Indonesia's property market pauses
Last Updated: August 03, 2015
And when adjusted for inflation, property prices in the country actually fell by 0.26% during this past year.
Nominal property price figures can be particularly misleading in Indonesia, because inflation has been high, and remains high. Residential property has been attractive to rich Indonesians and others partly as a protection against inflation.
All Indonesia’s major cities saw nominal property price rises. Manado led the price hikes with house prices rising by 21.90% (14.42% inflation-adjusted) during the year to Q1 2015. It was followed by Makassar (17.21%), Balikpapan (12.58%), Bandung (10.61%), Surabaya (8.80%), Batam (8.37%), Banjarmasin (8.35%), Semarang (8.30%), and Palembang (6.99%).
Some cities registered nominal price rises so small that in fact they were actually declines in value, in real terms.
Jakarta had an after-inflation price drop of around 1.78% y-o-y. Jakarta is classified by Bank Indonesia under Jabodebek-Banten, which includes Jakarta´s component cities (acronym: Jakarta, Bogor, Depok and Bekasi).
Other cities with real price declines included Medan (3.86%), Denpasar (3.13%), Pontianak (2.65%), Padang (2.52%), Yogyakarta (2.06%), and Bandar Lampung (0.67%).
Bank Indonesia’s survey also revealed that the recent surge in residential property sales somewhat decelerated in Q1 2015. After robust growth of 40.07% q-o-q in Q4 2014, property sales growth slowed to 26.62% q-o-q for all property types, with medium-sized houses being the most affected.
This is mostly due to stricter Loan-to-Value regulations, imposed to curb the rise of property prices. This has been effective - apartment price rises slowed in 2014, compared to the strong surge from 2012 to 2013.
Demand is likely to continue slowing in coming quarters, predicts Colliers International.
What motivates people in Indonesia to buy property? "Rich [local] investors care mostly for capital appreciation although they also buy apartments to get rental income," says Hasan Pamudji, head of research at Knight Frank, Indonesia. "Yield for high-end apartments can command between 8% and 11%."
But there are more mundane motives, adds Pamudji. "Typical investors in high-end residential in Jakarta comprise of rich Indonesians with some foreigners married to Indonesians. Because of traffic jams, those rich Indonesians have second homes or apartments near their workplaces and they go back to primary houses or apartments in the suburbs.
"There are a growing number of rich Indonesians who are young couples with overseas education who live in high-end apartments, as they are accustomed to living in vertical housing.
"Expatriates tend to rent houses in Kemang, Pondok Indah, Menteng, Kuningan etc where the area has more greenery, international schools, hospitals and entertainment. They also like to rent in high-end apartments or serviced apartments in the CBD and in the south such as Kemang, Pondok Indah, Pejaten."
Prices of strata title apartments in Jakarta range from US$ 3,283 per square metre (sq. m.) in Jakarta CBD, US$ 2,433 in South Jakarta, and US$ 1,583 in the capital’s non-prime areas, according to Colliers International.
About 3,255 units were completed in Jakarta in Q1 2014, including Belmont Residence (350 units), The Royal Springhill (192 units), Titanium Square (725 units), Northern Ancol Residence (800 units), La Venue - South Tower (341 units), Botanica Apartment (626 units), and Woodland Park (221 units).
Around 29,451 units are expected in total this year.
Jakarta's rental yields are attractive
Higher end apartments in Jakarta continue to enjoy a boom, with demand high. Prices rose rapidly until around a year ago, and they are now priced at around US$ 2,700 to US$3,000 per square metre (sq. m.). Rental yields have therefore fallen significantly to around 7.6% to 8.8% - though they have risen over the past year - and are down from around 10% to 13% three years ago.
The disadvantage of buying in Jakarta, for foreigners, is complex legalities and high transaction costs. However, changes in the law are in process which should make things much easier.
Villas on Bali are attractively priced at around US$1,006 to US$2,000 per sq. m.. On Bali, lower rental yields can be earned, at from 3.7% to 5.3%.
Round trip transaction costs are high in Indonesia. See our Property transaction costs analysis in Indonesia and Property transaction costs in Indonesia, compared to the rest of Asia.
Rental income tax is high in Indonesia
Rental Income: Nonresident individuals' rental income is subject to withholding tax at 20%, which is applied to the gross income. Rents are also subject to Value Added Tax (VAT) at 10%.
Capital Gains: Gains derived by nonresident individuals from selling real property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance tax.
Residents: Residents are taxed on their worldwide income at progressive rates, from 5% to 30%.
Buying costs are very high in Indonesia
The total roundtrip cost of buying and selling a property is between 11.75% and 17.75%.
The buyer pays for the 5% transfer tax, legal fees, and registration fees. The seller pays for the 5% land and building transfer duty (which is different from the transfer tax) and 5% agent’s fee.
Tenancy laws in Indonesia are generally neutral
Indonesian legal institutions are neutral between landlord and tenants.
Rent: Rents are freely negotiable. They are typically paid in advance for the duration of the lease agreement. However tenants are often able to negotiate smaller advance payments, or monthly payments.
Tenant Security: Lease periods typically vary from 1 to 3 years. The terms depend upon the bargaining skills of the tenant and the landlord. Tenants typically have an option to renew.
Economic deceleration in 2015Indonesia’s economy is very domestically-driven. It tends to be insulated from global economic trends. GDP growth is now slowing. In the first quarter of 2015 GDP grew at its slowest rate since 2009, up 4.71% from last year.
A lot of sectors decelerated during the first quarter, according to Statistics Indonesia. The most notable was the mining and quarrying sector, whose output actually shrank by 2.32% during the year to Q1 2015.
Disappointing growth in Q1 2015 has made investors concerned about the rest of the year. Also, the weakening economies of Indonesia’s two key trading partners, China and Japan, will negatively impact Indonesia’s economy, according to IMF Deputy Director for the Asia and Pacific Region Kalpana Kochhar.
In recent years, Indonesia enjoyed robust growth. It was almost wholly unaffected by the global economic crisis, and the economy grew by 5.6% in 2013, after real GDP growth rates of 6% in 2012, 6.2% in 2011, 6.4% in 2010 and 4.7% in 2009, despite the global economic slowdown.
In February 2015, unemployment rose slightly to 5.81%. One of the reasons why it is hard to cut Indonesia’s unemployment rate, aside from the slowing economic growth, is the tendency of investment in the country to be more capital-intensive than labour-intensive, according to Economic Minister Sofyan Djalil. The rapid rise of minimum wages is also a reason why investors are reluctant to engage in labour-intensive investments.
Inflation was 7.26% in June 2015, having surged to 8.36% in December 2014. While this seems high, inflation is actually now less high than in the recent past, suggesting that the recent stepping-up in the key interest rate has worked, and that Indonesia’s growing economy is becoming more flexible and productive as it grows. Since recent inflationary pressures are not as intense as expected, the central bank decided to maintain the benchmark rate at 7.5% in July 2015. The annual inflation rate is projected to be 6.8% in 2015, according to IMF, a little higher than the 5.4% average that prevailed from 2009 to 2014.