Indonesia’s recent economic turmoil has led many short-term investors to exit the country, causing the equity market to fall rapidly and the rupiah to weaken to over 11,500 per US dollar. This change of sentiment was triggered by the US Federal Reserve signaling to the market that it would withdraw its large monetary stimulus and begin “tapering”. Both markets have now recovered somewhat but the spotlight has been shone on emerging economies like Indonesia with current account deficits and overheating local economies.
How has all this macroeconomic uncertainty impacted the local real estate market? The last three years have been very strong as Indonesia’s economy continued to perform strongly with its large, increasingly affluent, young and urbanizing population underpinning demand for all types of real estate. When you combine this with ultra-loose monetary policy from across the world, the result was a very conducive environment for the property market.
However, in the last few months we have witnessed the beginning of a slowdown in the market. While growth has remained positive, the speed of price increases and absorption rates has slowed from the record levels we have witnessed over the past 2 years. We anticipate that the impact by sector will be as follows:
Slowing economic growth along with the upcoming elections will reduce the rate of rental growth and office space take-up. However, the scarcity of new supply and the on-going process of companies upgrading their space will mean that the market should remain firmly in favor of the landlord, particularly at the high-end of the market, for at least the next two years. Our forecast is rents will continue to rise albeit at a slower pace throughout 2014.
The retail property sector will continue to remain solid as occupancy levels remain at an all-time high and demand from local and foreign retailers to enter and expand their presence in the country continues. In addition, the on-going moratorium on new retail will ensure the market is not over-supplied. We are forecasting mall rentals to continue their steady increase over 2014.
The demand for condominiums over the past three years has been very strong as Jakartans have taken to inner city living. This sector has been impacted by interest-rate increases and dampening measures have begun to reduce sales rates in the sector. However, clearance rates remain at all-time highs with over 75 percent of all off plan units launched. The steep price increases that we have seen over the last three years are likely to reduce as the market digests the new economic reality but the long term trend into high rise living is very much here to stay and with the prices still very low by regional standards there remains plenty of upside in the years ahead.
With international and domestic tourism continuing to grow at a strong pace, especially in the tourism hubs of Bali and Lombok, the hospitality sector has been a net beneficiary of the depreciating rupiah with occupancy levels, room rates and resultant land and capital values continuing to increase on continued strong demand.
In summary, despite recent economic headwinds, the property market remains in good shape to continue its solid run over the years ahead. However, optimism over the last three years has given way to a realism that the pace of rent and price increases was not sustainable over the medium term and that a slow and steadier increase is better for the overall health of the property market and economy.
By Todd Lauchlan, country head of Jones Lang LaSalle Indonesia. Published in The Jakarta Post on October 25, 2013.