Indonesia is set to become a new economic powerhouse in Southeast Asia, luring more investors from overseas.
Increasingly more foreign buyers, especially from China, have spotted investment opportunities in Indonesia’s real estate market. I believe that Indonesia will become increasingly interesting once we see more regulatory changes to foreign ownership of property.
Having said that, you must understand how healthy the market is before making any investments. In this article, we explain how Indonesia’s property market has performed the past years and what my predictions are for 2019.
Indonesia’s Property Market in Previous Years
Indonesia’s property market has slowed down in the past years after experiencing a sharp growth in 2012. The Federal Reserve Bank of St. Louis has an illustrative graph showing the price changes.
As shown, the average price increase has slipped from 14% in 2013, down to around 3% in 2017 and 2018. In 2019, the average price increase was even lower and around 2.5% in the second quarter.
There are four main reasons for this decline:
- Political uncertainty
- Lower occupancy rates
- Introduction of a new luxury property tax
- A drop in GDP per capita between 2012 and 2015
The GDP per capita was USD 3,680 in 2012 and decreased to USD 3,330 by 2015. The slowing economy was a main contributor, which resulted in a reduced purchasing power among the middle- and upper-middle class.
The GDP per capita started to increase again after 2015 and was around USD 3,487 in 2017.
Indonesia’s Property Market in 2018 and 2019
According to a report by DBS Bank published in the first half of 2018, we saw a significant year-on-year increase in the presale market (37%) compared to the first half of 2017.
To summarize, the report for the first half of 2018 presented the following interesting results:
- The demand in 2018 improved across all residential segments
- We saw a slight improvement in rental yields, as well as price increases
- According to Colliers, the average rental increase for apartments in Jakarta in 2018 was 3% to 4%
The average asking price for apartments increased by 2.5% in the first half of 2018, compared to the first half of 2017, which is comparably low to other emerging markets.
The market remained weak in 2019 and property prices fell by 1.63 in the fourteen biggest cities during the first and second quarters, according to GlobalPropertyGuide.com.
Having said that, many analysts are positive for the coming years as Joko Widodo was re-elected as president, which many believe will have a positive impact on Indonesia’s real estate market.
Bali’s Property Market
Most investors turn their eyes to Jakarta when talking about investment opportunities. But I also want to give some notes about the property market in Bali.
Bali has seen great growth in property prices in the past decade, mainly thanks to increasingly more tourists and foreign property buyers. Bali’s property market slowed down in 2017, but overall, the growth remained above the national average level.
More than 30,000 expats live here, with most people investing in beach-side luxury villas. Prices are higher compared to other places in Indonesia as the market mostly caters to the high-end segment, where people tend to focus on luxury villas.
The prices of luxury villas have almost doubled in the past five to six years. In some cases, prices even tripled, based on location and the distance to popular beaches.
Bali’s property market is expected to perform well in the future, thanks to the increased threshold before the luxury property tax of 20% kicks in (from around USD 1.4 million to USD 2.1 billion) and future economic growth.
What can I expect from Indonesia’s property market in 2020?
Indonesia’s real estate market has been weak in recent years and several factors will have a big impact on the market in 2020.
Indonesia’s Economic Growth
In the last couple of years, Indonesia’s economy has grown at a rate of around 4.9% to 5.2%, which is okay. The economic outlook looks a bit worse for 2020 as the growth will decrease to 4.7% according to Moody’s, below the psychological ceiling at 5%.
The committee, on the other hand, predicts that the economy will grow by 5.3%, thanks to increased spending. The budget for 2020 was around 8.5% bigger than the originally proposes.
Having said that, the long-term outlook looks positive for Indonesia.
In the last few years, several international investors, like Mitsubishi UFJ Financial Group, have invested in the financial sector and other sectors, resulting in a higher consumption and more investment by the growing middle-class.
A report by the World Bank shows that the middle class of 52 million people (which continues to increase) has a big impact on the economy. With increased disposable incomes, the younger urbanized generation will turn the housing market around, as the demand for housing increases.
Below you can find other notable reasons speaking for an increased demand of real estate:
- The interest rate is currently only around 5%
- The LTV (Loan to Value) will be further increased in 2020
- Inflation is low, at around 3%
- The Indonesia Rupiah remains stable, ensuring good returns from property investments
- Developers provide more favorable payment terms, like 60 months payment plans, instead of previous payment plans of 36 months or 42 months
Mega Infrastructure Projects Planned
Indonesia invests heavily in big infrastructure projects in hubs like Jakarta.
Some of the new projects in Jakarta include the new Jakarta MRT and LRT projects, Jakarta to Bandung High-Speed Rail, the Ring Roads, and more.
The new MRT and LRT lines will revamp the current real estate landscape. People will be able to buy apartments and houses further away from the central areas, where many expats and local professionals are forced to live, due to traffic congestion.
Indonesia Is Asia’s Cheapest Country to Buy Property
Indonesia has left its bad years behind and offers the cheapest real estate in Asia.
The price per square meter in Jakarta’s business district is 20% lower than Hanoi’s and 55% less than that of Bangkok. The price difference is significantly higher if you compare with Singapore and Hong Kong, of course.
Increased Inflow of Chinese Property Investors
Chinese buyers are famously known for snapping up property in places like Bangkok, Ho Chi Minh City, Phnom Penh, and many other places around Asia. They’ve started to open their eyes for Indonesia as well.
According to Colliers International, the Chinese invested USD 169 million in Indonesia’s property market in 2017. This makes Indonesia the third most popular destination for Chinese investors in Southeast Asia.
Singapore received the most investment, with USD 2.1 billion, while Malaysia snapped the second place with USD 246 million.
Foreign Property Ownership Regulations
Indonesia is known for having some of the least foreign-friendly ownership regulations in Southeast Asia.
In 2016, the government went so far and issued an Emergency Law (referred to as Purppu). This gave the president instant authority to change the property ownership regulations, which will be needed for Indonesia to compete with its neighboring countries in the long run.
The new law moved Indonesia a tiny step forward, but many locals and foreigners still believe that more changes are needed.
Below you can find regulations included in the new law:
- You need to buy apartments with a million value of IDR 5 billion in Jakarta (around USD 328,000), according to the new investment requirements
- If you plan to buy a house, the land size can be maximum 2000 square meters
- You can only buy one property
- You need to keep your stay-permit when you own the property
With the new law in place, you can buy second-hand units (which wasn’t the case before), and you can mortgage your property in a bank or local financial institution.
The Indonesian housing market has slowed down since 2014 and will continue to be in a recovery mode in 2020. With a new government in place, we will see an increased budget spending of 8.5% and economic stimulus.
Even if a parliament committee predicts that the economic growth will increase to 5.3%, Moody’s predict that the economic growth will decrease to 4.7%, which would have a negative impact on the real estate market.
Indonesia might have one of the cheapest real estate markets in Asia, but you can’t make quick profits off the Indonesian property market yet and prices still growing slowly.
However, with low property prices, an increasing middle class, political stability, and the upcoming completion of mega infrastructure projects, Indonesia has the potential of becoming a good option for both Chinese and other foreign investors.
I hope that you found this article and recommend you to read my separate article that lists interesting new property projects in Jakarta.