Recovery seen in Jakarta property

Last year was a subdued period for the Jakarta property market for several reasons. A major damper stemmed from the government’s decision to slash fuel subsidies in October 2005. By the start of 2006, the inflation rate had soared to 17.62 per cent, while the benchmark central bank interest rate peaked at 12.75 per cent last year.

High lending rates made it expensive for developers to use project financing, affecting project activity and completion. Buyers, particularly in the residential sector, were also deterred from taking up mortgage loans. The floating mortgage rate, for instance, was about 11-13 per cent a year ago, according to Jones Lang LaSalle’s (JLL) head of research in Indonesia, Anton Sitorus. Given the high interest rate environment, investors too, preferred to put their money in the capital markets - whether in bank deposits or the stock market - which generated better returns than the property sector.

But there are some signs for cheer this year. In line with the steady recovery in the macro economy, Jakarta’s property sector is expected to pick up as well, although it is unlikely that there will be a runaway bull market as seems to be the case in Singapore. Already, the central bank has cut interest rates to 9 per cent, and is expected to lower the rates further.

Citing this development, a UOB-Kay Hian report in January said: ‘This should stimulate demand in the property sector.’ The report also noted that non-performing loans (NPL) in property credits have been falling, from 9.2 per cent in 2001 to just 4.3 per cent last November. This compares favourably with the current 8.1 per cent of NPL in the total loans of banks. ‘Hence, banks should be more encouraged to distribute property credit in the future.’

Office sector

Among the various property sectors, the office sector appears to be the most vibrant and promising. Figures from the latest Colliers International report show that the total office supply in the central business district (CBD) stood at 3.35 million square metres at the end of last year. Outside the CBD, the cumulative supply was 1.46 million sq m, concentrated in the South Jakarta district.

With more projects due to be completed between 2007 and 2009, office supply is estimated to go up significantly - by 22 per cent within the CBD. Outside the CBD, an extra 20 per cent is expected, with 70 per cent of the new space in South Jakarta.

But despite the surge in supply, Colliers predicts the market will not be affected ‘due to resilient inquiries for quality office space’, which should continue through 2008 should the government follow through with its measures to stimulate the economy and attract more foreign investors. Also, most of the buildings under construction have already secured pre-commitment leasing with major tenants, the report adds.

Michael Broomell, managing director of the consultancy’s Indonesia office, notes that until recently, there had been little activity or development in Jakarta’s office sector owing to the Asian financial meltdown. ‘It’s just in the last couple of years that we see offices being completed. So tenants are having more choices now, more opportunities to move into better and new buildings,’ he notes.

This pent-up demand for relocation is similarly noted by JLL. In its latest market review, on Q3 2006, it notes: ‘The trend of tenant relocations is expected to resume as an impact of growing competition in the market. In general, the current trend on new office developments in Jakarta is triggered by demand for better-quality workspace and inquiries from big corporate occupiers that require big spaces for expansions or consolidations.’

For now, main drivers come from growing sectors such as oil and gas, trading, finance and telecommunications. Another notable development is South Jakarta’s rise as an alternative growth centre to the traditional CBD. It is near enough to the CBD and prime residential districts, and offers cheaper rates minus the downtown congestion. It also has a good range of amenities and better infrastructure compared with other non-CBD parts of Jakarta.

Businesses eyeing the area include oil and gas, chemicals, logistics and fast-moving consumer goods. Already, Conoco Phillips, Thiess, Marathon Oil and Dupont have moved into the neighbourhood.

Says JLL’s Anton Sitorus: ‘These are businesses that are not as image dependent or image conscious as the financial services or consultancies, which still require prestigious addresses in the CBD.’ In the long run, property analysts are upbeat about the office sector. As JLL’s report sums up: ‘With a stronger economic foundation laid out by the current government, the economy is expected to improve gradually in the years to come. As such, we expect the office market to strengthen accordingly over the next couple of years.’

Residential sector

High interest rates and weak purchasing power combined to depress buying interest last year. JLL noted ‘minimal sales’ of condominiums in Q3 2006, causing prices to stagnate. As a result, developers delayed launches and completion to this year instead.

For 2007, analysts expect a huge influx of strata-title apartments. Colliers says another 22,900 new units will be added to the current supply of about 42,000, expanding the total condominium pool by 55 per cent.

But despite the surge, developers are unlikely to lower prices. In fact, Real Estate Indonesia (REI) expects residential housing prices to go up by at least 10 per cent. Two main reasons: declining interest rates that would stimulate stronger demand, coupled with higher building material costs.

Noting the mounting construction costs, Colliers expects developers to ‘hold back units until they have enough profit margin’. The consultancy notes that most of the new units are aimed at the middle or middle-low segment of the market, targeting especially young professionals and new couples. This is a group looking to buy new homes, and may have better purchasing power as the economy improves and bank lending rates ease.

In the rental market, there have been no new serviced or leased apartments launched in the past three quarters. Thus, ageing projects in this sector are facing stiffer rivalry, as tenants relocate to newer units in townhouse projects or condo units owned by individual landlords, who can offer competitive prices and flexible leasing terms, say analysts.

‘Only well-maintained apartment projects with good management and services can compete and survive in this leasing market,’ says Colliers in its report.

Aside from the improving economy and falling interest rates, analysts cite three other potential triggers for market activity.

The first is the emergence of South Jakarta. While the CBD remains the preferred residential choice among expatriates, many are also moving to South Jakarta, given the growing trend among multinationals to relocate there. The second is the recent flooding disaster, which affected a number of middle to upper-segment neighbourhoods. Says JLL’s Mr Sitorus: ‘Those who were affected may consider moving to flood-free areas, so there may be some relocation demand.’

Finally, there is the government’s plan to review foreign property ownership rules. Right now, non-residents are not allowed to buy and register any property under their names, except for 25-year leasehold apartments. But industry groups are pushing to open up the market to foreigners, and some analysts say a decision could be made as early as this month. Should that happen, it would boost the market significantly, they say.

Retail sector

The overall retail market trended downwards last year. As JLL notes in its report, consumers were conservative and spent largely on essential needs. This drove retailers, particularly the small to medium-sized local players, to delay expansion plans and close down unprofitable outlets. Thus demand for retail space remained modest. In line with that, rental remained largely flat last year. Only a few upper-class malls saw small increases ‘to cope with rising operational costs’, it says.

But of late, major retailers such as hypermarket and department store operators have begun to expand their networks. New brands and foreign retailers in the higher-end - such as Topshop, Topman and Pizza Marzano - have also entered the market, lured by Jakarta’s growing middle class. These major retailers helped fill up new shopping malls.

Still, given that within the next 2-3 years, Jakarta is expected to add another 20-30 shopping malls to its current 63, the vacancy rate is likely to go up, says a UOB-Kay Hian analysis. But the investment climate is expected to improve this year and boost consumption. Thus analysts expect the retail market to gain a stronger foothold by the middle of this year. Still, they warn that the growing retail space stock will limit rental growth. Also, competition among existing malls will continue to be tough, as new projects emerge with even more competitive packages.

Property equities

Earnings in the property sector have been improving since 2002, as most property developers restructured their debts following the 1997 financial crisis. Business has also been supported by the recovering economy and declining interest rates. In the first nine months of 2006, sales of the top eight listed property companies rose by an average of 17.8 per cent year-on-year, and net profits increased 15.8 per cent.

Meanwhile, net gearing fell from a peak of 9.7x in 2001 to just 0.3x in 2005. A UOB-Kay Hian report in January recommends Buy ratings for three stock picks among the listed top eight. The first, Ciputra Surya, is one of the most prominent developers in Suryabaya, East Java. Main strengths include strong earnings quality and one of the cleanest balance sheets in the sector. The company has total debts of just 2.9 billion rupiah (S$481,000) as at October 2006, with 214.5 billion rupiah in cash which provides financial flexibility for business expansion.

The second, Kawasan Industri Jababeka, develops townships and industrial estates in strategic locations in Cikarang (35km east of Greater Jakarta) and Cilegon (85km west of Greater Jakarta).

The third, Summarecon Agung, is emerging as one of the biggest developers in North Jakarta with a broad sales mix of real estate, rental and recreational.

Source: The Business Times, 17 April 2007