Asia.

Indeed the retail market looks healthy, according to JLL’s Asia Pacific Property Digest Q2 2015, with most shopping malls experiencing low single-digit vacancy rates, due in part to a moratorium on stand-alone shopping malls imposed by the Jakarta government.

“The retail market remains stable,” Taylor says. “The supply pipeline remains thin, vacancy is low and take-up has been largely supply driven in recent quarters. The strongest demand is coming from mid-market fashion and food and beverage.”

One major obstacle to business growth in Indonesia is urban infrastructure shortages, but efforts have been made to remedy this.

Infrastructure plans include a US$2 billion airport railway and, to mitigate the city’s horrendous traffic issues, a new Mass Rapid Transit (MRT), which is slated for completion by 2018. Plans are also underway for a light-rail system. And progress towards the construction of a ring road is finally on the table after years of delays.

Promised economic reform will give the city’s property market the boost it needs as investment floods in and infrastructure improves. It now remains to be seen if President Widodo’s bold vision for his country and its crowded bustling capital will bear fruit.

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