Having hit rock bottom, Indonesia property sector poised for recovery

October 6, 2021

Shoeb Kagda

Jakarta

A NEW commercial, residential and retail hub located about 20km north of the Indonesian capital Jakarta - known as Pantai Indah Kapuk (PIK) - is a hive of activity these days.

The second phase of this development, known as PIK2, has witnessed a rapid take-up by both individuals and businesses looking to take advantage of the expected rebound in the property sector as Indonesia continues to recover from the impact of the coronavirus pandemic.

According to Budhi Gozali, the chief executive officer of Indonesia Property Development Society, prices for shophouses in PIK2 have tripled to 15 billion rupiah (S$1.5 million) over the past two years. Rental for these properties have also doubled over the same timeframe.

"Covid-19 has had a significant impact on the property sector but demand for certain segments of the market has remained strong," he said. "I believe that in the next two to three years, there will be new opportunities that will emerge."

However, while landed residential and commercial properties have seen a strong demand, occupancy and rental levels in the office market are likely to remain under pressure, noted a recent report by JLL.

"Flight to quality will continue as a predominant theme in the occupier market as newer and improved buildings with competitive rents come online."

The report added that health and wellness will remain priority of businesses, and occupiers will likely expect high quality space with more collaboration areas.

High-rise residential properties have taken a big hit from the pandemic. Construction activity was paralysed for most of 2020 due to movement restrictions and lockdown measures.

During 2020, only 2,698 units were completed in Jakarta, down 72.4 per cent from the previous year.

In the Jakarta CBD area, the average price of strata title apartments rose by just 0.13 per cent year-on-year to 52.32 million rupiah per square metre in 2020.

In South Jakarta, the average price of strata title apartments rose by 0.37 per cent to 39.27 million rupiah per sq m over the same period.

"The reality we are facing is that in the last 24 months, year-on-year sales have dropped significantly," said Nico Po, the group CEO of Pollux Properties.

"This affects cash flows, and I believe that it will be the survival of the fittest and those developers that have proper corporate structures will survive."

Mr Po said that developers who were midway through their construction of high-rise buildings have faced numerous challenges in completing these projects.

"This is the lowest point for Indonesian real estate sector but for investors it is the right time to get in because next year we will see the start of the recovery," he said.

Pollux Properties, he added, has managed to complete a number of projects during the pandemic including integrated projects in Batam, Cikarang in West Java, and the 52-storey World Capital Tower in Mega Kuningan.

"We are positioning ourselves for the reopening and recovery of the economy, said Mr Po.

"The pandemic has taught us that having sound capital structure and proper cash flow management are key to long-term growth. If one does not plan for such stressful environments, it will be tough to sustain our business."

Having hit rock bottom, the recovery is underway, said the chairman of Real Estate Indonesia, Paulus Totok Lusida.

He noted that the property sector would grow by 20 per cent in 2021, driven by government support and incentives such as extension of principle payments, lowering taxes and interest rates on home loans.

"With these incentives, the growth trend is projected to continue in early 2022," said Mr Lusida.

Juda Agung, head of Bank Indonesia's Macroprudential Policy Department, concurred that the property sector was now clearly on the path to recovery.

He said that demand had picked up in both the primary as well as secondary property sectors following the central bank's decision to lower the benchmark interest rate to 3.5 per cent.

With the recovery in sight, fears of defaults by property players are also dissipating.

Despite the financial difficulties faced by listed property players Modernland Realty and Alam Sutera in 2020, most analysts do not see foresee a Evergrande-scale default occurring in Indonesia.

A key factor supporting the optimism of property players and investors alike is the underlying liquidity of Indonesian consumers.

According to the Indonesian Deposit Insurance Corporation, the number of deposit accounts as at July 2021 grew by 12.6 per cent year-on-year to nearly 360 million. The value of the deposits increased by 10.2 per cent to over 7,000 trillion rupiah.

Distribution of the growth in number of accounts across all income segments was fairly even, indicating that the Indonesian middle class was not severely impacted economically by the pandemic and is ready to start spending on big-ticket items once the dark clouds lift.