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Indonesia is set to become a new economic powerhouse in Southeast Asia, luring investors from overseas.
Increasingly more foreign buyers, especially from China, have spotted investment opportunities in Indonesia’s real estate market. I personally believe that Indonesia will become more and more interesting, once we see regulatory changes to foreign ownership of property.
If you plan to buy property in Indonesia, it’s important that you understand how healthy the market is, where we currently are in the market cycle.
In this article, I explain how Indonesia’s property market has performed the past years and what my predictions are for 2019.
Indonesia’s property market in 2017 & 2018: A throwback
Indonesia’s property market has slowed down the past years, after experiencing a sharp growth from the end of 2012 and throughout 2013. The Federal Reserve Bank of St. Louis has an illustrative graph showing the price changes, and the decline starting in 2013.
As shown, the average price increase has slipped from 14% in 2013, down to around 3% in 2017 and 2018.
There are four main reasons for this decline:
- Political uncertainty
- Lower occupancy rates
- Introduction of a new luxury property tax
- 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.
Positive signs in Indonesia’s property market
There are promising signs that can result in a stronger market growth in the coming years, despite the numbers shown above. For example, the economic growth has been consistent and above 5% over the past five years.
In addition, Indonesia is going through a rapid urbanization, resulting in quickly developing hubs like Jakarta, adding to the demand of real estate.
According to a report by DBS Bank published in the first half of 2018, we see a significant year-on-year increase in the pre-sale market (37%) compared to the first half of 2017.
To summarize, the report for the first half of 2018 presents the following interesting results:
a. The demand in 2018 improved across all residential segments
b. There’s a slight improvement in rental yields, as well as in price increases
c. The average rental increase for apartments in Jakarta in 2018 is 3% – 4%, and will remain the same until 2020
d. The average asking price for apartments increased by 2.5% in the first half of 2018, compared to the first half of 2017
Most of the market reports for 2018 show that the market enters a recovery phase, coming out of a long downward trend.
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 a great growth in property prices 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 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 do even better in the future, thanks to a stronger economic growth.
What can I expect from Indonesia’s property market in 2019?
The market will most likely improve in 2019 and in the coming years.
According to Colliers, the expected price increase for apartments in Jakarta will remain at 4.5% to 5.5%. Price increases in Surabaya will remain at 5% to 6%.
I’ve presented a number of examples that speaks for a better economic growth in Indonesia in the coming years. Below you can find the key reasons why most real estate experts believe that Indonesia’s property market will improve.
Indonesia has a steady economic growth
In the last couple of years, Indonesia’s economy has grown steadily. As mentioned, there was a big decline in the GDP per capita from 2012 to 2015, reducing the purchasing power among locals.
However, between 2015 – 2017 the GDP per capita increased from USD 3,330 to USD 3,840. Significantly more young and middle-class urban Indonesians will now afford to buy homes.
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.
Other notable reasons speaking for an increased demand of real estate:
a. The interest rate is currently only around 5%
b. The LTV (Loan to Value) has increased significantly. Banks now offer 85% of leverage to first time buyers, allowing people to borrow more money
c. Many investors have been waiting on the sidelines since 2014, due to the downward market trend. Now, they feel more confident
d. The inflation is low, at around 4.5%
e. The Indonesia Rupiah remains stable, ensuring good returns from property investments
f. 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, the 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 congestions.
Indonesia’s property prices are at the bottom
Prices have hit the bottom in the market cycle, according to many reports, and signs of recovery started in the first half of 2018. From this point, we will most likely see an upward trend, it’s unlikely that property prices will decrease further.
According to Savills Indonesia, property prices have decreased up to 25% since 2014 in some areas of Indonesia, while price increases have remained flat in other areas.
Indonesia is the cheapest place to buy property in Asia
Indonesia has left its bad years behind and offers the cheapest real estate in Asia.
The price per square meter in Jakarta’s business districts 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.
Indonesia’s property ownership regulations are still not favorable to foreigners
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:
a. 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
b. If you plan to buy a house, the land size can be maximum 2000 square meters
c. You can buy one property only
d. 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, but is expected to recover from 2019. Several factors indicate a market recovery in 2019 and beyond. Still, price increases and the market growth will most likely remain moderate in the coming time.
What does this mean?
You can’t make quick profits of the Indonesian property market yet. Even if real estate is cheaper compared to other places in Southeast Asia, prices still grow slowly. You need to wait for higher returns as the market is currently entering a recovery mode.
Many investors also wait for the results of the general elections in 2019.
With low prices, political stability, and the upcoming completion of mega infrastructure projects in Jakarta and other urban centers, the country has the potentials of becoming a good option for both Chinese and other foreign investors.
However, the main driver of the property market growth will still be dedicated to Indonesia’s quickly growing middle class.
I hope that you found this article and recommend you to read my separate article that lists interesting new property projects in Jakarta.
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