Indonesia, the largest economy in Southeast Asia, has stayed “off the radar” of most foreign property investors compared to its regional counterparts like Thailand and Malaysia, despite its strong economic growth and an enormous consumer market.
But the Joko Widodo government has in an unprecedented move opened up the real estate sector to full foreign ownership, which enables foreign property developers to enter the country by setting up a 100% foreign-funded company, without the prerequisite of finding a local partner.
Lots of foreign builders and potential buyers outside the country, however, are still sitting on their hands, due to a lack of understanding about the market.
Timothy Chang, the head of Kingland Avenue, a Hong Kong-based developer, is among the “early bird” foreign developers testing the water. He believes investing in property in Indonesia is a move that will lead to profits once the country rises to become one of the world’s economic powerhouses, although it’s a slow process as land issues have slowed down many infrastructure projects.
Land ownership issues
The first hurdle is to acquire a piece of land from the real owner. “We had to be very cautious, because the ownership of many pieces of land in Indonesia is very unclear,” said Chang, recalling his experience in acquiring land before parking his money in West Jakarta.
Chang visited about 100 plots of lands when he first came to Jakarta in 2014. At the beginning, he was attracted to a few well-maintained sites in downtown – “very flat, with manicured grass”. But when he asked for the land certificates, the people claiming to be owners either gave him documents dating back to the Dutch-colonial period, or told him to pay for an ownership lawsuit to say that the land was engaged.
“Supposedly, all [blocks of] land should be registered with the land bureau,” Chang said, “but some landlords hold the old certificates to skirt registration to avoid paying tax.” So, some people take advantage of that loophole by registering the land before the real owner with a fake certificate. And when the real owner goes to court to dispute ownership, construction on the site has to halt, he said.
So Chang’s practice is to do a thorough investigation of who owns a particular piece of land. “We hired lawyers to help notarize the certificates and check with the court to make sure the land is free from any disputes,” he said.
The promising housing market
Chang finally decided to begin a project targeting overseas Chinese – four apartments and an office building with a shopping mall and a hotel, on a 20,000 square-meter block in a newly developed suburb in West Jakarta, with Chinese communities around it.
The first residential building is not expected to be handed over till 2020, but nearly 80% of the apartments have already been sold. Most of the Chinese had bought for investment, as they believe that Indonesia has “significantly undervalued housing prices”, he said.
“As the capital city of the largest economy in the region, Jakarta’s property prices are much lower than those in Vietnam and Thailand,” he explained, “[and are] at the same level with Third Tier cities in mainland China.”
According to Chang, the current average capital gain, assuming that investors resell their homes a few years later, can reach between 10% to 25% per year. If they rent out their places, the average rental yield in Jakarta is about 7.5% per year, he said.
In the long term, this young developer believes the housing market will continue to expand, based on growing demand from the increasing population. “The figure is growing at a rate of 1.1% annually, which means every three or four years, there is a new generation the same size as Hong Kong’s population,” Chang said.
“More importantly, about 60% of the population is under the age of 30.” Chang was confident that the large proportion of young people would be the driving force propping up the domestic home market.
The wait-and-see foreign buyers
For developers, firm demand for housing is a stabilizing force that can keep the price of Indonesian homes from fluctuating with the economy. For foreign buyers, however, some uncertainties still hold them back.
The Indonesian government opened its domestic housing market to foreign ownership in 2015, allowing foreigners to buy and own property in the country with a Right of Use for an initial period of 30 years, plus two chances to extend – once by another 30 years and then for a further 20-year period.
However, Andrea Sutjiatma Joeng, a financial advisor at Father Financial, a Hong Kong-based wealth management company, who has been helping investors to allocate assets by different tools including property overseas for seven years, feared that the lack of contingency in the property right policy could be a potential risk.
“The policy may be changed in the future. So, we cannot use the situation right now to make a guaranteed prediction,” Sutjiatma Joeng said. “Thirty years is a long term for us to keep looking.”
By contrast, Malaysia’s policies seem to be more friendly for foreign buyers. “Foreigners are entitled to two types of property rights, including a 99-year leasehold as well as freehold in Malaysia,” Sutjiatma Joeng said.
A freehold asset is always more valuable than one with a time limit, but for investors who aim at short-term investment to profit from a rapid rise in home prices in Indonesia, they may not care how long that foreign owners can own a site, Sutjiatma Joeng said.
And, “it can’t be denied that the average rental yield in Indonesia is almost the highest in the region,” Sutjiatma Joeng said. According to their research, the rental yield is as high as 8.6%, compared to Malaysia’s 4.5%. So, “Indonesia is not a bad choice for short-term investment,” Sutjiatma Joeng confirmed.
In the long run, Sutjiatma Joeng advised investors to think about the uncertainties stemming from a cabinet reshuffle, policy changes or revised laws.
The outcome of the general election in 2019 could also have a big impact on Indonesia’s rising housing market.