Indonesian Property Developers Cutting Back on Concerns of Policy and Economic Uncertainty

Property Developers Cutting Back on Concerns of Policy and Economic Uncertainty

Stricter mortgage rules and an election might act as brakes on the housing market

By Francezka Nangoy & Ely Rahmawati on 2:12 pm December 26, 2013.
Property developers often take their projects to shopping malls, like this one in Semarang, Central Java, to attract potential customers and mock-up models prove popular in getting their ideas across. However, many firms are predicting slower economic growth in the year ahead. (JG Photo/Dhana Kencana)

The government’s tougher mortgage policy and uncertainty on the direction the economy is moving may prompt property developers to hold off expansion next year, industry executives say.Property developer Alam Sutera Realty trimmed its capital expenditure next year to around Rp 1.2 trillion to Rp 1.5 trillion ($98 million to $123 million) from around Rp 3 trillion this year.

“We reduced our capex by around 50 to 60 percent because we’re not planning to make any big, corporate decisions next year,” Hendra Kurniawan, Alam Sutera’s corporate secretary, told reporters in Serpong, Banten, on Monday.

Hendra said the cut was a cautionary move as the election year is coming. “It’s better if we wait for a more conducive environment after the elections,” he said.

An executive at a property consultancy company had a different view.

Arief Rahardjo, head of research at property consultancy Cushman & Wakefield, told the Jakarta Globe that in the elections in 2009 and 2004 had a “temporary and insubstantial” impact on the property market.

However, high interest rates and slowing economic growth may slow the property sector next year.

“We will see an increasingly ‘wait-and-see’ attitude from some property developers, investors and house buyers,” Arief said.

Bank Indonesia increased its key interest rate by 175 basis points to 7.5 percent since June to control inflation and a weakening rupiah caused by concerns the US Federal Reserve will curb its stimulus-spending program and of a ballooning current-account deficit. The central bank has set a 40 percent minimum down payment for bank loans used to purchase second homes and 50 percent for a third home.

The regulation follows the minimum 30 percent minimum down payment regulation set last year that had little impact on a market that has been growing steadily in the last few years.

Arief said demand growth is projected at only 3.7 percent, some 2 percentage points lower than this year.

“These issues are expected to hold back the significant land price growth of above 25 percent year-on-year, which has been seen over the four years. For 2014, residential land prices are forecast to grow more modestly by around 18 percent,” he said.

Bank Indonesia is also restricting mortgage distribution to houses that are still in the early stages of construction. This means developers must seek other sources of financing as previously customers could get the bulk of financing for buying units from banks, even though the construction of the unit has not been completed.

“It will be a tougher year for developers and will impact supply growth,” Arief said, adding the supply of houses in 2014 was projected to increase at a slower rate of 3 percent to 327,404 units. He did not specify the growth estimated for 2013.

On the other hand, developers are maintaining their optimism.

“Next year would be alright, although not as good as in the previous two or three years. In the past few years, demand and price increases have been outstanding,” said Indra Wijaya, vice president director of Agung Podomoro Land, one of the largest property developers in Indonesia.

He expects the property industry to grow less than 10 percent next year, but did not share any estimation on the company’s own growth target.

In the first nine months of 2014, Agung Podomoro’s net income stood at Rp 597.5 billion, compared with its Rp 682.7 billion net income in the same period a year earlier. Revenue fell 1 percent to Rp 3.48 trillion.

With slower sales, many developers, including Agung Podomoro, are trying to offset slowing sales by maintaining recurring income from properties like office buildings, hotels, and shopping malls.