The combined USD $2.8 billion worth of property projects in and around Jakarta implies that 2016 is the best year in terms of foreign investment in Indonesia's property sector since 2007. It is interesting to analyze why these foreign property companies are eager to invest in big projects while the Indonesian property market is yet to show signs of acceleration. After massive growth in 2010-2014 (when property sales and prices surged steeply), there occurred a big slowdown in the years 2015 and 2016 due to Indonesia's overall economic slowdown, weakening purchasing power, and tighter monetary policy of Indonesia's central bank.

But perhaps the timing is very accurate. In 2016 Indonesia's gross domestic product (GDP) finally started to accelerate after the prolonged slowdown in the years 2011-2015, while the Indonesian authorities (government and the central bank) have shown its commitment to boost the domestic property sector and investment climate. For example, the easing of mortgage rules (lower minimum down payment requirements and lower interest rates) and the easing of tax rules on property sales (the government halved a tax on home sales) are expected to give a boost to Indonesia's property market on the medium to long term.

Meanwhile, the Joko Widodo-led government has been issuing a series of economic policy packages (since September 2015) that aim to improve the investment and business climate in Southeast Asia's largest economy. The 13th package (issued on 24 August 2016) was in fact devoted to the residential property sector. However, it only involves deregulation for residential property projects for low-income families and therefore is of limited use for foreign developers which primarily aim at the middle income and high income consumers.

Moreover, due to Indonesia's sluggish property market over the past two years, land prices in Jakarta have eased. During the property boom these prices had soared significantly. According to research firm Indonesia Property Watch (IPW), the value of Indonesian property sales dropped 35 percent year-on-year (y/y) in 2014, 26 percent (y/y) in 2015 and 49 percent (y/y) in the first nine months of 2016.

Read more: Overview of Indonesia's Property Sector

The fundamental factors that should lead to strong growth of Indonesia's residential property market over the next couple of decades are:

  • Indonesia has a young and large population (including a rapidly expanding middle class). Many of these young people will purchase their first property unit on the short to middle long term.
  • Similar to the global trend, the process of urbanization continues to grow in scale and importance. Therefore, property projects in and around Jakarta (or other big cities) are in demand. In the case of Jakarta, for example, it is estimated that each year 200,000 people move to the capital city in search of a new living.

The China Communications Construction Group (CCCG) is the developer of Daan Mogot City in West Jakarta. This is a big project consisting of 30 apartment towers that will be developed over the next decade. It specifically targets at young, middle-income Indonesian couples who need housing with a high degree of accessibility (severe traffic congestion in Jakarta makes proximity to the city center vital).

Meanwhile, the Mitsubishi Corporation engaged in a joint venture (JV) with Bumi Serpong Damai. This JV aims to build 1,000 housing and retail units. Malaysia's Sime Darby Group engaged in a partnership with Indonesian developer Hanson International. These partners will invest IDR 11.3 trillion (approx. USD $841.71 million) for the development of a 500 hectare site.

Based on the latest data from Indonesia's Investment Coordinating Board (BKPM), the value of foreign direct investment (FDI) in all property segments in Indonesia rose to USD $1.67 billion in the January-September 2016 period, up from USD $1.48 billion worth of investment realization in the same period one year earlier. Meanwhile, the number of projects backed by foreign investors rose 34 percent year-on-year (y/y) to 842 over the same period.

Similar to the gradual recovery of the overall Indonesian economy, we believe the nation's property sector will experience a gradual recovery on the short-term and medium terms, but has great potential for high growth on the long term.