Housing Market in 2008: The Rise of High Rise

IN ITS PREVIOUS ISSUE, Asian Property Investment reported that the condominium market in Jakarta was said to have been moving toward an alarming level. In one hand, the brokers faced difficulty in selling new condominium units. While on the other hand, the developers were reported to still continue developing new condominium projects. If we look at 4 to 5 years back from now, the development of condominium projects in Indonesia, especially in Jakarta has been very aggressive. Many developers began to enter the condominium market by building new projects to serve the market demand of new condominium units. Before, housing market in Indonesia has been dominated by landed or horizontal houses. Many landed housing projects in various scales have been developed nationwide. However, because of the scarcity of land in the urban areas, most of landed houses can only be built in sub urban areas.

In urban areas, especially in the metropolitan cities the choice is only to build high rise or vertical houses like condominiums and apartments. Meanwhile, because of poor transportation system in Indonesia, people began to realize that living in a condominium or apartment near down town is much more convenient than living in a landed house but far away from workplace. People then favor “back to city”, borrowing a slogan popularized by Agung Podomoro Group, an icon in Indonesia property industry by buying a condominium or renting an apartment in the city.

The Government also realizes the important of developing vertical houses to fulfill the housing needs in some metropolitan cities. For five years starting this year, the Government has been planning to build at least `1,000 towers low cost condominium and serviced apartment projects using some subsidy schemes for middle to low income people.

The continuing development of condominium projects by developers and the up-coming development of 1,000 tower government subsidized low cost condominium and apartment projects indicate a rise of high rise or vertical houses in Indonesia. Housing market in Indonesia especially in the metropolitan cities in 2008 and beyond could be dominated by vertical houses like condominiums and apartments.

Prospect in 2008

During the year 2007, as predicted before the economy of Indonesia will grow around 6,2% (moderate scenario). Although, global financial market has been shaken by US subprime mortgage crisis and oil price hike approaching the psychological level of US$ 100 dollar per barrel this year, but the economy of Indonesia is still predicted to grow above 2006 growth level.

Some factors contributing to this growth according to the consensus of economists are: firstly, the down trend of interest rate; secondly, the low and stable inflation rate; thirdly, the impressive performance of export; and fourthly, the improvement of domestic and foreign investment. Those favorable economy indicators have resulted in an improvement of people purchasing power.

In the Year 2008, some economists still believe that the economy of Indonesia will grow above the 2007 growth level, despite the slow down of global economy do to oil price hike. World Bank also predicts that economy of Indonesia will grow at 6,5% level in 2008, the highest among Southeast Asia countries economic growth next year, which is only around 5,7%.

The Government of Indonesia even projects that the economy of Indonesia will grow at 6,8% level. If we look at the trend of some economic indicators like investment and international trade, it is inevitable that our economic growth next year will outperform the growth of the year before. With such an impressive economic performance outlook next year, Bank Indonesia (BI) is expected to continue cutting down BI rate to around 7-7,5% from 8,25% level now, especially if the inflation rate can be maintained at 6-6.5% level.

And if the interest rate drops, banks will not have other choice accept lending their money to the real sectors. Some sectors that are predicted to receive more loans from banks among other are: infrastructure sector like toll road, power plan, and telecommunication; plantation sector like cacao and rubber; and oil & gas sector. Property sector like housing will also enjoy a significant growth because of money pumped by banks to finance home buyers with low interest rate mortgages.

As reported in the statistical data of Bank Indonesia, the national mortgage loan outstanding has been increased from IDR 72.6 trillion in 2006 to IDR 92.7 trillion in September 2007 or grows 27.6%. In the Year 2008, mortgage loan outstanding is predicted to increase to around IDR 126.0 trillion or grows around 29% from the previous year.

Market Expansion

The worry from this magazine about Jakarta’s condominium market as quoted in the beginning of this column, has its own reasons. The massive development of condominium projects recently and the up-coming 1,000 tower government subsidized low cost condominium projects can cause an over supply to Jakarta’s condominium market.

This problem will arise, especially if most of condominiums built before are sold to investors who buy condominiums for renting or to speculators who buy condominium units for a speculative motive expecting capital gain from price hike. If it is the case, we worry that investors will face difficulty in renting the condominiums delivered to them when all the new projects developed are completed next year. The developers will also face difficulty in selling new condominiums projects, because they have to compete with speculators who own the existing condominium stocks.

However, we still expect that with the increasing purchasing power of people and low interest rate mortgages next year, the new condominium projects built can be absorbed by market. How to anticipate the challenges in condominium market next year? Segmentation, targeting, and positioning (STP) probably can be a key. For example, the high-end condominium segment is predicted to be stagnant next year, because of the market limitation. To anticipate that, developers should come out with better concept projects to attract home buyers, otherwise avoid this segment.

Meanwhile, although middle segment is predicted to have a good prospect next year, but still developers are suggested to go for low cost segment. In this segment, developers will compete with the up-coming 1,000 tower government subsidized low cost condominium projects. However, with a good concept plus low price strategy developers should not worry, because market for this segment is still untapped. To expand the market, developers are suggested to move and find new development areas out of Jakarta’s Central Business Districts (CBDs).

Outside Jakarta, developers are suggested to consider Surabaya, Bandung, Batam, Depok, Bekasi, and Tangerang as a priority. Medan, Makasar, Denpasar, Malang and Jogjakarta probably have a good prospect to be tapped also next year. Many developers have depended on hard cash or cash installment payment methods in selling their condominium projects to home buyers. The involvement of banks in the transaction is very limited. In effect, this strategy has limited the market of their condominium projects. With the down trend of mortgage interest rate next year, developers can involve banks in financing their transactions with buyers to expand the market. (Sasmaya Tuhuleley)