Meikarta, One of Indonesia's Troubled Property Projects?

The giant Meikarta project, which is being marketed as the "Shenzhen of Indonesia", is to be developed about 34 kilometers to the east of Indonesia's capital city of Jakarta on the western part of Java island.

However, in local media there are articles informing that Lippo Cikarang has not collected all necessary permits. For example, news agency detik.com reported that the Deputy Governor of West Java, Deddy Mizwar, requested the Lippo Group to delay works related to the construction of Meikarta because it is yet to obtain a recommendation from the regional West Java government. This would imply that the act of selling Meikarta property to consumers would be an illegal act.

Moreover, Mizwar said the company also needs to conduct more research into the impact of the property development project on local communities that reside in the area.

In an article published on news agency tempo.com regional West Java parliament Chairman Ineu Purwadewi Sundari was quoted saying the developer of Meikarta is currently still completing the permitting process. However, this process cannot be completed soon because local regulations concerning spatial planning still need to be designed. Still, the chairman believes the project is running in line with existing laws. Several buildings are indeed already in the progress of construction in the area but these buildings are actually not part of the Meikarta program, he said.

Danang Kemayan Jati, Director of Public Relations at Lippo Karawaci (the parent company of Lippo Cikarang), emphasized that all permits from the district level have been collected, including the Building Permit (IMB) and Environmental Impact Assessment (AMDAL). However, he added that the company will conduct further research to see whether there are other licenses that still need to be obtained at the provincial level. He hopes to see all matters related to the permits completed as soon as possible so the groundbreaking ceremony for Meikarta can be held before the end of the year. Jati also emphasized that the company is not doing an illegal act by selling units of the property project to the consumer because these sales (and marketing activities) do not require permits.

Last year a similar grand project encountered problems: the giant land reclamation project in the bay of Indonesia's capital city of Jakarta. In April 2016 Indonesian President Joko Widodo suspended all activities related to the ambitious project due to alleged violations of - and/or hiatuses in - Indonesian law. Moreover, a corruption scandal emerged involving one of the developers of the land reclamation project (property developer Agung Podomoro Land that is listed on the Indonesia Stock Exchange) and a local Jakarta legislator (Muhammad Sanusi). Former Agung Podomoro Land General Director Ariesman Widjaja was eventually sentenced to three years in prison and an IDR 200 million fine (or three additional months imprisonment) y the Jakarta Corruption Court as he was found guilty of bribing Sanusi in a bid to influence the outcome of deliberations on two draft bills with regard to Jakarta's Zoning Plan and Coastal Northern Territory (RZWP3K) for the period 2015-2035 and the North Jakarta Strategic Area Regional Spatial Plan. Agung Podomoro Land's subsidiary Muara Wisesa Samudra had earlier been awarded the rights to develop Islet G, a big residential and commercial property project called Pluit City.

Read more: What Can Investors Learn from Jakarta's Land Reclamation Project?

Indonesia is known for its unclear regulatory framework, a situation caused by weak coordination and cooperation between separate government institutions on both the central and regional level. Therefore, pioneering development projects are always plagued by a legal framework that is actually not prepared to deal with such a project. It will then require more time (for new regulations and laws to be designed) but also a good network (within regional and local governments) to realize a project.

Considering the Lippo Group is behind Meikarta (one of the largest diversified conglomerates in Indonesia with high connections), chances are big that any existing problems will be cleared although it may require some time. Therefore, we regard investing in property in Meikarta an interesting investment choice but - indeed - high risk as long as the legal situation is not 100 percent clear.

There is also some concern about Meikarta's accessibility because its position is currently a bit in the "middle of nowhere". However, the government is starting to build six important infrastructure projects in the region that will significantly help the flow of people and goods from - and to - Meikarta. These projects are the rapid train Jakarta-Bekasi-Cikarang-Bandung, the Patimban Deep Seaport, Kertajati International Airport, APM Monorail, the Jakarta-Cikampek Elevated Highway toll road, and the light rail transit (LRT) Cawang-East Bekasi-Cikarang.

Lippo Cikarang's net profit fell 26.2 percent (y/y) to IDR 262 billion in the first half of 2017, while sales fell 3.1 percent to IDR 842 billion over the same time. Therefore, the industrial township developer hopes to see improving earnings on the back of the Meikarta project.

Revenue generated through residential housing and apartment sales account for about 75 percent of Lippo Cikarang's total revenue. However, Indonesia's economic growth is still somewhat bleak as people are seemingly reluctant to buy and invest. Therefore, it is a positive matter that Lippo Cikarang's recurring revenue grew by 7 percent (y/y) to IDR 137 billion in the January-June 2017 period.

Shares of Lippo Cikarang have fallen 5.74 percent to IDR 4,760 a piece so far this year.

Stock Quote Lippo Cikarang - LPCK:

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