More and more signs point toward a strengthening property sector in Indonesia. In the third quarter of 2016 the property sector has seen more activity, a trend that is expected to continue into the fourth quarter and in 2017. Stanley Ang, Chief Marketing Officer at urban development company Lippo Cikarang, said this development is partly supported by the government's tax amnesty program and the lower interest rate environment in Indonesia as well as Bank Indonesia's decision to ease the loan-to-value (LTV) ratio.
In late August 2016 the central bank of Indonesia (Bank Indonesia) cut the LTV ratio requirement by lowering the minimum down payment (DP) that is required for first home purchases (when using credit) to 15 percent for houses sized larger than 70 m2 (from 20 percent previously). Meanwhile, the minimum DP for the purchase of a second home was lowered to 20 percent (from 30 percent previously), while that for a third home was lowered to 25 percent (from 40 percent previously). This move aimed at boosting spending amid tough economic conditions and declining housing credit.
Meanwhile, Bank Indonesia has also been eager to cut its benchmark interest rate this year. At the start of the year the BI rate stood at 7.50 percent. However, after several interest rate cuts and the adoption of the 7-day Reverse Repo rate (RR rate) as its new benchmark tool in August 2016, the key interest rate of Bank Indonesia now stands at 5.00 percent. This lower interest rate regime also has an impact on mortgage loans.
However, both the positive impact of fund repatriations within the context of the central government's tax amnesty program and the lower interest rate environment will require a couple of months to really impact on the property sector. Moreover, in the 13th economic policy package, released in late August 2016, the government reduces bureaucracy (red tape) in a bid to boost the construction of low-cost housing for the poorer segments of Indonesian society. This should also boost the property sector of Indonesia although it will need some months before deregulation has been accomplished.
Another interesting and positive development is that property firms have launched a number of projects this quarter that target the middle and lower-middle class segments of society. The units of these projects are relatively small but affordable. Meanwhile, the higher-middle class and elite markets for property projects in the urban areas, particularly Jakarta, have become somewhat saturated.
In combination with (government-led) infrastructure development - including toll roads, harbors, airports and power plants - it should all lead to the continuation of a strengthening property sector in 2017. Infrastructure projects are important because usually there emerge several property projects around a new infrastructure project.
Luke Rowe, Head of Residential at commercial real estate and investment management services firm Jones Lang LaSalle, said 1,034 apartment units were sold in Jakarta in the third quarter of 2016, while only 600 new units were added in the same quarter.