Untapped opportunities in Indonesia’s real estate market
Average land prices in Indonesia have been growing across the nation. Prices continue to be highest in the capital city, Jakarta, which is the economic center of Indonesia. The average land price in industrial areas in Jakarta reached over 5.7 million Indonesian rupiah per square meter, while the landed residential home prices were almost three times higher, reaching more than 15 million Indonesian rupiah per square meter. In August 2019, President Joko Widodo announced that Indonesia will move its capital city to East Kalimantan in the next few years. Since then, the property market in Borneo Island, where East Kalimantan is located, has become more attractive than before.Indonesia’s largest real estate companies, such as PT Lippo Karawaci, PT Bumi Serpong Damai, and PT Ciputra Development have seen rising sales in the residential houses and apartments sectors over the past few years. This indicates that the demand for these properties in Indonesia is still high, even during the recent COVID-19 pandemic crisis. However, its property supplies are still relatively low. There is still much room for further developments to fulfill the country’s demand for residential and commercial real estate.
Indonesia’s efforts and challenges to expand the sector
To meet the rising property demand and lower its housing backlog, the Indonesian government has introduced several measures to expand the sector, such as decreasing key interest rates, providing housing financing liquidity facility, providing tax incentives to Indonesian real estate investment trusts, and increasing the loan-to-value ratios. The government also launched the "One Million Houses" program (Program Sejuta Rumah), aiming to build one million houses each year, and increased the price threshold for luxury property taxes to encourage home buying in Indonesia.Indonesia has restrictions on foreign real estate property ownership, and only citizens can own property and land in the country. However, purchasing real estate is possible through a strata title agreement. Owning an Indonesian legal entity such as limited liability companies allows foreigners to have the right to build and the right to use the properties for up to 60 years.
Despite the ongoing efforts to improve the sector, persisting challenges remain. Indonesia’s rising housing backlog in recent years primarily affected low-income households. Additionally, a substantial portion of Indonesians are engaged in informal employment, making it more difficult to secure bank loans for purchasing a house. On the other hand, the most residential property developers in Indonesia rely on internal funds for financing their projects. Given the rising land prices, this can place small developers at a disadvantage, consequently limiting the housing supply across the country.
