Demand showing some improvements
Lalaine C. Delmendo | March 07, 2022
Indonesia's residential property market remains sluggish, with the composite-16 property price index rising only by 1.53% during the year to Q3 2022, according to Bank Indonesia. In fact when adjusted for inflation, property prices declined by 3.48%.Looked at longer-term, the property market is hardly moved, with prices up by a meager 1.47% in 2021, 1.43% in 2020, 1.77% in 2019, 2.95% in 2018, 3.5% in 2017 and 2.38% in 2016. In real terms, prices fell by a cumulative 1.68% from 2016 to 2021.
During the latest quarter, residential property prices rose by a miniscule 0.16% q-o-q (fell by 1.26% inflation-adjusted).
“Only a few projects have raised the asking price due to approaching completion date,” said Colliers International in its Q3 2022 report. “Colliers forecasts prices to remain flat until the end 2022 given subdued demand.”
When inflation is taken into consideration, only one of the eighteen major Indonesian cities recorded house price increases in Q3 2022 as compared to the same period last year.
In Jakarta, prices of apartments rose by a minuscule 0.67% y-o-y to IDR 35.24 million (US$2,255) per sq. m. in Q3 2022, according to Colliers International.
While demand showed some improvements lately, it remains far below its pre-crisis levels. Residential property sales rose by 15.2% in Q2 2022 from a year earlier, in sharp contrast to a 10.1% y-o-y decline in the first quarter, according to Bank Indonesia.
Residential construction activity remains weak, impaired by completion delays. In Q3 2022, there were 219,291 high-end apartment units in Jakarta, up by a meager 0.1% from the previous quarter and by 1.3% from a year earlier, according to Colliers.
Despite this, the wider economy remains strong. Indonesia's economy was estimated to have expanded by around 5.4% to 6% in Q3 2022 from a year earlier, according to President Joko Widodo, following y-o-y growth of 5.44% in Q2 and 5.01% in Q1. The country's strong growth was mainly attributed to strengthening consumption and rising exports amidst further loosening of Covid-19 curbs.
The Indonesian economy grew by 3.7% during 2021, fully offsetting its 2.1% contraction in 2020. The International Monetary Fund (IMF) expects the economy to grow by a robust 5.3% this year.
Analysis
of Indonesia Residential Property Market »
Jakarta's rental yields are moderate to attractive
Gross rental yields in Jakarta - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are quite attractive, though significantly lower than they were 4-5 years ago. Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Jakarta´s property market now looks well-priced.
Higher end apartments in Jakarta are now priced at around US$ 2,500 to US$2,800 per square metre (sq. m.). Rental yields on these apartments are now around 5.2% to 7.7%.
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$2,000 per sq. m.. On Bali, lower rental yields can be earned, at an average of around 4.0%. As always, it must be stressed that there is a wide range, depending largely on location.
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.
Indonesia’s economy remains strong
Indonesia’s economy was estimated to have expanded by around 5.4% to 6% in Q3 2022 from a year earlier, according to President Joko Widodo, following y-o-y growth of 5.44% in Q2 and 5.01% in Q1. The country’s strong growth was mainly attributed to strengthening consumption and rising exports amidst further loosening of Covid-19 curbs.The Indonesian economy grew by 3.7% during 2021, fully offsetting its 2.1% contraction in 2020. To boost economic activity during the pandemic, the government allocated a Covid-19 recovery budget amounting to IDR 692.5 trillion (US$44.19 billion) and IDR 619 trillion (US$39.51 billion) in 2020 and 2021, respectively.
Before the Covid-19 pandemic, the country enjoyed two decades of uninterrupted economic growth. Indonesia’s resilience can be attributed to its very domestically-driven economy. It tends to be insulated from global economic trends. In fact in recent years, Indonesia has enjoyed robust growth despite the global crisis. From 2000 to 2019, the economy grew by an average of 5.3% per year, based on figures released by the International Monetary Fund (IMF).
The IMF expects the Indonesian economy to grow by a robust 5.3% this year while the Asian Development Bank (ADB) is slightly more optimistic, projecting an economic expansion of 5.4%.
“The Indonesian economy is coping well with threats to growth,” said ADB Country Director for Indonesia Jiro Tominaga. “Consumer spending is robust, and commodity exports have boomed. However, high commodity prices have also spurred inflation. For 2023, the risks are on the downside due to slower global growth, global financial volatility, tighter macroeconomic policy in Indonesia, and continuing shocks from the Russian invasion of Ukraine.”
In September 2022, overall inflation accelerated to 5.95%, up from 4.69% in the previous month and just 1.6% a year ago, according to Bank Indonesia. This is now well above the central bank’s target range of 2% to 4% and the highest level since October 2015.
From an average of 9.5% from 2001 to 2008, inflation dropped to an annual average of 4.7% from 2009 to 2019 and further to 2% in 2020 and 1.6% in 2021.
Unemployment is expected to fall to 5.5% this year, based on IMF estimates, from 6.5% in 2021 and 7.1% in 2020. Currently, there are about 8.4 million unemployed persons in Indonesia.
Rupiah weakening, public finances gradually improving
The Indonesia rupiah depreciated by 11.2% since January 2020 to reach an average monthly exchange rate of IDR 15,429 = USD 1 in October 2022. Aside from the relative strength of the US dollar, Bank Indonesia noted that the continued depreciation of the domestic currency is “spurred by increasing global financial market uncertainty given more aggressive monetary policy tightening in several countries in response to an uptick of inflationary pressures and concerns stoked by global economic moderation.”
This follows a cumulative 4.4% depreciation in the value of rupiah against the US dollar from 2016 to 2019.
The rupiah is expected to weaken further against the U.S. dollar during the remainder of the year as foreign investors flock to the US financial market as the Fed continues to raise its key interest rates to rein in heightened inflationary pressures.
Indonesia is expected to record a fiscal deficit amounting to IDR 732.2 trillion (US$46.81 billion), equivalent to about 3.92% of GDP. This is smaller than the previous estimate of 4.5% of GDP and the deficits of 4.65% of GDP in 2021 and 6.5% of GDP in 2020, due to strong revenue forecasts, according to Finance Minister Sri Mulyani Indrawati.
As such, the government would cut its debt issuance to IDR 757.6 trillion (US$48.43 billion) this year, from the initial target of IDR 943.7 trillion (US$60.32 billion).
“Our debt issuance has experienced an extraordinarily steep decline. This is an indicator of the health of our state budget, which is extraordinarily good,” said Indrawati.
The country’s gross government debt will be around 40.9% of GDP this year, according to the IMF, slightly down from 41.2% in 2021 but still higher than the shortfall of 39.8% in 2020 and 30.6% in 2019 before the pandemic.