Despite current depressed prices and rental values, Chan Fookkheong sees opportunities for capital gains for cash-rich investors
The beleaguered Jakarta property market has not shown any signs of recovery since the recession began in early 1998. However, with the uncertainty of the presidential elections now removed, it is hoped that the new government would focus its attention on reviving the country's economy and restoring confidence.
Among the sub-sectors, only the residential market began to show some signs of activity since September. Otherwise, the property market remains in deep slumber.
Initial talk of abundant acquisition opportunities at "fire sale" prices failed to materialise as vendors and mortgagee banks remained deadlocked over debt re-structuring.
The Indonesian Banks Restructuring Agency (Ibra), with the responsibility of recovering distressed loans, has not shown any inclination so far to sell mortgaged property assets at current depressed valuations.
Thus, foreign investors hoping to acquire trophy properties in Indonesia have not met any success despite many attempts to persuade vendors to part with their properties at realistic prices.
Residential
With a population of 16 million in greater Jakarta – Jakarta, Bekasi, Tangerang and Bogor – the residential market is constantly in short supply as housing projects in satellite towns are oversold. Total housing stock as at early 1998 was 1.6 million units with a cumulative absorption rate of 85%. Typically, the most popular houses are priced between 100 million rupiah and 200 million rupiah per unit as this price range is affordable to middle-class buyers.
These housing estates have mostly been developed in Bekasi, Tangerang and Bogor, as the land prices were low enough to be an incentive to develop quality middle-class housing. Typically, developers build whole townships on sites ranging from 500 hectares to 6,000 hectares.
A factor providing underlying stability to the housing sector is that 90% of the purchasers were owner-occupiers. The private sector dominates the housing market as government-owned companies are not competitive in this area.
Since the crisis in August 1997, sales turnover declined by 80% despite developers slashing prices by 50% to move units. The main disincentive for purchasers is the unavailability of home mortgages since local banks are under liquidity pressure.
A survey last year estimated that half of all housing developers in greater Jakarta stopped all development activities or had gone bust as a result of the recession, increase in building material prices and the plunge in sales.
Apartments and strata-titled condominiums did not fare much better than landed homes. With a variety of products targeted at middle-low income, middle-upper income and upper income groups, this sector is now experiencing the effects of overbuilding and excessive speculation.
A halt to all construction activity in this sector since January 1998 has ensured that total stock will be capped at current levels. The total stock of leased apartments as at September was around 5,600 units.
In the apartment sub-sector, where buildings are owned by a single owner and retained for rental income, the occupancy rate declined from 66% in 1997 to 50% by mid-1999. Average gross rents of US$22 per square metre (psm) per month in 1997 plunged to US$15 psm per month by the third quarter of this year.
The middle-upper income apartments that are located in the central business district have been more resistant to falling rents with average occupancy rates greater than 70%. In the strata-title condominium sub-sector, the total stock as at September was 25,500 units. With the recession, the cumulative sales rate is expected to drop to 60% by the end of this year, from 77% at the beginning of 1998.
Prices declined by 60% in US-dollar terms with transactions of existing condominiums being relatively active between January and June this year.
The buyers were Indonesians with ready cash taking a long-term view, knowing that the transacted prices are half of current replacement cost.
A middle-upper class three-bedroom condominium in the central business district (CBD) can now be bought for only US$800 to US$1,000 psm, compared to US$2,500 psm in mid-1997.
The additional attraction for local investors is that there is now greater leasing demand for condominiums located in the CBD as expatriates flock to renting condominiums and apartments for security reasons in the aftermath of the riots in May 1998.
Office
The office market comprises 3.06 million square metres of existing stock, mostly located along Jalan Jend Sudirman, Jalan MH Thamrin, Jalan HR Rasuna Said, and Jalan Jend Gatot Subroto.
More than 60% of this was developed for investment, so most Grade A buildings in the city are comparable to those in Singapore or Hongkong.
Demand for office space has plunged, and the vacancy rate now stands at 25%. It is forecast to rise to 29% by end-2000 as more companies go bust or reduce space requirements as business contracts. However, supply is capped as all construction activity was halted since March 1998. The higher vacancy rate had a disastrous impact on gross rents which fell from US$24 psm per month in 1996 to less than US$14 psm per month currently.
Furthermore, the depreciation of the rupiah against the US dollar created a new leasing practice among desperate landlords who now rent in rupiah. This recent leasing practice is popular in Grade B buildings where gross rents range from 60,000 rupiah to 80,000 rupiah psm per month.
The few strata title sales of office space over the past nine months were by local owner-occupiers at a price level of US$1,200 psm in Menara Kadin, a new office building located at Jalan HR Rasuna Said.
Development land prices have plummeted by over 70% with no interest shown by investors in the midst of a city dotted with partially-constructed office buildings.
The short-term outlook is continued downward pressure on rents, occupancy rates and capital values as the recession takes its toll.
However, the silver lining is that a recovery in the office sector beyond year 2001 is likely to be swift as future corporate expansion will be constrained by the existing office stock since all construction has been shelved.
Industrial
The industrial land market continues to experience downward pressure on values. The market is almost exclusively owner-occupied with limited rental opportunities.
Industrial parks developed by major developers are the standard source of supply of industrial land, ready-built factories and warehouses. Manufacturers and industrialists buy either land ready for construction, off-plan factories or factory buildings that are ready for occupation.
The industrial estates are located away from Jakarta in the conurbations of Bekasi in the east and Tangerang in the west.
Current stock of industrial land is 4,750 hectares and no new supply is anticipated in the next two years.
The main source of demand is from foreign manufacturers and joint-venture companies, led by Japanese and Korean manufacturers, while companies from Taiwan, Hongkong and Europe have an increasing presence over the past three years.
At the peak of the industrial market in January 1997, land prices within industrial estates were transacted at US$80 psm in Bekasi and at US$60 psm in Tangerang.
The occupancy rate stood at 80% in early 1997 but is now at 65%. Land prices have fallen to US$20-$30 psm and will stagnate at this level until economic recovery occurs.
Retail
The Jakarta retail market is divided into two sub-markets, namely shopping centres within the CBD and those outside the CBD. Total retail space stock stands at around 1.72 million sq m and is unlikely to grow in the next three years.
At end-1996, the vacancy rate in both CBD and non-CBD retail centres was less than 5%. By June 1998, the vacancy rate had risen to 20% and is currently at 30%.
Average gross rents declined to an average US$30 psm per month. Ground floor prime space is now pegged at US$50-$60 psm per month while anchor tenants are paying less than US$10 psm per month.
Outlook
Generally, investment yields are in the range of 5 to 8% cash-on-cash except for the apartment sector where yields are in the range of 12 to 15%.
Compared against a one-year rupiah fixed deposit rate of 25 to 30% per annum, it appears that the risks in property investment are not worth taking.
However, seen against a backdrop whereby historically property values resisted correction to a sustainable rate, existing property prices offer extremely good value when measured against current replacement cost.
It is now possible to acquire Grade A property at less than half the current replacement cost. With no new construction activity predicted in the property sector for the next three years, capital values will bounce back strongly once the economy recovers.
Further, the weak rupiah could provide another avenue of capital gain since it could have strengthened considerably against the greenback by the time the asset is sold.
Any investment strategy is likely to be driven by yields, as the assumption is that there will be no capital appreciation for the next two years, with a potential 10% downside from the acquisition entry price. Given the Asian penchant for investing in property, it is likely that an opportunistic foreign investor buying at current levels will be able to re-sell to local buyers at a healthy margin in three to four years' time.
Another factor in favour of cash-rich investors is that there are many cash-strapped and highly-leveraged property companies which are more than willing to discuss equity injection or buy-out deals.
Added to this distress list are banks saddled with non-performing loans that come with mortgaged properties of all types. Since banks prefer to recover loans than get into the property business, another opportunity lies in the buy-out of these loans at major discounts, with the buyer inheriting the mortgaged properties.
Indonesia has in recent times attracted mostly negative media attention. However, it should be stressed that the potential for the country to get back on its feet should not be under-estimated.
With a new government in place that will hopefully promote economic growth and equitable distribution of the economic pie, it will not be too surprising to witness capital, both from Indonesians and foreigners, flowing back into the country.
[The writer is executive director of investment sales and senior technical adviser (Indonesia) of CB Richard Ellis.]