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 houses saw the highest sales growth, about 41% q-o-q in Q4 2012. In December 2012, the total outstanding housing loans in Indonesia rose a stunning 21.74% y-o-y, to reach IDR222.35 trillion (US$22.79 billion).
The reason for strong property 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 this 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 neighbouring 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 has 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 rates
- Foreign ownership restrictions
- High costs of building materials
- High tax rates
- Red tape in government
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 purposes, can purchase a home, apartment or condominium as long as it isn't a 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 bagunan). 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-year 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 landowner, for 25 years and extendable to a further 25 years. A mooted change 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 welcome change, investors will still find it coming up short when compared with the regulations in other countries in the region such as Malaysia and Singapore.
Analysis of Indonesia Residential Property Market »
The disadvantage of buying in Jakarta, for foreigners, is complex legalities and high transaction costs.
Villas on Bali are attractively priced at around US$1,400 to US$2,300 per sq. m.. On Bali, lower rental yields can be earned, at from 2.3% to 6.3%.
Indonesia’s laws on foreign ownership were expected to be relaxed this year, but that now appears unlikely.
Round trip transaction costs are high in Indonesia. See our Property transaction costs analysis in Indonesia and Property transaction costs in Indonesia, compared to the rest of Asia.
Capital Gains: Gains derived by nonresident individuals from selling real property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance tax.
Residents: Residents are taxed on their worldwide income at progressive rates, from 5% to 30%.
The buyer pays for the 5% transfer tax, legal fees, and registration fees. The seller pays for the 5% land and building transfer duty (which is different from the transfer tax) and 5% agent’s fee.
Rent: Rents are freely negotiable. They are typically paid in advance for the duration of the lease agreement. However tenants are often able to negotiate smaller advance payments, or monthly payments.
Tenant Security: Lease periods typically vary from 1 to 3 years. The terms depend upon the bargaining skills of the tenant and the landlord. Tenants typically have an option to renew.
Indonesia’s economy is very much driven by domestic developments, and tends to be insulated from global economic trends. In the first quarter of 2013, real GDP expanded by 6.02% from the same period last year. This is strong growth, but actually the slowest growth rate since Q3 2010 and lower than economists’ expectations, according to Statistics Indonesia. In April 2013, Bank Indonesia, the country’s central bank, lowered its economic growth projections in 2013 to between 6.2% and 6.6% from an initial forecast of between 6.3% and 6.8%.
The slight slowdown was due to slowing exports, government spending and private consumption.
Yet analysts are confident that Indonesia’s economy remains on track. It is hard to see what would dent Indonesia’s growth – it was almost wholly unaffected by the global economic crisis, and the economy grew by 6.2% in 2012, after real GDP growth rates of 6.5% in 2011, 6.2% in 2010 and 4.6% in 2009, despite the global economic slowdown.
The main worry is political. President Susilo Bambang Yudhoyono is constitutionally barred from seeking a third term in the next presidential election, to be held in mid-2014. Yudhoyono was easily reelected in April 2009 with 60.8% of votes during the first round. His closest opponent was former president-Megawati with only 26.8% of votes.
President Yudhoyono has overseen a strong revival of confidence since 2004. A retired general with a doctorate in economics, he had the political and intellectual acumen to implement several reforms, including unpopular ones. Laws were enacted to improve the investment climate and the delivery of public service. However, more recently Yudhoyono’s reputation has been tainted by his family’s alleged involvement in corruption.
The likely leading candidates are Aburizal Bakrie, chairman of the ruling Golkar Party; former Indonesian armed forces commander Wiranto; Jakarta Governor Joko Widodo; possibly
Pabowo Subianto, former Commander of the Army Strategic Reserve (KOSTRAD), former President Megawati Sukarnoputri, and former vice president Jusuf Kalla. Several of these candidates would (according to elite opinion) be disastrous. Names mentioned as specially undesirable include Bakrie, Subianto, and Megawati.
Despite these worries, growth continues strong, in fact almost too strong. In February 2013, the overall unemployment rate dropped to 5.92% from 6.92% from the same period last year, according to Statistics Indonesia, and there are worries that the booming economy could encourage trade union militancy.
The annual inflation rate is projected to surge to as high as 7.76% if the government hikes subsidized fuel prices this year. While this seems high, inflation is actually now less high than in the recent past, suggesting that Indonesia’s growing economy is becoming more flexible and productive as it grows. In April 2013, inflation slowed to 5.57%, and though this still above the central bank’s target of between 3.5% and 5.5%, Bank Indonesia has felt able to keep its benchmark rate at a record low of 5.75% since February 2012. From 2009 to 2012, the average annual inflation rate in the country has been at 4.9%.