Property bubble in Indonesia

Property bubble in Indonesia?

The announcement yesterday that Indonesia is planning policies to quell rising property prices against a backdrop of rising inflation comes as concerns grow over the health and stability of the real estate market, with some suggestions that a bubble is forming.

BY KARIM RASLAN –

6 HOURS 19 SEC AGO

The announcement yesterday that Indonesia is planning policies to quell rising property prices against a backdrop of rising inflation comes as concerns grow over the health and stability of the real estate market, with some suggestions that a bubble is forming.

A small two-room apartment far from the city centre in Jakarta can cost up to US$80,000 (S$101,100) — increasingly out of reach of ordinary Indonesians, an Al Jazeera report in May highlighted.But even as analysts are calling on the government to tighten control on property sales to forestall a bubble, there is also a long-standing housing shortage. The report cited a developer as saying that the big cities would need some 13 million new housing units, including 200,000 in Jakarta.

The real estate sector has shown exceptional growth since last year, with property shares on the Indonesian Stock Exchange rising by more than 70 per cent in the first five months of this year. Occupier demand has been powered by strong economic growth, growing middle class and purchasing power, as well as an attractive market for business and foreign investment.

Jakarta remains at the heart of this boom: A joint study by the Washington-based Urban Land Institute (ULI) and the Jakarta branch of PricewaterhouseCoopers, Emerging Trends in Real Estate: Asia Pacific 2013, found that the capital ranked first as the most preferred destination for real estate investment in the region. Indeed, Jakarta shot up from 11th place last year, overtaking Singapore as the previous leader.

Real estate firm Knight Frank also noted that Jakarta topped the list of its index of price growth in the world’s luxury real estate markets, with prices in the city having risen 38 per cent last year. Average property prices for Jakarta currently stand at US$346 per square foot, up from US$250 in the previous year.

But it appears that the authorities are having to tread a fine line between dealing with higher prices and demand for more property. Before yesterday’s announcement, Bank Indonesia (BI) — the central bank — had played down the notion that a bubble was forming given that domestic demand is still strong. Senior BI official Difi Johansyah said housing demand stood at around 13 to 15 million units, while yearly supply was only 1 to 1.5 million.

Also, Knight Frank’s Asia-Pacific Research Director Nicholas Holt was cited in the Bangkok Post as saying that the firm remained upbeat about the office space sector in Jakarta, particularly in the Central Business District (CBD) whose occupancy rates are expected to remain above 90 per cent.

That’s significant when you consider that Jakarta’s 2012 office supply was 6.8 million sq m (including 4.69 million, or 69 per cent, located in the CBD) and another 544,604 sq m expected to be added this year.

Indonesia’s property sector therefore clearly has room to grow: The issue is one of long-term sustainability.

As the country becomes more prosperous, more Indonesians — especially those living in the rural areas or in the provinces outside Java — will want better and bigger housing. They will want to move to the cities where there are better paying jobs, quality of life and educational facilities.

The challenge is to ensure that property — particularly residential units — remain affordable for these groups, as well as for lower- and middle-income urban dwellers. Imagine the disappointment, perhaps even anger, that they will feel if they are priced out of the cities. This is not far-fetched.

Housing is a basic need. Indonesia’s growing economy isn’t going to do any of its most vulnerable and disadvantaged people any good if they are excluded from this.

ABOUT THE AUTHOR:

Karim Raslan is a columnist who divides his time between Indonesia and Malaysia.