Modest house price rises in Indonesia
February 12, 2018
During the latest quarter, residential property prices rose by a meagre 0.5% (0.3% inflation-adjusted).
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. Surabaya led the price hikes with house prices rising by 6.86% (2.94% inflation-adjusted) during the year to Q3 2017, followed by Bandung (5.22%), Jabodebek-Banten (3.65%), and Bandar Lampung (3.34%). Smaller house price rises were registered in Manado (2.34%), Semarang (2.2%), Banjarmasin (2.1%), Makassar (1.82%), Batam (1.75%), Palembang (1.67%), Yogyakarta (1.36%), Padang (0.95%), Pontianak (0.85%), Medan (0.8%), Denpasar (0.58%), and Balikpapan (0.29%).
However, when adjusted for inflation, all cities, except Surabaya and Bandung, actually recorded declines in value, ranging from 0.15% for Jabodebek-Banten to 3.39% for Balikpapan.
Prices of strata title apartments in Jakarta rose by 4.6% during the year to Q3 2017 to an average of IDR 32.7 million (US$2,289) per square metre (sq. m.), according to Colliers International.
"Apartment prices are anticipated to grow by 4.5% to 5% by the end of 2017 and will rise to 6% to 8% in 2018 on the back of better economic projection, which in turn will improve sales performance," said Colliers International.
In 2017, the economy grew by a healthy 5.05%, at par with the previous year's 5.02% growth, fuelled by rising commodity exports, as well as strong public infrastructure investment, according to Bank Indonesia. The Indonesian economy is expected to remain strong this year, with a projected GDP growth rate of 5.1% to 5.5%.
Jakarta's rental yields are attractive
Gross rental yields in Jakarta - the return earned on the purchase price of a rental roperty, before taxation, vacancy costs, and other costs - are now very attractive, though lower than they were 4-5 years ago. Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Jakarta's property market now looks well-priced.
Higher end apartments in Jakarta are now priced at around US$ 2,50to US$2,900 per square metre (sq. m.). Rental yields on these apartments are now around 7.4% to 8.5%, and have risen over the past two years.
The disadvantage of buying in Jakarta, for foreigners, is complex legalities and high transaction costs. However, changes in the law are in process which should make things much easier.
Villas on Bali attractively priced at around US$1,100 to US$2,300 per sq. m., judging by surveys that we conducted last year. On Bali, lower rental yields can be earned, at from 3.8% to 5.0%.
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.
Rental income tax is high in Indonesia
Rental Income: Nonresident individuals' rental income is subject to withholding tax at 20%, which is applied to the gross income.
Capital Gains: Gains derived by nonresident individuals from selling real property are taxed at a flat rate of 5%, which levied on the transaction value.
Inheritance: There is no inheritance tax.
Residents: Residents are taxed on their worldwide income at progressive rates, from 5% to 30%.
Buying costs are very high in Indonesia
The total roundtrip cost of buying and selling a property is between 11.75% and 17.75%.
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.
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.
Almost two decades of uninterrupted economic growthIndonesia’s economy is very domestically-driven. It tends to be insulated from global economic trends. In fact in recent years, Indonesia has enjoyed robust growth despite the global crisis. From 2006 to 2016, the economy grew by an average of 5.7% per year, according to the International Monetary Fund (IMF).
In 2017, the economy was estimated to have expanded by a healthy 5.05%, at par with the previous year’s 5.02% growth, according to Bank Indonesia. This was mainly fuelled by rising commodity exports, as well as strong public infrastructure investment.
Economic growth is expected to accelerate to 5.1% to 5.5% in 2018, on the back of rising investment, more fiscal stimulus and growing exports, according to Bank Indonesia.
In Q3 2017, nationwide unemployment stood at 5.5%, up from 5.33% in the previous quarter but down from 6.18% a year earlier, according to the country’s statistics agency, Badan Pusat Statistik Indonesia (BPS).
In 2017, overall inflation was 3.61%, a slight increase from 3.02% in 2016 and 3.35% in 2015, fuelled by an increase in food prices and transportation costs, according to the BPS. From an average of 9.5% from 2001 to 2008, inflation dropped to an annual average of 5.5% from 2009 to 2016, according to the IMF. The overall decline in inflation suggests that the recent stepping-up in the key interest rate has worked, and that Indonesia’s growing economy is becoming more flexible and productive as it grows.
Inflation is expected to fall in the lower end of the central bank’s target range of 3% to 5% in 2018, amidst the government’s promise to not raise fuel prices - a populist move ahead of the 2019 general elections.