Structural Obstacles Stand In the Path of Property Boom

By webadmin on 10:47 pm May 15, 2011
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SK Zainuddin

Indonesia’s property boom is at unprecedented levels, with prices in major cities rising 20 percent or more per year and foreign investors pouring into the market.

Unless the government fixes the land laws, though, the vast majority of Indonesians will not enjoy the benefits of the boom, industry players said.

Growing consumer purchasing power has created a new segment in the property market that is expected to grow exponentially in the coming years.

Since the 1997 financial crisis, the property market has recovered strongly. In 2001, property prices rose 100 percent as the market started to catch up with the appreciation of the US dollar. The second major spike in prices came in 2004.

“Commodity prices are unbelievable and they are pushing everything up,” said Harun Harjadi, managing director of Ciputra Group. “Land prices in Jakarta are crazy, and last year prices went up 30 percent.”

Ciputra Group, one of the largest property developers in the country, has felt the ups and downs of the market. In 1997, the rupiah collapsed and demand dried up, leaving it facing huge losses and mounting debt.

Today, the group has projects in 23 cities across the country. It hopes to expand to 30 cities as it tries to harness the favorable economic winds, but it has learned the hard lessons of the past.

“One thing that has changed is the way we do our business,” Harun said. “Land acquisition cannot be financed by borrowing any longer as such loans have been on Bank Indonesia’s negative list since 1997. As property developers are not allowed to borrow to finance land acquisition, we have to finance such activities through issuing equity and bonds through the capital markets.”

To do that, he said, the size of the issue needs to be substantial, giving only the largest developers access to the capital markets.

In addition, land acquisition has been difficult since 1997. “Most of our big projects now are on land that we acquired pre-crisis,” he said. “Post-crisis, acquiring large tracts of land has been almost impossible.”

Analysts said Indonesians are not putting their land or property assets to maximum use. In his book, “The Mystery of Capital”, Hernando DeSoto suggested the formalization of informal property rights.

“They can be used to put in motion more production by securing the interests of other parties as collateral for a mortgage or by assuring the supply of other forms of credit and public utilities,” DeSoto wrote.

Other obstacles include relatively short windows of time to use property, which current laws set at a maximum of 25 years. Analysts said such regulations discouraged potential foreign investment. Neighboring countries such as Malaysia and Singapore provide 99-year land leases.