From The Jakarta Post

Low cost housing for the masses: how close are we?

Andhika Suryadharma, Research Analyst

The need for providing low cost housing in the cities has been acknowledged, but many stumbling blocks still lie ahead.

As land becomes scarcer, residential areas in the city center are a privilege reserved for the upper income classes of society. Meanwhile the masses continue to be further sidelined to the outskirts. This ongoing trend has created major problems for big cities like Jakarta, in the form of daily traffic congestion.

Land prices on the outskirts of Jakarta are continuing to rise. Take the Depok area, for example, where a high end real estate developer in has been offering land for more than Rp 2 million per square meter, which is far too expensive for most people in Jakarta, a city with population density of over 11,000 people per square kilometer and a regional income per capita of Rp 18 million (as of 2001).

The good thing is that this housing problem has been acknowledged. The government is planning to provide approximately 1.3 million housing units all over Indonesia by 2009, of which one million units are currently still needed. Sixty percent of this will be parsimonious flats spread across ten big cities in Indonesia -- Jakarta, Bandung, Surabaya, Semarang, Yogyakarta, Palembang, Medan, Batam, Banjarmasin and Makassar.

But in spite of this, many hurdles still lie ahead, involving aspects such as financing, incentives for developers as well as supervision.

The total funding needed for this whole project is estimated at around Rp 50 trillion (US$5.4 billion).

Uncertainties still prevail in this regard. A portion may be borrowed from the Islamic Development Bank, while local banks such as Bank Tabungan Negara (which specializes in mortgage loans) may also participate. The government may also have to directly take some of the burden. All in all, there is yet to be a very clear picture on who will shoulder how much.

The private sector obviously has to be involved, but in order to do this the regulators obviously must provide incentives. Actually a few incentives have already been considered by the government; for example an exemption from the 10 percent value added tax (VAT) to reduce costs, as well as subsidized rates for loans and the exemption of building construction license fees.

But the developers want to go further, requesting a 50 percent reduction of land and building taxes if the land on which the flats are built on belongs to the government.

So far those incentives are still under discussion by the regulating body. Out of all, the VAT exemption scheme would most likely be approved. However the REI, an association of Indonesian real estate developers, says that this single incentive alone will not be sufficient to attract developers.

Furthermore, as the flats are aimed at the middle to lower income brackets (Rp 2.5 - Rp 6 million per month), unit prices are integral to the success of the housing program. Prices are estimated at around Rp 150 million for a 30 to 36 square meter unit. Assuming a 15 percent interest rate and a 15 year period on mortgages, this would translate to monthly installments in the region of Rp 1.7 million.

This amount seems significant for the target market, especially for households with incomes below Rp 5 million (since the installment would represent over one third of their incomes). Thus to cater for households with incomes below that figure, subsidies may be needed. However, this may lead to further problems of people underreporting their incomes!

So the road ahead for the government's housing plan is still subject to many challenges. Much still needs to be further improved in terms of financing, incentives and supervision. At this juncture, how quick the program would proceed is not yet clear, what's more obvious is the necessity.

Disclaimer: This article should not be taken as any recommendation by PT Bahana Securities to enter into any investment agreement.
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