Housing and apartments pace property growth

Andhika Suryadharma, Research analyst

Despite modest growth in office and industrial property sales, the residential-property sector has shown substantial improvement.

Although economic growth has been improving, data from Procon Indah shows quite a disappointing picture for office and industrial-estate rentals.

The take-up rate for industrial estates experienced a decrease of 65 percent compared to last year, while office rentals only showed 27 percent growth. Why have these subsectors been performing so badly?

The outlook for industrial property depends greatly on infrastructure development. The production process and the flow of goods are useless if there is not enough infrastructure, such as adequate water-treatment facilities, power plants, and airports and seaports.

The investment climate also plays a crucial role in the demand for industrial property. Currently, the country's infrastructure is still far from adequate and the investment climate has not yet improved sufficiently to draw an influx of foreign direct investment.

In this regard, it is clear why there has not been much investment in these subsectors. Unless infrastructure and other support facilities are significantly improved, growth in industrial property will remain modest.

As for office rentals, a lot depends on the growth of one specific industry. So far, Jakarta office rentals have been boosted by the financial-services industry. Rental prices in the Jakarta office market are among the cheapest, with an average of US$8.75 per square meter a month in the CBD area, compared to Southeast Asian countries such as Malaysia (US$12 per square meter per month) and Singapore (US$68 per square meter per month).

To spur growth in these subsectors, both infrastructure and facilities for industry need to be improved. Incentives for investors should be increased in order to encourage them to invest more. Economic growth also needs to become more diversified.

However, the outlook for residential property is very different. Rental apartments and condominiums in Jakarta have shown high sales growth. The take-up rate for apartment rentals reached 2,000 units in the first quarter of this year, compared to only 73 units in the first quarter of last year. Condominiums also scored a take-up rate of 4,865 units, almost quadruple last year's figure.

It is true that residential property still faces many challenges. One thing we should be aware of is that there are many investors which are shifting their property investments to Singapore. The freehold period there can be up to 99 years compared to Indonesia, which is currently in the process of extending freeholds to between 50 and 70 years from the current 25.

Transaction costs are also much higher in Indonesia. They can reach as high as 15 percent of the property value here, whereas Malaysia and Thailand have figures below 6 percent.

Furthermore, uncertainty in the realm of land ownership is also staggering here.

Only a while ago back we witnessed the row over land ownership in Meruya, West Jakarta, whereby residents were told to relocate despite having official titles to their plots of land.

Still, the residential-property sector is currently experiencing something of a boom after the government once again lowered its benchmark interest rate to 8.75 percent, making it more attractive for potential buyers to seek mortgages.

Rental rates for apartments, condominiums and landed housing could still grow as the mortgages offered by the banks become more attractive. Banks are offering loan rates of between 10 and 15 percent as they compete to gain market share. Some banks are even offering 9.75 percent fixed-rate mortgages for three years, and a floating rate capped at 11 percent for the subsequent two years.

If these conditions persist into the future, the landed and non-landed residential property sectors will continue to grow stronger.
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