Back to the city in property sector? Not so fast!

Andhika Suryadharma, Research Analyst

At the Jakarta Property Expo last week, a number of new apartment developments were offered as part of the so-called "back to the city" concept -- the modern way of living. The concept was introduced by a property developer that has been aggressive in offering high-rise options for living in the city.

The "back to the city" concept encapsulates a desire to shift from suburban living to urban living. At the present time, millions of people working in Jakarta live in the suburbs because of sky-rocketing property prices in the city.

For people living out of town in areas like Tangerang, Bogor, Bekasi or Depok, commuting can be very time-consuming. Many of them spend 3-4 hours a day traveling to and from work.

With the roads becoming ever more jammed, and fuel prices and tolls rising, the cost of commuting is soaring. Major property developers view this as an opportunity. As a result, apartments for sale or lease offer an alternative way of life for commuters.

They are practical, especially if the apartment is located in close proximity to centers of economic activity.

So, will "back to the city" become the new way of life?

Let's crunch some numbers. A middle-class person who rents a 2-bedroom house in Bekasi for Rp 600,000 per month must travel some forty kilometers back and forth everyday. If he or she needs one liter of gasoline for every eight kilometers, he ends up spending some Rp 360,000 on fuel costs per month (assuming a five-day working week).

The commuter must also pay expressway tolls, which after the recent hike could amount to Rp 320,000 monthly.

This is on top of the higher mileage on his car, which could result in an average of Rp 100,000 per month in additional spending (this is based on a perusal of after-sales service quotations for a mid-size passenger sedan).

In total, this person will have to shoulder nearly Rp 800,000 per month in traveling costs.

Now, let us assume there's a 60-square-meter apartment (two-bedroom) for rent. Out guinea pig would be able to avoid all the transportation costs he would otherwise have to bear if he lived in Bekasi.

However, the rental will be substantially higher. Given an average effective rental rate of Rp 129,900 per square meter per month (including service & maintenance charges) -- according to Bank Indonesia's quarterly property survey -- the monthly rental bill could easily exceed Rp 7,000,000 per month!

Of course, there are apartments that cost only four or five million, but it's still a lot more expensive than commuting.

So will "back to the city" become the new norm? Aside from the tangible costs and benefits, much also depends on a range of intangible costs, such as stress and wasted time. However, from a material standpoint alone, it seems unlikely that the recent increase in tolls and fuel costs will result in a rapid influx into the city.

Bank Indonesia's latest survey suggests that the occupancy rate for leased apartments is still below 75 percent. But it is difficult for effective rental rates to adjust downward as energy costs keep rising, and landlords are reluctant to offer lower rental rates.

Given that the prices of new apartments are rising by the day, landlords of existing properties believe they are already gaining from higher apartment prices on the aftermarket. In reality, however, that may not necessarily be the case!

To make "back to the city" really succeed, the costs of living in an apartment must be lowered.

The government's plan to subsidized housing projects is a start, but there must be more new initiatives. For example, the government needs to apply subsidized electricity tariffs to apartments as is the case for landed residences.

For many Indonesians, price remains a key consideration.

According to figures from the statistics agency, the average per capita income in Jakarta was only slightly over Rp 4 million per month in 2005 (we should expect the latest figure to have increased only modestly).

So, paying Rp 7,000,000 on rent alone would seem very unrealistic for the average Jakartan.
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