Indonesia’s property market is now slowing, despite robust economic growth, helped by market-cooling measures imposed by the authorities. True, Indonesia’s residential property price index (14 major cities) rose by 7.88% during the year to end-Q2 2014, but this is a significant slowdown on 12.11% year-on-year price increases during the same period last year (all figures from Bank Indonesia). Look at it this way: when adjusted for inflation property prices rose during the past year by just 1.19%.
Nominal property price figures can be particularly misleading in Indonesia, because inflation has been high, and remains high. Residential property has been attractive to rich Indonesians and others partly as a protection against inflation.
All Indonesia’s major cities saw nominal property price rises. Makassar led the market with house price increases of 19.28% (11.89% inflation-adjusted) during the year to Q2 2014. It was followed by Manado (13.36% nominal), Surabaya (12.78%), Denpasar (10.16%), Bandar Lampung (9.37%), Banjarmasin (7.81%), Palembang (7.34%), Bandung (7.25%), and Jabodebek-Banten (6.87%).
Jakarta had a y-o-y price-increase after-inflation of only 0.25%.
Jakarta is classified by Bank Indonesia under Jabodebek-Banten, which includes Jakarta’s component cities (acronym: Jakarta, Bogor, Depok and Bekasi).
Many cities registered nominal price rises so small that in fact they were actually declines in value, in real terms, including Padang (4.33%), Yogyakarta (4.07%), Medan (3.99%), Semarang (2.5%), and Pontianak (1.69%). All these apparent house price rises actually amounted to declines.
The luxury market has been weakening, with a decline in expatriate arrivals and business travel because of the economic slowdown. The vacancy rate for Jakarta high-end rental apartments increased from 11.7% to 14.7% y-o-y to end-June 2014, according to Jones Lang LaSalle (JLL).
Vacancy increases pushed some landlords to discount rents, although a number of landlords of good quality apartments managed to maintain stable rents. Overall net effective rents in the luxury apartment market in Q2 2014 stood at US$ 217 per sq. m. per annum, down by 1.5% q-o-q, according to JLL. Apartment capital values softened by 0.8% q-o-q. Average high-end yields were 8.6%, again according to JLL.
There was also a decrease in sales of large houses, which in turn slowed demand more generally, caused by the stricter loan-to-value (LTV) ratio launched in September 2013.
This doesn’t exactly represent any kind of downturn, given that in the first quarter residential property sales rose by “only” 15.33% – but the point is, it really was in fact a slowdown from Q1 2014’s massive quarterly sales increase of 31.54%.
What motivates people in Indonesia to buy property? “Rich [local] investors care mostly for capital appreciation although they also buy apartments to get rental income,” says Hasan Pamudji, head of research at Knight Frank, Indonesia. “Yield for high-end apartments can command between 8% and 11%.”
But there are more mundane motives, adds Pamudji. “Typical investors in high-end residential in Jakarta comprise of rich Indonesians with some foreigners married to Indonesians. Because of traffic jams, those rich Indonesians have second homes or apartments near their workplaces and they go back to primary houses or apartments in the suburbs.