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Indonesia: Overview

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Last Updated: May 06, 2008

Construction boom in Indonesia

Indonesia is 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. True, the perception in Indonesia is that new records are daily being hit at the launch of new projects, but a large part of this is marketing hype. In reality residential prices rose by only 5.40% in Indonesia in 2007, and fell by 1.24% in real terms (2006 figures: 6.60% nominal price rise, 0.52% real) The house price index is still about 50% below its 1994 peak in real terms.

The biggest hindrance for foreigners wishing to buy in Indonesia is the ownership issue.

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.

Though in practice, foreigners receive rolling lease contracts and an assurance that should the situation change they will become titled. Foreigners are likewise not allowed to own land.

Read Price History  »

RENTAL YIELDS

Excellent yields on Jakarta apartments

Yields on apartments in Jakarta have decreased but are still excellent at 9.9%. This is because apartment prices increased slightly faster than rent. A 120-sq. m apartment now sells for around US$1,354 per sq. m from only US$993 per sq. m last year. Apartment prices in Jakarta average US$1,552 per sq. m.

On the other hand, villas in the popular tourist destination, Bali, have much lower gross rental returns at around 4.57%.

Read Rental Yields  »

TAXES AND COSTS

Rental income tax is high in Indonesia

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 nonresident individuals from selling real property are taxed at a flat rate of 20%, levied on the gross value of the property.

Inheritance: There is no inheritance tax.

Residents: Residents are taxed on their worldwide income.

Read Taxes and Costs  »

BUYING GUIDE

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

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

Recovery after terrorism and tsunami

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$1,420 in 2006.

Recovering from the effects of the 1997 Asian Crisis and the subsequent political crisis, Indonesia is slowly getting back on track. The average GDP growth rate from 2000 to 2005 was 4.8%. Then the election of President Susilo Bambang Yudhoyono in 2004 led to a revival of confidence, steady recovery of the economy, and declining interest rates.

Economic growth was 6.3% in 2007, the fastest this century, following 5.5% GDP growth in 2006. And with mortgage interest rates falling to an unprecedented 8.8%, due to more moderate inflation, down from 12-14% a few years ago, there is still potential for more growth. The government recently announced excellent fiscal surplus numbers, the trade account is in surplus. Except for the very high spending on construction and the too-low spending on real productive investment, this looks like a healthy economy.

 

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

RESIDENTIAL PROPERTY FACTS
Price (sq.m): $1,354 For a 120 sq. m. property, usually an apartment. Rental Yield: 11.27% For a 120 sq. m. property, usually an apartment.
Rent/month: $1,526 For a 120 sq. m. property. Income Tax: 20.00% Assumptions: Owners are a non-resident couple drawing US$ / €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.

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