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Indonesia: Overview

Last Updated: Oct 31, 2008

House prices in Jakarta stagnate

Indonesia has been in the grip of a building boom. Condominiums, offices, malls, mixed use complexes and even whole townships are in various stages of construction - from the heart of downtown Jakarta, to the most distant suburban fringes, on throughout the country.

Certainly the construction industry has been happy. No less than 83.3% of Indonesia’s gross fixed capital formation last year was spent on buildings, compared to only 10.5% spent on machinery and equipment, something noticed by the economist Michael Taylor in Asia Sentinel. As he points out, this is an extraordinarily high ratio of investment spending, and compares to a mere 32.9% in Thailand, 52.9% in the Philippines, and 44% in China.

Yet despite, or rather perhaps because of this, house prices barely rose during the past few years.

Though Indonesia’s national house price index rose 5.6% in the year to end-Q2 2008, adjusted-for-inflation prices fell 4.2%.

In Jakarta the average price of strata-title apartments was IDR 10.7 million (US$1,060) per sq. m. in Q2 2008, according to Colliers, relatively unchanged since end-2007.

Things are likely to get worse. Surging food and fuel prices in the first half of 2008 pushed inflation up to more than 10% in the year to May (12% in September). To tame inflation, the Bank of Indonesia, the central bank, has hiked key interest rate seven consecutive times to 9.5%.

Then the global financial crisis hit Indonesia. The stock market has collapsed, and on October 27 the Rupiah exchange rate fell to IDR11,200 per US dollar, a depreciation of 22% from August, and the lowest level since July 2001.

Theoretically, foreigners can own condominiums or strata-title residential property. However, a decade after Regulation 41 of 1996, no foreigner has actually received a strata title certificate of ownership. Foreigners are likewise not allowed to own land.

In practice, foreigners receive rolling lease contracts, and an assurance that should the situation change they will become titled.

In controlling landed property, foreigners often set up a Penanaman Model Asing (PMA) Company. It has 30 years to operate after formation. It can be granted additional 30 years, and another 30 years, if it expands its project through additional investment. This can be 100% controlled by a foreigner. The Right to Build (Hak Guna Bangunan – HGB) is available to PMA companies. The right to build or construct on land is valid for 30 years. This can be extended for an additional 20 years, and even for another 30 years after that.

The government is considering extending property usage rights of foreigners to 70 years from the current 25 years with two possible extensions of 20 and 25 years.

However, the government is still unlikely to allow foreigners to own real estate outright.

Read Price History  »

RENTAL YIELDS

Last Updated: Apr 25, 2008

Spectacular yields on Jakarta apartments

Apartments in Jakarta have always shown up in Global Property Guide surveys with pleasingly high rental yields. We assume that, as in most 3rd world countries, housing is under-built relative to demand because of transaction costs, taxes, and various risks more present here than in the 1st world - and also because of the difficulty buyers have in getting fully financed, given the less than satisfactory legal and institutional protections for lenders.

Jakarta gross rental yields now average 12.84%. The average buying price of a good-quality used apartment is US$1,282.

Bali villas are slightly more expensive, as might be expected. We do not have enough data to report rental yields for Bali.

Read Rental Yields  »

TAXES AND COSTS

Last Updated: Jan 05, 2009

Rental income tax is high in Indonesia

Effective Tax Rate on Rental Income
Monthly Income US$1,500 US$6,000 US$12,000
Tax Rate 20% 20% 20%
Click here to see a worked example
Source: Disclaimer

Rental Income: Non-resident 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 non-resident 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.

Read Taxes and Costs  »

BUYING GUIDE

Last Updated: Jul 31, 2007

Buying costs are very high in Indonesia

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.

Read Buying Guide  »

LANDLORD AND TENANT

Last Updated: Jun 21, 2006

Tenancy laws in Indonesia are generally neutral

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.

Read Landlord and Tenant  »

ECONOMIC GROWTH

Last Updated: Oct 31, 2008

Strong recovery with Yudhoyono the Reformer

With more than 13,000 islands spread along Southeast Asia, Indonesia is the world’s biggest archipelago. It has a population of 221 million, the fourth biggest in the world after China, India and US. GDP per capita is around US$1,925 in 2007.

The presidency of Susilo Bambang Yudhoyono has led to a revival of confidence and substantial economic reforms. He was the first president to be directly-elected, in 2004.

A retired general with a doctorate in economics, he has 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. To attract more foreign investments, the government passed a landmark investment law that provides equal treatment regardless of nationality.

President Yudhoyono is seeking reelection in the April 2009 general elections. He is widely expected to win the crowded race (more than 10 candidates are running including two former presidents), despite the current financial and economic crisis.

In the early 2000s, the Indonesian economy was stabilized, after being devastated by the Asian Crisis. The economy expanded by an average of 4.6% from 2000 to 2003, then by an average of 5.4% from 2004 to 2006, and finally by 6.3% in 2007.

Economic growth for Indonesia is expected to slow to 5.5% in 2008 and 6% 2009. The government is relying on continued foreign investment and strong consumption growth to fuel the economy. It also plans to accelerate the release of development projects to pump-prime the economy and real estate sector. Inflation in 2008 is expected to be around 10%, before easing to 8% in 2009.

 

  • Very high yields in Jakarta
  • Tenant neutral rental market
  • Serious ownership limits
  • High rental income tax
  • High transaction costs
  • Perhaps overbuilt

RESIDENTIAL PROPERTY FACTS
Price (sq.m): $1,287 For a 120 sq. m. property, usually an apartment. Rental Yield: 12.34% For a 120 sq. m. property, usually an apartment.
Rent/month: $1,588 For a 120 sq. m. property. Income Tax: 20.00% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.
Roundtrip Cost: 26.4% The total cost of buying and then reselling an apartment. Includes:

* all transaction taxes and charges:
* lawyers' and notaries' fees
* agents' fees

Assumptions: The buyers are non-resident foreigners. The apartment cost US$250,00 / €250,000. 		Cap Gains Tax: 0.0 Assumptions: The property was bought for US$250,000 / €250,000, and sold 10 years later, after a 100% appreciation.
Landlord & Tenant Law: Neutral Rating is based on a detailed study of each country’s law and practice.
MAY 2009
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