President's development plans to boost housing market

Among the "good intentions" of Indonesia's new anticorruption, pro-business strategy was a mooted plan by President Joko Widodo to ease restrictions on foreign property ownership.

It wasn't formalised in his policies, but minders shared his view that foreign investors would be able to purchase apartments worth at least 2.5 billion rupiah (HK$1.59 million) in the capital Jakarta, other main cities and on Bali island for the first time in order to boost much-needed tax revenue.

It is, of course, too early to tell which pre-election promises are ultimately doable, but Widodo's apparent willingness to spend on infrastructure and ease problems such as Jakarta's notorious traffic jams is a further fillip to an already booming property market.

For two years in a row, Jakarta led Knight Frank's annual Prime International Residential Index, recording annual growth of 38 per cent in 2012 and 2013. Bali has taken the No 3 spot, gaining 22 per cent in 2013, showing that "Indonesia's key markets are continuing to outperform the rest".

A slowdown is to be expected in any election year, and Indonesia is no exception. Although Jakarta still tops the table in Knight Frank's third-quarter data, rising 27 per cent in the 12 months to June, a sharp deceleration was noted this year, when prices crept up by a mere 2.5 per cent.

In the past two weeks, though, Hasan Pamudji, associate director at Knight Frank Indonesia, detects a shift in mood. The property market did pare back right up until the end of last month, as slowing economic growth and market uncertainty in general saw investors and owner occupiers alike sit on the sidelines awaiting the election outcome. School and Eid ul-Fitr holidays also added on the slowdown, he says. "However, after [Widodo] was confirmed as president and a new cabinet was created, we have seen the market start to move again."

International investors, developers and buyers had placed high hopes on Widodo's pro-investment policies as a starting point for a change for Indonesia, Pamudji says. The president's apparent commitment to prioritising domestic issues - revitalising the economy, improving the investment climate, bureaucratic and governance reforms, improving education and health, and implementing large-scale public transport infrastructure programmes - is fuelling optimism, he adds.

Colliers International research shows that the Jakarta apartment market maintained a stable performance throughout the election period, the overall take-up rate climbing by 1.4 per cent quarter-on-quarter to 86.6 per cent in the third quarter. Apartment prices gained on average 17 per cent year-on-year, led by South Jakarta, and followed by the central business district (CBD) and non-prime areas.

Ferry Salanto, Colliers' associate director, research, has seen fresh hope since the new cabinet was announced. "Many investors held [back] because they wanted to make sure who would be at the helm," he says. For investors who have been in Indonesia for some time, the election outcome also had an "insignificant impact" on their business expansion decisions. "My division feels that Japanese and Korean investors are very active in looking for investment opportunities in Indonesia," Salanto says.

And, while recent government measures have tightened recruitment of foreign workers in Indonesia, Salanto notes that the new rules mainly target middle- to lower-level workers. He expects that the new president's investment roadshows will encourage more overseas companies and increase the number of expatriates. The growing middle class, which more than doubled in size from 2006 to 2011, and traffic jams in Jakarta will further push demand for apartments, especially from young families or executives who work in the CBD, he says.

However, despite overall optimism, challenges remain in this emerging market. Knight Frank's Pamudji cites possible hikes in fuel subsidies, electricity tariffs and minimum wages affecting consumer purchasing power and adding to businesses' operational costs. Further economic slowdown may affect business expansion and consumer sentiment, while external factors, such as the global economy and the US Fed tapering, may also impact the Indonesian economy. "Therefore, government efforts to speed up infrastructure development are crucial and need to be implemented. Local manufacturing and domestic export need to be improved heavily to boost the domestic economy," he says.

Colliers' Salanto agrees that the plan to slowly reduce fuel subsidies in Indonesia remains an issue because of the strong link between fuel prices and economic growth, including the inflation rate. "Overall, increasing fuel prices likely means that the cost of anything relying on transport will be affected, including raw materials for construction," he says.

Knight Frank's outlook for Jakarta's property market overall is that the office sector will experience challenging times due to ample new supply during a period of slower economic growth. The retail sector will also come under pressure as higher inflation impacts consumer spending. The residential sector will likely perform better, though, as "people still need housing".

Pamudji says: "[Widodo]'s plan to speed up infrastructure development and open up opportunities to develop industrial estates outside of Java Island is an encouraging plan."

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