Impact of Indonesia's Infrastructure Development on Property Sector
With the Indonesian government showing its commitment to push for infrastructure development, the property sector of Indonesia is expected to get a boost as infrastructure development opens access to new areas. For example, Indonesia's first high-speed train project that is to connect Jakarta and Bandung (in West Java) is expected to give rise to new economic centers and cities along the 142 kilometers-long railway. Moreover, existing property in the proximity of a new infrastructure project should lead to significantly rising property prices.
Currently, there are various big infrastructure projects under construction in Indonesia. For example, the above-mentioned high-speed railway in West Java, the mass rapid transit (MRT) in the Greater Jakarta area, the light rail transit (LRT) in the Greater Jakarta area as well as in Surabaya (East Java) and Palembang (Sumatra), and the commuter line in the Greater Jakarta area. When these projects are being constructed in the proximity of existing property then prices of this property could rise up to 20 percent per year in the next couple of years (nearly double from the normal growth pace of property prices). In case there is no existing property in the proximity of a new and ambitious transportation infrastructure project under development, then land prices surge as investors are eager to purchase this land for property projects.
Indonesian news agency Kontan conducted interviews with Real Estat Indonesia (REI) Chairman Eddy Hussy and Indonesia Property Watch (IPW) Executive Director Ali Tranghanda that touched upon the subject of government-led infrastructure development and its impact on the property sector.
Question: The government of Indonesia is eagerly undertaking and encouraging infrastructure development such as the MRT, LRT and toll road development. What is the impact of such infrastructure development on the property sector of Indonesia?
Eddy Hussy: In line with better and more complete infrastructure, Indonesia's property sector will surely get a boost. I have always said that the property sector is the locomotive of the economy because property is always the first to be developed. When there is an infrastructure project that opens access to a new region then property developers are the first to enter the region. After property development has been started, then it will be followed by other developments.
Ali Tranghanda: The impact is big. However, the type of infrastructure project will appeal to different segments of society. For example, the development of a toll road tends to trigger property development for the middle class and elite near the infrastructure project, while train or MRT projects tend to encourage property projects for the middle class and lower class. However, there is a change occurring: whereas in the past train transportation was mostly used by the lower classes, more and more people within the middle class segment and even elite are now using train transportation as services have improved.
Question: Can ongoing infrastructure development support growth of Indonesia's property sector in 2016 or is that too soon?
Eddy Hussy: To give a quick overview, the property sector of Indonesia was booming in the years 2009-2012. The following year it was still good as economic growth was still ok. However, in the next couple of years (up to the present) we saw plunging property sales, even though prices remained relatively stable. In 2016, I still expect that the property sector remains sluggish, particularly property for the middle class and elite because people's purchasing power has weakened amid the country's economic slowdown. Earlier, REI said it estimates a 11 - 12 percent growth of the property sector in 2016. However, given the bleak performance in the first quarter it may be difficult to achieve this target.
Read more: Overview and Analysis of Indonesia's property Sector
Question: What about the future prospects of Indonesia's property sector?
Eddy Hussy: Property remains an attractive sector because prices in Indonesia are relatively low (compared to neighboring countries). However, we cannot simply look at prices only. We also have to take into account that Indonesia is the most populous nation in Southeast Asia with some 255 million citizens. This implies that demand for property in Indonesia is huge and prices will continue to rise into the future.
Question: Is there any threat of a property price bubble in Indonesia?
Eddy Hussy: I do not see this threat. About three or four years ago Indonesia's property sector was indeed overheating, but not heading to a bubble (Bank Indonesia then implemented a tighter policy) but there is no threat of a price bubble at the moment. If Indonesia's overall economic growth accelerates then property prices will rise accordingly. There are plenty of opportunities for investors in the property sector. However, it will first require the economy to accelerate and purchasing power to improve.
Question: The Indonesian government wants to see lower lending rates. What will be the impact on the property sector?
Eddy Hussy: Regarding the government's plans to push lending rates down to single digit margins, we warmly welcome this plan as cheaper borrowing costs will boost Indonesia's property sector (moreover all our neighboring countries have single digit lending rates). The recent decision of Bank Indonesia to cut the benchmark BI rate to 6.75 percent has indeed succeeded in pushing down lending rates of local banks. However, it will require more time before we will see the real impact as the property sector is still sluggish at the moment. Currently, Indonesia's lending rates average around 10 - 11 percent. This is still significantly higher compared to the average of 7 - 8 percent in the 2010-2012 period.
Question: Do Indonesia's recent policy changes related to the property sector (such as the loan-to-value ratio) still influence the property sector?
Eddy Hussy: The LTV policy indeed needs a revision. However, it is more important to change the house ownership credit scheme (Kredit Pemilikan Rumah, abbreviated KPR). Currently, KPR is only disbursed to first home buyers, not for the purchase of a second or third house. However, there are plenty of Indonesian consumers with good jobs and who can afford the purchase of more than one house through a KPR scheme. Therefore, I believe KPR should not be limited to first home buyers only. If consumers are allowed to purchase more houses through a KPR scheme it will also increase the cash-flow of property developers when developing the property.
Question: Which areas in Indonesia are attractive in terms of property investment?
Eddy Hussy: Surely the bigger cities that have plenty of economic activity going on would be my choice. The bigger cities of Indonesia are also the location where the richer segments of society live and therefore property can be sold more easily.
Ali Tranghanda: The most attractive places in terms of property investment are Bekasi, Depok and Sawangan Bogor. Property prices in places such as Tangerang and Serpong have already become too high for investment.