Jadeite in The Equator: a Guide to Real Estate Investment in Indonesia

As the Belt and the Road put into practice, more and more enterprises have adjusted their layout strategy and started to make overseas investment. Lying in the sea between Southeastern Asia and Northwestern Australia, Indonesia is called “Nation of Islands”. As one of the most powerful members of ASEAN, it has important strategic position in the Belt and the Road cooperation.

Indonesia consists of 17,508 islands with a population of 255 million in 2015, 87% of which believe in Islamism and make the country a “democratic and mild Muslim”. Taking up about 5% of the total population, overseas Chinese play a vital role in the business world. Indonesia is presidential republic country. In October of 2014, Joko Widodo, who was born in a common family and used to do business in real estate and furniture, took office as president. During his service, the country is politically stable with problems like corruption and low effect of government.

At present, it is steady to invest real estate there because local investors are very worried about the supply exceeding demand situation in Jakarta. Besides, usually growth in real estate will slow down before next presidential election (in April of 2019). For foreign investors, basic supervision is still a big obstacle. Yet the situation is promising in the long term, and with the strong support from the fundamentals including moderate economic growth, increasing home use, firm urbanisation, and newlyborn middle class.

Steadily-advanced Situation Attracts Foreign Funds
As a developing country, Indonesia is a key nation along the Belt and the Road corridor and a great market with a population of 255 million. Since 2013, the market has attracted many Chinese enterprises. Though as politics and economy are not finally stable, there may be various uncertainties, there are also opportunities facing ahead.

As the fourth biggest population in the world, Indonesia owns great market potentials. In 2014, national GDP reached 910.479 billion USD and 3,643.87 USD per capita. Counting by expenditure approach, household consumption took 56.12% of the total GDP. Over half of the population is below 30 years old, which makes an important consumption drive for Indonesian economic growth. In 2015, the ten members of AESEAN will form a united market with a total population of over 620 million expanding the radiating ability.

At the moment, Indonesia has become the most fast-growing country in AESEAN and is the largest economy there. It kept growing under the attack of financial crisis, which was not commonly-seen apart from China and India, which reminded people not to overlook its development in the future.

Information on the website of Department of Commerce of PRC shows that investing situation in Indonesia embodies following advantages: large population, great market potential, low cost labour, long coastline that controls many sea transportation pivots, highlyopen and stable financial market, rich natural resources, and so on. Since Joko Widodo assumed office and carried on the previous government’s policies and paid greater attention to the construction of infrastructure, eliminating poverty, attracting foreign funds, and increasing job opportunities, investing situation may be further improved in the future.

After the Belt and the Road Initiative was put up, more and more Chinese enterprises started to make investment in primary industry like agriculture, fishery , forestry, and secondary industry like machinery, transportation, minor, and energy, and tertiary industry including finance and tele-communication in Indonesia. Among these, Sima Bridge, Windpowered Station and Gatti Gedi Dam and other infrastructure investments from Chinese funds bring great convenience for local people and are highly welcome by them.

Investment Law Amendment Warms up Real Estate Market
When making investment in Indonesia, foreign enterprises should first pay attention to law policies as Indonesia has a comparatively complete law system with some vague regulations, low feasibility as well as contradictions and conflicts among different laws. Taxing system there is quite complex, and tax cost is a little high for enterprises, but there are preferential tax policies and industrial preferential treatments towards medium and small-sized companies. Labor cost is rather low as a whole, but the Labour Law is unfavourable to investors. Chinese enterprises should pay close attention to local law changes if they want to make investment there, and calculate tax cost, take full use of the preferential policies, get familiar with the specific regulations regarding salary and protecting the rights and interest of labourers, and then calculate labor cost carefully.

At the same time, Indonesian government has realised the importance of new investment
toward economic growth. As the initiative country of ASEAN, Indonesia has been devoted to opening trade and investment targets, and has carried out measures including setting up one-stop service to enhance large-scaled investments and ensure the persistence of them. So far, a series of plans, procedures, and lawmaking that aims at encouraging foreign investors to build partnership with Indonesia counterparts are undergoing.

For example, one week before July the 31st, the Indonesian government started to discuss amending investment law to allow foreigner to own deluxe apartments in the islands, and hopefully, the amendment can come into practice in two or three months. Nathan Ryan, owner of Bali Realty, a real estate company, expects that this will draw the attention of house buyers from China and Singapore.

Compared with the previous year, the amendment makes the price of high-end housing rise violently by 15% in the Bali Island, which is famous for surfing and rice field views. The rise is at top among its kind that are followed and studied by Knight Frank LLP, and it’s still going up. Also, according to reports from Knight Frank, prices of villas in the Spanish (house resource) Ibiza Island increase by 5% while those of the Italian Sardinia Island falls by 8%.

“Asian buyers are undoubtedly a sleeping giant for Indonesian real estate market,” says Ryan, who comes from north Kuta where surfing and night life are wellknown, “These buyers have enough money. Yet in the past, Indonesian property right rules draw them back as they want to buy properties with permanent ownership”.

At present, foreigners can ask a local to be their agent or change house buying into “long-term lease” to bypass the government’s prohibition in owning the house. Still, Sofyan Djalil, Minister of Economic Affair Coordination Department of Indonesia, stated on July 23rd, that the government was going to amend the rules together with immigration department and tax authority. He took Malaysia as an example to point out how foreigners could own property right after the approval of national authorities.

The Indonesian government discussed the conditions for nonIndonesian to buy houses and the limitation of house size they can buy. According to the proposal, foreigners are only allowed to buy deluxe apartments without owning land rights. Before this, Setyo Maharso, a member of the presidential election team of Indonesia president, Joko Widodo, used to make it clear that the government would allow foreigners to buy properties no smaller than 200 m2 and no less than 2.5 billion IDR (185,000 USD).

Rising Invest Destinations Inspire Investment Upsurge
The centre of Indonesian real estate development is still in Jakarta State and its surrounding regions. About 38% of construction projects for next year are centreed in Jakarta, most of which are office buildings. By 2014, newly-built projects in Indonesia will reach 3,600, including retail markets, hotels, apartments, office buildings and others, among which 70% developers are private business and state-owned enterprises, and 30% of those built by the state are office buildings, courts, administrative office centres and so on. Indonesian real estate industry, especially which in Jakarta State, has always been favored by investors from home and abroad during recent years. As house prices in the capital soar higher than before and many industries are nearly fully-taken, some investors gradually transfer their attention to new regions.

Some investors are seeking for new chances in general Jakarta region (Jakarta, Bogor, Daboh, Tangerang, Bekasi), including the capital and parts of West Jave and Banten State. To be more exact, investors’ interest in Bekasi, which lies in the east of Jakarta, and Tangerang, which lies in the west of Jakarta, has increased greatly.

Bekasi focuses mainly in industry and logistics because it is convenient to reach other cities in general Jakarta region from here. Recent transaction includes LOGOS buying a to-be-developed land for the construction of threefloored logistic infrastructure with a net rentable area of 155,000m2.

Investors who are interested in Tangerang first lay their concentration on the residential and shopping malls that are to meet the demands of the fast-growing middle class. For example, Keppel Land announced in December, 2016, that they would cooperate with subsidiary of Metropolitan land (Metland) to build 450 singlefamily villas in Metland Puri City.

Surabaya is the second largest city of Indonesia and a centre of its industry and trades. It falls behind Jakarta in the developing of real estate market partly because investors usually favour the capital. CBRE Study shows that as the strategic position, the growing middle class, its land usability, and gradually-expanded infrastructure (including outer ring roads) of Surabaya enable it to be the best choice of commercial estate and residential develop besides Jakarta in the coming three to five years. Large land developers including Ciputra, Intiland and Pakuwon have shown themselves in this market, of which the six Tunjungan Plaza projects by Pakuwon are consist of complex super streets with highend shopping centres and deluxe apartments and are expected to open for sale in December, 2017.

Bandung lies in about 140 km in the southeast of Jakarta and is the most densely-populated third largest city of the country and a hot tourism destination. To some extent, real estate development is restricted by bad city planning. However, recent infrastructure construction plans (including the high-speed train that connects the city with Jakarta) will provide new investment opportunities in medium-term. Research Department of CBRE predicts that Bandung will follow the develop model of Jakarta’s and keep the east suburbs as industrial district while the west part as residential and retail for hotel business. Also, it may have priority in developing residential houses first because there is no high-end residential project there by now. Opportunities for office buildings are limited since the ample choices around Jakarta can meet market demands. Shortterm developing project include Summarecon Bandung Project of Summarecon Agung, which is a complex city project consisting of residential apartments, commercial lands and dual-use lands for both commerce and residential.

As general Jakarta, Surabaya and Bandung will offer a great number of new chances for regions outside Jakarta in the coming three to five years, long-term activities are expected to expand to other important cities in the country, especially Medan, Semarang, Makassar, Palembang, Samarinda, Yogyakarta and Malang.

In five to ten years, activities in these regions will be led by experienced persons or developers who have made great achievements in specific fields or projects. Investing in these cities carries more risks. Thus, developers will focus on the fields they are familiar with. For example, Agung Podomoro Land has started to copy its super street concept, whose design is very similar to the big success of Central Park streets in the west of Jakarta. in the new projects in Medan.

Batam and other regions can also expect certain chances. The region has been listed as special economic zone. Its low labour cost and encouraging policies of the government attract investments from industrial developers and owners. For hotel business, the government encourage new destination like Lombok, Flores and other hot tourism destinations including off-islands, which attract more and more investors from home and abroad who are interested in new hotel development projects.

Retail to be a Key Industry for Real Estate Business
As consumer expenditure is still the biggest drive for economic growth, Indonesia welcomes international retailers who are keen on digging out the growing consumption ability of the emerging middle class. The trend will encourage investors to explore new retail projects in general Jakarta and second-tier and even third-tier cities. Yet, the booming E-commerce plays great challenge for physical retail shops, especially traditional shopping malls. Department of Information and Communication Technology predict that by 2020, E-commerce will expand to 130 million USD.

Therefore, it will be the key to success in these new markets to choose the best concept, either community shops that provide daily necessities or living centres as some of the regions are lack of well-ordered high-quality retail equipment.

Some developers choose to build a complement set of large retail centre with entertainment and dinning equipment. For example, Aeon, a Japanese retail group, will open its second shopping centre in Jakarta Garden City Complex in the east of Jakarta in Indonesia in the end of September. The centre covers about 16,500 m2 and contains five floors, including 227 tenants and gourmet plazas, game halls, multihall cinemas, skating rink, children theme parks and ferris wheels. Aeon opened its first shopping centre in Tangerang in 2015 and plans to operate over 10 such centres by 2025 around the country—all parts of the country except central Jakarta.

Summary
Before the presidential election in April, 2019, many Indonesian investors may be prudent in some way. Foreign buyers will continue to be restricted by supervision obstacles. Though Jakarta will keeps on attracting great sum of investment in real estate in the following years, some far-sighted investors and developers have begun to look for regions outside the capital to grasp the significant chances there. Thus, they pay close attention to the construction of infrastructure like railway, airports, and highways, which helps improve local transportation and open new lands for developing.

Edited by this newspaper)