Indonesia's property market continues to disappoint

Indonesian residential property prices rose by 4.5% during the year to end-Q3 2011, according to Bank Indonesia’s Residential Property Survey. Higher prices of construction materials (up by 7% to 12 %), higher workers’ wages and a higher permittance were some of the reasons for the price rise witnessed in new construction.

The relatively poor price performance of residential property in Indonesia has been something of a puzzle.  There is tremendous pent-up housing demand. Indonesia has the world’s fourth largest population of 245 million people. Despite strong economic growth and high levels of investment, some of the major factors that have hampered the growth of Indonesia’s housing market are:

• High mortgage interest rates
• Foreign ownership restrictions
• High costs of building materials
• High tax rates
• Red tape in government

Rapid urbanization has led to high urban densities, especially in Jabodebek-Banten (Jabotabek) which led the property market among the regions. Jabotabek or greater Jakarta is the urban development around Jakarta with more than 28 million residents, and its population continues to grow due to migration from all Indonesia. Here property prices were up 5.74% over the year to Q1 2011.  However, in inflation-adjusted terms, prices were down by 1% over the same period.

Greater Jakarta was followed by Makassar with price increases of  5.32%. Makassar’s economy is driven by the fishing industry; it used to be a major trading port. About 8 % of Indonesia’s total population lives in this historic port city. In the near future, property prices in Jabotabek and Makkaser are expected to outpace the rest of the archipelago of Indonesia, barring Bali.

To curb inflationary pressures, the central bank raised the key rate by 25 basis points to 6.75% in February 2011.  But generally, the direction of interest rates has been down since December 2005, when Bank Indonesia’s policy interest rate stood at 12.75%. Inflation eased to 5.54% in June 2011 from 6.65% in the previous quarter, and Bank Indonesia expects inflation to be under 5% going into 2012.

The Rupiah has held firm during the 2011 ‘crisis of the West’.  Indonesia’s economy grew 6.1% in 2010, after 4.6% growth in 2009, despite the global crisis. With high domestic consumption and investment and healthy export revenues, the Indonesian government is confident that the economy will grow by 6.6% in 2011.

Foreign ownership is difficult in Indonesia.  Land titles (hak milik) can only be held by Indonesian citizens. Foreign land ownership is against the constitution.

For apartments, the 1996 regulation (No. 41/1996) states that foreigners who reside in Indonesia, or visit the country regularly for business purposes, can purchase a home, apartment or condominium as long as it isn't a part of a government-subsidized housing development.

However, foreigners can only hold land-use (hak pakai) deeds, and most developments hold right-to-build deeds (hak guna bagunan). It is not possible for someone to have a land-use deed for a sub-unit of a right-to-build deed. The length of these titles varies as well. Therein lie some of the difficulties and unclear ownership issues.

So foreigners can effectively only lease, and not truly own an apartment for up to 70 years, but not free standing houses. Within this 70-year period, foreigners must also periodically renew their right to use. The initial hak pakai period is for 25 years, then renewed for an additional 25 years and finally 20 years.

Additionally, the threshold or minimum property sales price that a foreigner can purchase is 1.5 billion Indonesian Rupiah, which is around USD168,388.  This minimum "purchase" price is quite high in the Indonesian context.

Foreigners may purchase a house on freehold land by written consent from the landowner, for 25 years and extendable to a further 25 years. A mooted change in the law on foreign property ownership would extend the leasehold period to a full 70 years as opposed to 25 years followed by subsequent renewals, was expected at the end of 2010, but is yet to be passed in the House of Representatives, and has encountered opposition, particularly in Bali.

While the passing of this law will be a welcome change, investors will still find it coming up short when compared with the regulations in other countries in the region such as Malaysia and Singapore.

this is  right propery  indexs  Source: The Heritage Foundation and the Wall Street Journal

Property Rights Index - indonesia Compared to Continent

Footnote   |   Export

Sort: Alphabetically  | Ascending Rank  |  Descending Rank

Hong Kong	90
Singapore	90
Japan	80
South Korea	70
Taiwan	70
Bhutan	60
Macau	60
India	50
Malaysia	50
Thailand	45
Georgia	40
Sri Lanka	40
Kazakhstan	35
Pakistan	30
Philippines	30
Nepal	30
Indonesia	30
Cambodia	30
Mongolia	30
Armenia	30
Tajikistan	25
Kyrgyztan	25
Maldives	25
Timor-Leste	20
Bangladesh	20
Azerbaijan	20
China	20
Laos	20
Vietnam	15
Uzbekistan	15
Turkmenistan	10
North Korea	5

indonesia: Property rights index
A subcomponent of the Index of Economic Freedom, the property rights index measures the degree to which a countrys laws protect private property rights, and the degree to which its government enforces those laws.
Higher scores are more desirable, i.e. property rights are better protected. Scores are from 0 to 100.
The index also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts.
The Global Property Guide considers protection of property rights as a significant factor affecting the desirability of a residential real estate investment.