Overview

The largest economy in Southeast Asia, Indonesia has charted impressive economic growth since overcoming the Asian financial crisis of the late 1990s. The country’s GDP per capita has steadily risen, from $857 in the year 2000 to $3,603 in 2016.

Today, Indonesia is the world’s fourth most populous nation, the world’s 10th largest economy in terms of purchasing power parity, and a member of the G-20.

An emerging middle-income country, Indonesia has made enormous gains in poverty reduction, cutting the poverty rate to more than half since 1999, to 10.9% in 2016. To strengthen the country’s investment climate and economic growth, the government continues to announce policy reforms which are welcomed by investors. These policy reforms include opening sectors for investment and reducing high logistics costs.

The GDP Annual Growth Rate in Indonesia averaged 5.28 percent from 2000 until 2018. With a population of 261 million, around  1.7 million Indonesian youths enter the workforce each year. Its working-age population is projected to continue to increase as a share of total population until 2030.

A role model for a successful political transition, Indonesia is stable politically and has a presidential system of democracy. A comprehensive push for decentralization has seen much power transferred to the regions.

A large portion of the population is entering the middle-class and affluent consumer (MAC) socioeconomic category. Following a massive reduction in Indonesia’s poverty rate in the last two decades, one in every five Indonesians now belongs to the middle-class group. Another 45 percent are part of an aspiring group who are no longer poor or vulnerable to poverty, and members of this “aspiring class” have yet to reach the level of economic security and lifestyle of the middle class.

Indonesia is undergoing a historic transformation from a rural to an urban economy. The country’s cities are growing faster than in other Asian countries at a rate of 4.1% per year. By 2025 – in less than 10 years – Indonesia can expect to have 68% of its population living in cities. Approximately 18 million of the 21 million jobs created between 2001 and 2011 were in urban areas, marking a major shift of the employment base toward cities.

Emerging Trends in Real Estate in Indonesia

According to a recent report by PwC and Urban Land Institute, the expected best bets in the residential sector in Asia-Pacific region appear in a collection of emerging-market destinations that appear at the top of 2017 year’s rankings, including India, Vietnam, and Indonesia. In some ways, these are curious choices because each of the individual countries is currently suffering from oversupply issues.

For instance, Jakarta is ranked seventh in investment, sixth in development in a list of 22 cities in Asia-pacific region. Jakarta has proved to be a popular choice in our survey for the last five years, and while investors have always found it a difficult market in which to place money, prices for office assets have performed exceptionally well over that period. That has recently changed, however, amid a huge pipeline of new supply, combined with ongoing weak demand from tenants in the commodities sector.

Given oversupply conditions in the office sector Jakarta, both local and foreign investors are looking elsewhere, and in particular at affordable housing projects. According to one fund manager: “In terms of middle classes buying high-rise apartments, the market is very weak, so the strong fundamentals are now at the bottom of the housing market.” In addition, large mixed-use projects would probably generate strong institutional demand, he said.

The common theme across major investment destinations in Asia-Pacific is that demand is much stronger at the lower end of the market than at the top, where affordability issues are becoming acute. As a result, large-scale affordable housing programs are becoming increasingly common throughout the region, and have begun to attract interest from institutional investors.

In Jakarta, the middle- and upper-income housing markets are midway through a profound slump. Fundamentals currently strongly favor lower-cost homes. For example, houses costing approximately US$35,000 are readily salable and offer good development margins.

According to one Jakarta-based interviewee: “For our project, we’re looking for a mid-20s IRR and 2x multiple.” Large-scale government incentivized affordable housing schemes also are underway in India and are rumored to be in the pipeline for Vietnam, the Philippines, and Malaysia.

According to another Jakarta-based fund manager, recent weak sales of mid- and high-end housing contrast with strong demand for lower-priced homes (i.e., selling for under US$40,000). Affordable housing schemes are now drawing institutional interest from international funds and “offer mid-20s IRR and a two-times multiple—you can also exit quite quickly because construction techniques are very simple.”  

The Opportunity

There is a substantial demand for affordable housing in Indonesia – a function of both new annual demand creation and an unmet deficit. There are approximately 64.1 million housing units in Indonesia, of which around 20 percent are in poor condition and an estimated 820,000 to 1 million new units are needed each year to respond to annual housing demand from population growth, new household formation, and migration to urban areas. The private sector only produces approximately 400,000 units per year. Public sector programs, including incremental home improvement assistance, rental housing, and social housing programs, enable an additional 150,000 to 200,000 solutions. This leaves a gap of an estimated 220,000 to 370,000 households that must resort to informal solutions or overcrowding in existing units each year.

Based on a 2015 National Household Survey data by the Central Agency of Statistics (BPS), Ministry of Public Works and Housing (MPWH) estimates a housing backlog of 11.4 million units.

Affordability remains a key constraint in significantly improving housing outcomes for most Indonesians. Based on BTN analysis of 36m² or below BTN non-subsidized loan portfolio, the estimated home price for basic commercial unit is IDR 250 million (US$ 18,775). Around 60% of Indonesian households cannot afford an equivalent formal housing unit without subsidy enhancements.

Indonesia has developed a broad set of policies and institutions to support affordable housing but these have not yet been effective in improving housing outcomes at the scale necessary. These measures include:

(i) a series of neighborhood community driven development programs such as the National Program for Community Empowerment (Program Nasional Pemberdayaan Masyarakat, PNPM) – Urban;

(ii) highly to fully subsidized public rental housing programs (e.g. Rusunawa);

(iii) Home Improvement Assistance (Bantuan Stimulan Perumahan Swadaya, BSPS) – an up-front assistance for incremental home improvement;

(iv) housing microfinance (KPRS/KPRS Mikro Bersubsidi) started in 2006 through a MPWH Ministerial Regulation No.05/Permen/M/2005, which aims to provide mortgage for fixed and non-fixed low income people by either subsidizing individual for housing improvement, mortgage interest rate buy down through KPRS Bersubsidi, or subsidy for development or housing improvement using KPRS Micro Subsidy;

(v) a subsidized Mortgage Liquidity Facility (Fasilitas Likuiditas Pembiayaan Perumahan, FLPP) which aims to enhance mortgage affordability for middle-income households by subsidizing interest rates for fixed-rate mortgages; and

(vi) an interest rate buydown subsidy for mortgages, Skema Selisih Angsuran (SSA) introduced in 2015 and Subsidi Selisih Bunga (SSB) introduced in 2016 

Based on the above findings, we believe there is a huge investment opportunity existing in Indonesia’s affordable residential sector, with IRR between 18% – 22%, provided that the investment process is managed wisely and professionally.