Nominal property price figures can be particularly misleading in Indonesia, because inflation has been high, and remains high. Residential property has been attractive to rich Indonesians and others partly as a protection against inflation.
All Indonesia’s major cities saw nominal property price rises. Makassar led the market with house price increases of 19.28% (11.89% inflation-adjusted) during the year to Q2 2014. It was followed by Manado (13.36% nominal), Surabaya (12.78%), Denpasar (10.16%), Bandar Lampung (9.37%), Banjarmasin (7.81%), Palembang (7.34%), Bandung (7.25%), and Jabodebek-Banten (6.87%).
Jakarta had a y-o-y price-increase after-inflation of only 0.25%.
Jakarta is classified by Bank Indonesia under Jabodebek-Banten, which includes Jakarta's component cities (acronym: Jakarta, Bogor, Depok and Bekasi).
Many cities registered nominal price rises so small that in fact they were actually declines in value, in real terms, including Padang (4.33%), Yogyakarta (4.07%), Medan (3.99%), Semarang (2.5%), and Pontianak (1.69%). All these apparent house price rises actually amounted to declines.
The luxury market has been weakening, with a decline in expatriate arrivals and business travel because of the economic slowdown. The vacancy rate for Jakarta high-end rental apartments increased from 11.7% to 14.7% y-o-y to end-June 2014, according to Jones Lang LaSalle (JLL).
Vacancy increases pushed some landlords to discount rents, although a number of landlords of good quality apartments managed to maintain stable rents. Overall net effective rents in the luxury apartment market in Q2 2014 stood at US$ 217 per sq. m. per annum, down by 1.5% q-o-q, according to JLL. Apartment capital values softened by 0.8% q-o-q. Average high-end yields were 8.6%, again according to JLL.
There was also a decrease in sales of large houses, which in turn slowed demand more generally, caused by the stricter loan-to-value (LTV) ratio launched in September 2013.
This doesn't exactly represent any kind of downturn, given that in the first quarter residential property sales rose by "only" 15.33% - but the point is, it really was in fact a slowdown from Q1 2014's massive quarterly sales increase of 31.54%.
What motivates people in Indonesia to buy property? "Rich [local] investors care mostly for capital appreciation although they also buy apartments to get rental income," says Hasan Pamudji, head of research at Knight Frank, Indonesia. "Yield for high-end apartments can command between 8% and 11%."
But there are more mundane motives, adds Pamudji. "Typical investors in high-end residential in Jakarta comprise of rich Indonesians with some foreigners married to Indonesians. Because of traffic jams, those rich Indonesians have second homes or apartments near their workplaces and they go back to primary houses or apartments in the suburbs.
"There are a growing number of rich Indonesians who are young couples with overseas education who live in high-end apartments, as they are accustomed to living in vertical housing.
"Expatriates tend to rent houses in Kemang, Pondok Indah, Menteng, Kuningan etc where the area has more greenery, international schools, hospitals and entertainment. They also like to rent in high-end apartments or serviced apartments in the CBD and in the south such as Kemang, Pondok Indah, Pejaten."
Property prices are likely to rise about 10% [nominal] in 2014, according to Eddy Hussy of Indonesian Real Estate - a slowdown from the average growth rate of 15% to 17% in the past couple of years. The property market slowdown, says Hussy, is mainly attributable to the lowering of the maximum loan-to-value (LTV) ratio for mortgages used to purchase additional homes, as well as the introduction of a rule that prohibits banks from providing loans for unfinished residential projects, blocking off-plan sales for those without the cash to pay upfront. The LTV ratio cap was set at 60% for second homes, and 50% for any additional properties.
These restrictions mainly affect the mid-market: "We expect transacted prices to be under pressure as volumes have been down, and more incentives are offered such as longer terms of down payment installment and developers’ installment payment," says Knight-Frank's Pamudji.
"Please note that middle to lower segment typically take out mortgage loans and developers’ installment payment schemes. Buyers for high-end typically use hard cash or developers’ installment payment (progressive until completion)."
The high interest rate enviroment has also hit demand. Total home mortgages increased by only 0.32% q-o-q to IDR282.36 trillion (US$20 billion) in Q1 2014. Stricter mortgage regulations will also slow the market this year.
The average price of strata-title apartments in Jakarta increased by 2.45% to IDR24.4 million (US$2,087) per square metre (sq. m.) in the first quarter of 2014, according to Colliers International, with average prices varying from US$3,274 per sq. m. in Jakarta CBD, US$2,282 in South Jakarta, and US$1,609 in the capital’s non-prime areas. There were about 1,246 units completed in Jakarta in Q1 2014, according to Colliers International, including Kemang Village (175 units), Pakubuwono Terrace (750 units), Sherwood Apartment (100 units) and Woodland Park (221 units). About 20,889 units are expected to be completed this year.
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.
"Some foreigners use this," says Knight-Frank's Pamadji. "However, it is not appealing to them. They [alternatively] sometimes use the nominee scheme or they have an Indonesian spouse. Also, sometimes they use the PMA or setting up under foreign investment company if they have businesses in Indonesia."
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.
Quite aside from his popular appeal fostered partly be his "blusukan" visits to poor areas across Jakarta wearing simple informal clothes and chatting to people about problems like the price of food, housing, local and flooding and transport problems, Jokowi was an effective reformer during his time as mayor, creating a bureaucratic recruitment system called "lelang jabatan", giving every civil servant the same opportunity to achieve a certain position by fulfilling the required qualifications and passing the test, whose results were announced transparently.
In addition he introduced a "Healthy Jakarta card" of health insurance, inaugurated the construction of the Jakarta MRT, and re-started the construction of the green line of the Jakarta Monorail. He also initiated programs aimed towards transparency, such as online taxes, e-budgeting, e-purchasing, and a cash management system.
Jokowi was supported by former president Megawati Sukarnoputri, and almost half his cabinet appointees were her people, which has disappointed many observers. This is a nod to political realism, given that Parliament is stuff with traditional politicians whose interests are largely glued to whatever will fatten their own wallets.
Yet Jokowi has been keeping his reform promises. In mid-November he raised the government-subsidized petrol price by more than 30%. Previously fuel subsidies had consumed $21 billion, or 13% of Indonesia's national budget. Wealthy car drivers, who make up a tiny fraction of Indonesia’s 250 million population, benefited the most from cheap petrol, as well as smugglers.
Jokowi promised to cushion the effect of the price rise for poorer Indonesians by distributing benefits through its new education, health and welfare cards. I November, Fitch re-affirmed Indonesia's sovereign credit rating at BBB- with a stable outlook citing "strong commitment of the new Government in continuing structural reforms and improving the investment climate' as one of the key factor." But given a largely hostile legislature stuffed with vested interests, Jokowi faces tough challenges in moving ahead with his reform agenda.
Indonesia has registered robust economic growth for 13 years. The economy is very much driven by domestic developments, and tends to be insulated from global economic trends. That's partly because Indonesia is the world’s biggest archipelago, with more than 13,000 islands. It has a population of 230 million, the world’s fourth most populous country after China, India and the US. Its GDP per capita was around US$3,510 in 2013, according to the International Monetary Fund (IMF). The country’s real GDP growth rate averaged 5.4% from 2000 to 2013.
Indonesia’s economy grew by 5.21% in the first quarter of 2014, the country’s weakest pace since late 2009. The mining sector contracted by 0.4% y-o-y in Q1 2014, in sharp contrast with an annual growth rate of 3.91% in Q4 2013, as a direct result of the export ban on some minerals and raw materials.
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 5.8% in 2013, after real GDP growth rates of 6.2% in 2012, 6.5% in 2011, 6.2% in 2010 and 4.6% in 2009, despite the global economic slowdown.
The economy is expected to expand by 5.4% this year and by another 5.8% in 2015, according to the IMF.
Indonesia’s overall unemployment rate is projected to fall slightly to 6.1% this year, from 6.3% in 2013, 6.14% in 2012, 6.6% in 2011, 7.1% in 2010, and 7.9% in 2009, according to the IMF.
Bank Indonesia decided to increase the benchmark interest rate by 25 bps to 7.75% on 18th November 2014, in response to the new government's fuel subsidy reform policy. Interest rates moved down after December 2005, when Bank Indonesia’s policy interest rate stood at 12.75%, falling to 6.00% in June 2013. They have since moved up again in five small steps to the present rate.
In the first quarter of 2014, the country’s current account deficit narrowed to 2.1% of GDP, down from an all-time high of 4.5% of GDP in mid-2013, thanks to several government measures which crimp imports and attract investments. From January to May 2014, about US$11 billion poured back into Indonesia’s capital markets.
Bank Indonesia aims to slash the current account deficit to between 2.8% and 2.9% of GDP this year, from last year’s 3.3% of GDP.
In July 2014, the country’s annual inflation rate slowed to 4.53%, down from 6.7% in the previous month and 8.61% in the same period last year, according to Bank Indonesia. The central bank’s target inflation rate in 2014 was set at 4.5% plus or minus 1%. From 2009 to 2013, the average annual inflation rate in the country has been at 5.2%.