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Indonesia Real Estate Report Q4 2011
Business Monitor International, Oct 2011, Pages: 61
Indonesia has a surging economy, growing urbanisation, relative political stability and strong savings and income growth. Consumer spending is growing, particularly from increasingly affluent sections of the population. This is a population that has doubled in 30 years, increasing the demand for property and providing a rapidly expanding labour force.
Indonesia's economy grew by 6.5% year-on-year (y-o-y) in Q211, led by a healthy mix of private consumption, net exports and investment. BMI remains optimistic that the economy can continue to outperform the Asia-Pacific region, and sees real GDP growth coming in at 5.9% this year (versus consensus expectations of 6.4%) before falling slightly to 5.8% in 2012 (versus consensus expectations of 6.5%). Another global recession would destabilise but not derail Indonesia's strong performance.
As a result of surging demand, the Indonesian property market is looking up. It is among the top 10 fastest-growing sectors in the economy in 2011. Despite looming international economic problems – especially in the US and the eurozone – demand for real estate development in Indonesia is likely to remain strong over the medium to long term.
Office space demand is expected to grow, driven by economic growth and foreign direct investment (FDI). Businesses are expanding, upgrading and relocating. In the retail subsector, with ever-increasing consumer spending, demand will also continue to expand – especially from foreign retailers moving into the market. The industrial subsector will also continue to grow in most centres due to expanding manufacturing, as well as the potential for increases in productivity. Companies based in Korea and Taiwan are considering relocating factories from China to Indonesia.
One substantial hindrance to both the industry and the economy as a whole is that Indonesia's physical infrastructure is substandard. The extent of future growth depends very much on the government’s ability to push through bureaucratic reforms that will allow much-needed infrastructure investment. It is not necessarily financial constraints that are acting as barriers to implementation but rather the regulatory environment and red tape. BMI remains confident, however, that with the support of public-private partnerships, fiscal policy will be conducive to infrastructure growth over the next few years. The government’s draft 2012 budget, released in August 2011, has allocated IDR168.1trn (US$19.67bn) for infrastructure spending by government institutions, up by 16% from the 2011 revised budget. However, some commentators believe that the budget still fails to prioritise the requirement for massive infrastructure expenditure.
Foreign direct investment has increased significantly in recent years since the global downturn, even though at 2% it has remained the same proportion of GDP since 2008. In Q410 and Q111, FDI for the whole economy was more than US$4bn, which compares well with the first three quarters of 2010, where FDI averaged around US$3bn. Indonesia still requires further FDI, especially to reduce inefficiencies.
Some of the key opportunities currently in the real estate market are:
- Government spending on infrastructure is expected to increase.
- BMI anticipates that commercial rents will generally continue to rise, some at approximately the same speed and some stabilising.
- There is a huge opportunity for the development of affordable housing. Some key risks to the current real estate market are:
- Corruption is still rife and the legal system is unreliable and in need of reform.
- The government’s version of Indonesia-registered REITs has a prohibitive tax burden.
- The advent of political instability would threaten the country’s lower-risk image.
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