Investing Condominiums in Jakarta, Indonesia - Assignment Example

Investing Condominiums in DKI Jakarta, Indonesia By: Steven I. Highlights I. What is Indonesia? Indonesia is categorized as a third world country with the world’s 3rd largest population. This country is divided into five major islands, and has a fabulous metropolitan capital city; which is Jakarta. Jakarta is the capital city of Indonesia and a lot of important events take place there. This is of course the city in which government stakeholders and businessman make crucial decisions for the sake of millions of Indonesians. This makes Jakarta play a key role in Indonesian real estate. Thus, many people come to Jakarta to convert their hopes and dreams into real value. Today, individuals who come to Jakarta have a purpose. As such, the need to market potential residential properties that can be turned into something that can generate huge income is of primary interest to those involved in the real estate business. Those people come to Jakarta to find investors, and markets to sell their property. It currently good timing to be engaged in this industry due to the fact that the government has start to realize that expanding property development will help the country’s growth and will help investors to gain profits from it (Yan et al., 2010). By doing this, stakeholders can open new job fields; which can push down the unemployment rate - allowing Indonesia to grow faster. A lot of investors believe that Indonesia could become one of the largest countries in future. This is due to the fact that the nation exhibits a rapid level of economic growth and its high population will positively impact the residential real estate business. This is reflected from the fact that GDP “Gross domestic product” rose 5.72 percent in the three months This surprising statistics beat all estimates in a Bloomberg News survey of 25 economists; where the median was 5.34 percent. The economy grew 5.78 percent in 2013” (Manurung & Suhartono, 2014). In the future, this growth will positively impact the residential real estate business. So, a lot of interesting events in residential real estate business are happening in Indonesia right? This research report will give the reader insight of condominium market in Jakarta. I. What is DKI Jakarta? DKI Jakarta, or we usually call it “Jakarta” is the area of the capital city of Indonesia, this city is the metropolitan, and where the government makes decisions that impact upon Indonesian’s way of life. DKI Jakarta is divided into East Jakarta, West Jakarta, South Jakarta, Central Jakarta, North Jakarta, Bekasi, Tangerang, and Depok. 70% of the annual national funds are allocated to be spent within Jakarta. This is why Jakarta is the most important element within Indonesia (Monkkonen, 2013). Jakarta has become the center for trading, business, governance, diplomat, and international events. Most of the important events happen in here, thus it positively affects their property prices. It is because of these factors that so many people come to this place and subsequently need residential real estate. II. Indonesia Economy and Residential Real Estate top Three Trend As a result of uncertainty in Indonesian politics, there is a great level of fear with regard to who is going to be elected as the new president or ministers within the government. Additionally, tighter monetary policy means that people assume this could negatively affect Indonesia’s residential real estate business. Jakarta’s residential real estate market has since become darling property for investors. The supply, and demand of the property seems to continuously grow; even though the interest rates continue to rise. Most of the investors believe that overall Indonesia residential real estate has a good prospect that will generate huge profits in future; especially with regard to the growing number of middle class incomes that are being represented to a more and more prevalent degree within the system. II.1 Residential Real Estate Prices Trend 1.) 2.) According to the 1st graph, the last 4 years of residential real estate prices has been grown rapidly. Further, the graph shows that the residential real-estate business is doing good within the market. The GDP growth continues to rise alongside the inflation rate. This makes some of individuals who can still afford the residential real estate property pause; even though the prices goes up. Residential real-estate prices in 14 major cities rose 7.4% in Q1 of 2013. For example, Makassar residential real-estate has increased 15.6% in Q1 of 2013, followed by Palembang (10.57%), and Denpasar (9.97%). The demand continously increases, and it impacts the fourth quarter of 2012; where the residential real estate sales soared up to 26.7%. This impacts the outstanding housing loans that exist within the system. This has proven to be quite high; as the GDP recently hit $22.7 billion USD.This happens as a result of the fact that the GDP of Indonesia is growing alongside increasing inflation (Michael, 2010). II.2 GDP, and Housing Demand Trend After the global economic crisis, Indonesia’s GDP growth rate drastically ascended. In 2009, Indonesia only grew 4.6%, and in 2010, the economy grew until it hits the highest GDP at 6.9%. After that, the average of growth has been between 5.7%-6.5%; which is much higher than the growth in 2009. The growth of the GDP impacts upon the housing demand. This is affected due to the fact that this increase causes more Indonesian people to be able to afford residential real estate. Additionally, urbanization makes people have more options; and it attracts greater markets in real estate. By reflecting on this condition, it is forecasted that 50% of people under 30 years old, which most of the Indonesian population, will buy their first living place in the next five years. Furthermore, Indonesia’s middle-class and affluent consumer (MAC) is predicted to double by 2020. The MAC group is a type of Indonesian consumer who likes to spend their money. All of this happen because when the GDP goes up; their purchasing power becomes stronger and leads them to purchase housing. This is why the increasing GDP impacts housing demand in the way that it does. II.3 Interest Rate and Residential Real Estate Trend As this graph shows, the interest rate of the Bank Indonesia was as low as 5.75% in the year of 2012 and 2013. This started the housing demand to skyrocket; because people were more confident to borrow and loan money; as well as purchase residential real estate in Indonesia. Further, the graph indicates that the rate increased to 7.5% in 2014. This happened because the inflation of the Rupiah (Indonesia Monetary Instrument) was impacted by the political events that were currently happening within the nation. They were holding a presidential election that made the market behave with much uncertainty; which lead their interest rate increases. Investors tended to wait for the new President to be elected. Therefore, they did not want to buy Rupiah to invest within Indonesia’s business sectors for during this period of time. However, investors still believed that after the presidential elections, the new country’s leaders would arise and implement a new system for the next 5 years. “Indonesia’s growing economy, relatively stable political climate, surging consumer saving and spending, should lead to an increase in demand for property in the near future” (Global Property Guide, 2013). III. Jakarta Condominium Business Reflecting on those current market trends, the level of GDP, and inflation proportionally rise. This positively affects the condominium market in Jakarta. This is due to the fact that even though the prices of condominiums rise, people still can afford it because the GDP is going up; thereby having a positive impact on wages. Today, the many Jakarta Condominium businesses lead the residential real estate business sales in Indonesia. It is because their price is relatively cheaper than other residential real estate such as houses, and apartment. Additionally, the number of middle class individuals within current Indonesian society is growing rapidly. Even though nearly all property prices are going up, condominiums still provide prices that are affordable for most of the people. Condominium’s investors also provide flexible financing for individuals who want to purchase their own condominium. Additionally, the trend of housing demand, especially in Jakarta, provides a positive impact to the condominiums investors. This is because the younger generation prefers to live in condominiums rather than single family house. Due to the limitation of space in Jakarta, condominiums will be the choice for them to live well into the future. Further condominiums are more attractive due to a lower price as compared to a traditional single family house. Besides this, condominiums are oftentimes the only properties available in Indonesia; where foreign individuals can have a right of ownership. Thus, up to this point, investing in condominiums in Jakarta will be a good business venture; because they have a great long-term value. III. Market Analysis III.1 Market Segmentation in Jakarta The figure above shows a graph concerning the condominium market segmentation in Jakarta; with a special concentration on the middle class segment that has an average age of 30 – and are about to purchase their first living places for their new family. The middle class dominates the sales of new condominiums. As such, the graph shows the highest number of middle class people (55.5%), followed by lower middle (22.1%), and upper-middle (13.3%). More than 80% of middle class people, and today 55.5% of those middle class people, come from the lower middle class that become richer and upgraded to the middle class segment. Further, the graph shows that the upper, and high-end segments are low because they do not generate much profit for investors. Ultimately, fewer upper class people are more likely to purchase condominiums because they have more money to afford houses to live in. This shows that investor will gain low profit if they develop more condominiums that target the upper class people because they will gather fewer buyers. Thus, if investors want to achieve larger profits, they should develop condominiums for middle class people in Jakarta; because they can provide residential real estate business that can attract the majority of people who live in that area. III.3 Market Profitability in Jakarta The intensity of rivalry in the condominium business is relatively high. The supply of the condominiums keeps increasing; so much so that by the end of 2013, there are more than 100,000 new condominium units in Jakarta. Currently, there is a high level of advertising for condominiums on the street, radio, and television. Different investors, and companies own each these respective rights and seek to market themselves as best they can. All of these seek to compete to find tenants and potential buyers. There is a high exit barrier; due in part to the fact that the investment of condominiums buildings is very high. Thus, investors need to be careful in deciding their investment steps. The bargaining power of buyers is relatively high; if we compare with the bargaining power of suppliers. The bargaining power of buyers is high because the buyers have a lot of options in society. Condominiums investors need to apply competitive prices, so they can compete with others in attracting potential buyers, and renters. The threat of new entrants is also relatively high; as people realize that there is a very large prospect in the Jakarta Condominium sector these days. They can generate huge profits if they build condominiums; because the trend of people who live in Jakarta today favor to live in condominiums rather than houses. This is due to the fact that condominiums have relatively cheaper mortgage prices and rent prices as compared to houses. This, in turn, leads to a low level of substitute products. It is almost impossible to find residential real estate property that is cheaper than a condominiums in Jakarta. Thus, for now condominiums are the most convenient residential real estate to live in with price that is affordable for a majority people. I. Jakarta Condominium Sales Activities Indonesia’s politics, and regulation conditions, have affected a minor decline in Jakarta condominium’s business. There uncertainty alongside the new regulation that the Bank of Indonesia has created for financing a purchase requires that individuals must pay 30% of the down payment prior to receiving further loan assistance. But the middle class still strongly contributes to the condominium sales. In the year of 2013, there were 7970 sold; moreover, this number was 60% of the total of condominiums that were sold for all class segments. The middle class prefer to purchase condominiums which relatively cheaper than the landed residential property. Investors still believe that the Jakarta condominiums market will grow in future after the election. By the end of the year 2013 there were 23 new projects launched with additional 12,500 units in Jakarta. As such, the middle segment class dominated this increase with 53.2% of the sales. I. Jakarta Condominium Sales, Supply, and Demand I. Jakarta Condominium Sales Demand As is shown above by the red line in the chart, the sales rate of condominium in Jakarta grew by 0.9% from the previous year to 96.9% in the fourth quarter of 2014. The red line always shows that the demand has remained around 90% or above. The data reflected in the light blue chart shows the strong growth of demand from year to year has not changed. Further, the information shows that condominium business is growing strongly. From the graph, one can note that the demand is almost tied with the supply. This makes the price of the condominiums increase in the future. The pre sales rate escalates by 0.3% from the previous year; with 51,134 units to be absorbed in the future. Investors still forecast that this number will eventually go up. Additionally, once the new President is elected, then there is a degree of stability for the next 5 years; as such, it will positively impact the property prices as more investors tend to build new condominiums projects. Up to this point, the middle class has dominated the demand for condominiums. The research shows that they represent 38.8% of all new transactions. The lower middle prefers mortgage payments. The middle to upper class buyer prefer to one to three payments in cash, a bank mortgage, or hard cash up front. I. Jakarta Condominium Sales Supply Until the end of 2013, there were 119,435 units of condominiums within the supply of Jakarta. As we can see from the dark blue chart on the graph, a representation of strong supply is directly noted. Before 2013 ended, there were condominium buildings being completed; such as Bayview Apartments at Pluit, The Wave Tower Sand at Rasuna Said, U Residence Tower I in Karawaci, Green Lake Sunter Tower Northern, Scientia at Summarecon Serpong, Aeropolis Residence in Cengkareng, Sunter Icon. By location, all of the condominiums projects were concentrated in the secondary area, or in other words, the area that had a large percentage of the middle class. These represented 85,152, or 71.3% of the total property, and only 7.6% were noted within the so called “prime area”. In the future, there are 90.5% of buildings which will be located in the secondary areas; as investors will not concentrate on the prime area due to the price of the prime area being quite high. Therefore, investors prefer to build condominiums in the secondary area, so people can afford it. I. Jakarta Condominium Supply Portion By District From the 119,435 units represented, most of the existing condominiums were located in three different ares within Jakarta. As such, South Jakarta represented fully 29.5% of the total projects. Additionally, there were 23.7% in North Jakarta, and 18.5% in West Jakarta. This number will be decreased in future; because there is less land in Jakarta. Most of the people who live in these three areas are people in middle class income. These are groups of people who developed a purchasing power to purchase, or rent condominiums. Therefore, investors still concentrates on these three areas in addition to Bekasi, Depok, East Jakarta, and Tangerang. This is the result of the fact that these 4 cities have a higher percentage of people who live in the lower class segments. VI. Jakarta Condominium Prices “Property markets in Jakarta and Bali are becoming frothy, especially at the higher end of the market” (Forbes, 2014). This graph reflects the supply and demand in equilibrium of property sales, and rental markets. When the supply goes up then the price tends to go up; because currently in Jakarta the demand is very high. Therefore the demand catches the supply and equalizes. This fact shows that even if the supply goes up, the occupancy rate is low therefore the prices continuously rise. Additionally, it shows that condominium prices rose between 11 and 17 percent during 2012 and 2013, and it is currently 50% higher than 2008 (Yusuf & Resosudarmo, 2009). The graph also shows that it is not only middle class condominium prices that keep going up; but also lower middle and upper middle. This is a good sign for the condominiums investors because they can utilize this opportunity to generate huge profits for their company and themselves. This is because the condominium price is growing rapidly. The property value will also grow in future. V. 6 Steps Of Acquisition Process Condominiums in Jakarta VI. Top 3 Condominium Investment Constraint Red tape in government As in most third world countries, the corruption of the government is relatively high. Investors need to have a close working relationship with government if they hope to achieve their land deeds faster without any problems. Indonesians oftentimes refer to this system as “Money talks”. Investors need to maintain relationships with government by giving them shares if the business is growing well; further they sometimes bribe the city governors so they can build their condominium buildings faster. Foreign ownership restrictions It is hard for foreigners to own property in Indonesia. Foreign investors who are willing to invest in the condominium business in Jakarta need to follow a process. They need to submit the business plan in advance and exhibit how this can positively affect Indonesia. For example, opening employment opportunities and specifying how the project will be mindful of emission reduction is just a start. Then these stakeholders need to make a very sizable deposit in the Bank of Indonesia to show that they have a strong economic stake in the success of this project. Further, they need to show their other investments assets. But again, if the foreign investors have a close relationship with the government, they can easily get the land deed for investing condominiums in Jakarta. High costs of building materials Up to this point, Indonesia still is highly dependent on the importation of the building materials from others countries. This is due to the fact that there are only a few building material factories in Indonesia that provide acceptable products which are safe for building condominiums. Thus, the cost of importing the building materials makes the cost to build a condominium relatively higher for the investors. VI. Financing Assumption= Investors Income in $USD VI. Rent Jakarta Condominiums rent prices are based on the number of rooms. The number of rooms reflects the more expensive rent price that the tenants need to pay per month. On average, the price of one room in Jakarta is $650 per month. Normally, some of investors will rent the condominiums before they sell it to individuals. They wait the property to grow, so they will acquire higher returns. Calculation: - 1 bedroom condominium at $650 per month One-bedroom Rent 1 x 650 x 12 = $7,800 Gross Income (GI) $7,800 -Vacancy and Collection Loss Gross Income (GI) $7,800 Vacancy & Collection Loss (VC) 10% of GI $ 780 Effective Gross Income (EGI) $ 7020 - Operating Expense Effective Gross Income (EGI) $ 7020 Operating Expense 30% of EGI $ 2106 Net Operating Income (NOIs) $ 4915 - Property Value Stabilized Net Operating Income (NOIs) $ 4915 Discount Rate (0.7x0.075) + (0,3x0.20) 11.25% Overall Capitalization Rate (0.1125 – 0.0575) 5.5% Property Value $89,363.36 VI. Selling Condominium Jakarta Condominiums sales price are based on the number of rooms. In average the price to purchase a condominium is $215 per sqft. - 1 bedroom condominium at 780 sqft One-bedroom Price 1 x 215 x 780 = $167,700 Gross Income (GI) $167,700 If the investor buys 167,700, and we assume that the property is going to steadily grow at 10% then at least the investor should rent the condominium, and sell the condominium at the 10th year and above. By doing so, they will achieve the break event point in investing in one condominium. VI. Conclusion The condominiums business in Jakarta is very promising right now; even though there is a bubble at Indonesian residential real estate property that may negatively impact the Indonesian residential property. However, it is the belief of this author that the demand of condominiums will eventually increase. More lower class people will upgrade to the middle class and individuals who are 25-30 years old are going to purchase, or rent, their first place to live independently. They will prefer to purchase, or rent condominiums because they are cheaper or otherwise more affordable than other prospects. Additionally, the limitation of spaces in Jakarta makes the housing prices, and apartment prices very high. Consequently, those who can afford houses, and apartments, are generally aspiring individuals. Nevertheless, the majority of the Indonesian population is comprised of middle class people. As more and more lower and middle class people will have more income because of rising GDP, they will necessarily be able to change their buying habits accordingly. As such, more investors have proposed condominiums in the very near future as a means of meeting this prospective demand. VI. References Colombo, J. (2013, October 3). Why The Worst Is Yet To Come For Indonesias Epic Bubble Economy - Forbes. 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(2012, March 16). UPDATE 2-Indonesia sets rules to prevent housing, auto loan bubbles| Reuters. Retrieved from http://www.reuters.com/article/2012/03/16/indonesia-economy-cbank-idUSL4E8EG1XD20120316 Vaishali, R. (2013, March 5). Indonesia’s Rising Middle-Class and Affluent Consumers. Retrieved from https://www.bcgperspectives.com/content/articles/center_consumer_customer_insight_consumer_products_indonesias_rising_middle_class_affluent_consumers/ Read More