Indonesian residential property prices rose by 4.5% during the year to end-Q3 2011, according to Bank Indonesia’s Residential Property Survey. Higher prices of construction materials (up by 7% to 12 %), higher workers’ wages and a higher permittance were some of the reasons for the price rise witnessed in new construction.
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 of the major factors that have hampered the growth of Indonesia’s housing market are:
Greater Jakarta was followed by Makassar with price increases of 5.32%. Makassar’s economy is driven by the fishing industry; it used to be a major trading port. About 8 % of Indonesia’s total population lives in this historic port city. In the near future, property prices in Jabotabek and Makkaser are expected to outpace the rest of the archipelago of Indonesia, barring Bali.
To curb inflationary pressures, the central bank raised the key rate by 25 basis points to 6.75% in February 2011. But generally, the direction of interest rates has been down since December 2005, when Bank Indonesia’s policy interest rate stood at 12.75%. Inflation eased to 5.54% in June 2011 from 6.65% in the previous quarter, and Bank Indonesia expects inflation to be under 5% going into 2012.
The Rupiah has held firm during the 2011 ‘crisis of the West’. Indonesia’s economy grew 6.1% in 2010, after 4.6% growth in 2009, despite the global crisis. With high domestic consumption and investment and healthy export revenues, the Indonesian government is confident that the economy will grow by 6.6% in 2011.
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.
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 of the major 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
Greater Jakarta was followed by Makassar with price increases of 5.32%. Makassar’s economy is driven by the fishing industry; it used to be a major trading port. About 8 % of Indonesia’s total population lives in this historic port city. In the near future, property prices in Jabotabek and Makkaser are expected to outpace the rest of the archipelago of Indonesia, barring Bali.
To curb inflationary pressures, the central bank raised the key rate by 25 basis points to 6.75% in February 2011. But generally, the direction of interest rates has been down since December 2005, when Bank Indonesia’s policy interest rate stood at 12.75%. Inflation eased to 5.54% in June 2011 from 6.65% in the previous quarter, and Bank Indonesia expects inflation to be under 5% going into 2012.
The Rupiah has held firm during the 2011 ‘crisis of the West’. Indonesia’s economy grew 6.1% in 2010, after 4.6% growth in 2009, despite the global crisis. With high domestic consumption and investment and healthy export revenues, the Indonesian government is confident that the economy will grow by 6.6% in 2011.
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 »
RENTAL YIELDS
Last Updated: Jun 07, 2011
The selling prices apartment in Jakarta’s central business district (CBD) range from around US$1,300, to US$1,830 per square metre (sq. m). The average rental rate is around US$12.70 per sq. m. per month. This translates into gross yields ranging from 7.9% to 11.3% Villas in Bali, on the other hand, generally have lower yields with an average of around 3.9% to 5.5%. They are a bit cheaper too, selling in a range from US$1,260 to US$1,380 per sq. m.
TAXES AND COSTS
Last Updated: Feb 03, 2012
Rental Income: Nonresident individuals' rental income is subject to withholding tax at 20%, which is applied to the gross income. Rents are also subject to Value Added Tax (VAT) at 10%.
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%.
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%.
BUYING GUIDE
Last Updated: Jul 31, 2007
The total roundtrip cost of buying and selling a property is between 25.5% and 47.5%. The 20% Sales Tax on Luxury Goods and VAT of 10% make up most of the total expenses. The seller only pays for the 5% agent’s fee, while the buyer shoulders all other transaction costs, including the Transfer Tax of 5% and a 5% Tax on Acquisition of Land and Building.
LANDLORD AND TENANT
Last Updated: Jun 21, 2006
Indonesian legal institutions are neutral between landlord and tenants.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.
ECONOMIC GROWTH
Last Updated: Jan 05, 2012
Indonesia’s high growth, high inflation
With more than 13,000 islands spread along Southeast Asia, Indonesia is the world’s biggest archipelago. It has a population of 230 million, the fourth biggest in the world after China, India and US. GDP per capita is around US$2,240 in 2008.President Susilo Bambang 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. However, more recently Yudhoyono’s reputation has been tainted by his alleged involvement in corruption.
Nevertheless, president Yudhoyono’s rule has seen a strong revival of confidence and substantial economic reforms since his first election in 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.
Indonesia’s economy grew 6.1% in 2010, after 4.6% growth in 2009, despite the global crisis. With high domestic consumption and investment and healthy export revenues, the Indonesian government is confident that the economy will grow by 6.6% in 2011.
But economic growth never translated to strong house price increases. One possible reason for property’s weak performance is Indonesia’s unpredictable inflation rate, typically outpacing economic growth.
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