Slowing Economic Growth: What about Indonesia's Property Sector in 2014?

Matters have turned around after the central bank (Bank Indonesia) introduced measures to curb Indonesians' demand for housing, particularly because it detected speculative buying in the country's property sector. In July 2013, Bank Indonesia raised the minimum down payment requirement and curbed mortgages in terms of second home ownership. Moreover, it gradually raised Indonesia's benchmark interest rate (BI rate) during the year from 5.75 percent to 7.50 percent in November 2013, thereby making borrowing costs more expensive.

This week, Indonesia's real estate association Real Estat Indonesia (REI) claimed that between IDR 5 and 6 trillion (USD $434.7 - $521.7 million) worth of mortgages were not disbursed in the month after Bank Indonesia introduced policy adjustements and has caused property developers to delay projects. The REI says that growth of Indonesia's property sector in 2014 will be difficult if the central bank will not lower its BI rate and if it does not ease its tighter policy regarding credit for house purchases.

Despite the less rosy outlook of Indonesia's property sector for 2014, both Moody's Investors Service and Fitch Ratings believe that the credit profiles of Indonesian property developers will remain stable. Fitch says that Indonesian property developers (particularly residential property) will book lower presales in 2014. This will limit the start of new property projects as presales are a common source of funds for the construction. As such, those companies that can rely on recurring revenue will have more scope for investments and business expansion. Recurring revenue mostly constitutes income that is generated through the renting out of property, such as shopping malls, hospitals, and apartments. The companies that have good recurring revenue streams include Lippo Karawaci, Kawasan Industri Jababeka, and Alam Sutera Realty.

Prices of Indonesian residential property have risen significantly since 2011 at around 30 percent per year. Although having risen sharply, Fitch says that there are no signs of a bubble yet as Indonesian property prices come from a low base, while the affordability ratio of Jakarta is still moderate compared to capital cities in other Asian countries. Moody's believes that property prices will moderate in 2014 although housing demand in the Greater Jakarta area remains robust amid a growing population, the continued process of urbanization and a growing per capita GDP. It also stresses that Indonesia has a young population - over 50 percent of the total population is below the age of 30 years - and thus many Indonesians are expected to buy their first house in the near future.

The chart below is the property and real estate sectoral index of the Indonesia Stock Exchange (containing all listed property and real estate companies). After its peak on 31 March 2013, the index fell sharply. However, the property and real estate index still - by far - outperforms the performance of Indonesia's general index (IHSG). Between 1 January and 22 November 2013, the property index gained 23.67 percent, while the IHSG lost 0.64 percent during the same period.

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