Indonesia's housing market is a picture of stability
Lalaine C. Delmendo | March 29, 2020
During the latest quarter, residential property prices rose by a meagre 0.3% q-o-q (0.19% inflation-adjusted).
Seventeen of Indonesia's 18 major cities saw nominal property price rises in 2019. However, when inflation is taken into consideration, only the city of Medan actually recorded an increase in value of 4.53% during 2019.
In Jakarta, prices of strata title apartments rose by 3% during 2019 to an average of IDR 34.8 million (US$2,130) per square metre (sq. m.), according to Colliers International.
Demand is almost steady. Residential property sales rose slightly by 1.19% in Q4 2019 from a year earlier, a sharp slowdown from the previous quarter's 13.95% growth, according to Bank Indonesia. On a quarterly basis, sales actually declined 16.33% in Q4 2019.
Indonesia's economy grew by 5.02% in 2019, slightly slower than the prior year's 5.17% growth, as investment and exports weakened, according to Statistics Indonesia. Recently, Bank Indonesia trimmed its 2020 economic growth forecast to 5% - 5.4%, from 5.1% - 5.5%.
In March 2020, the Indonesian government unveiled its second emergency stimulus package worth US$8 billion, in an effort to protect the economy from the adverse impact of the coronavirus outbreak.
It provides a range of fiscal and non-fiscal incentives for the manufacturing sector and small and medium-sized businesses. This follows a US$725 million stimulus package announced last February 2020 to support tourism, the airline industry, and the property market. The package includes US$104 million funds for the subsidized housing program, which is expected to cover financing for 175,000 new homes.
Jakarta's rental yields are moderate to attractive
Gross rental yields in Jakarta - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are quite attractive, though significantly lower than they were 4-5 years ago. Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Jakarta´s property market now looks well-priced.
Higher end apartments in Jakarta are now priced at around US$ 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.
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 2000 to 2018, the economy grew by an average of 5.4% per year, according to the International Monetary Fund (IMF).
In 2019, the economy grew by 5.02% from a year earlier, slightly slower than the prior year’s 5.17% growth, as investment and exports weakened, according to Statistics Indonesia.
Recently, Bank Indonesia trimmed its 2020 economic growth forecast to 5% - 5.4%, from its earlier projection of 5.1% - 5.5%. Other international organizations such as OECD and Fitch Solutions estimate that Indonesia’s growth will not reach 5% this year.
Tourist arrivals rose by only 1.8% to 16.1 million in 2019, a sharp decline from the annual average growth of 12% from 2013 to 2018, according to Statistics Indonesia.
The tourism sector is expected to receive a further blow this year, after the government imposed travel bans and suspended its visa exemption policies to curb the spread of COVID-19.
The Indonesia rupiah appreciated by 10.4% against the US dollar in the past seventeen months to reach an average exchange rate of IDR 13,757.9 = USD 1 in February 2020, thanks to the central bank’s efforts to defend the domestic currency amidst rising current account deficit and worsening global trade tensions. This partially offsets the 13.7% drop in its value against the US dollar from September 2016 to October 2018.
Indonesia recorded a budget deficit of IDR 353 trillion (US$21.6 billion) in 2019, equivalent to 2.2% of GDP in 2019, wider than the government’s target of 1.8% and the prior year’s shortfall of 1.76% of GDP, according to the Ministry of Finance. The country’s government debt stood at about 30.2% of GDP in 2019.
Unemployment stood at 5.28% in Q3 2019, almost unchanged from a year earlier, according to Statistics Indonesia.
In 2019, overall inflation slowed to 2.72%, down from 3.13% a year earlier and the lowest level in about two decades. From an average of 9.5% from 2001 to 2008, inflation dropped to an annual average of 5.1% from 2009 to 2018. In February 2020, inflation was 2.98%.