Oversupply Causes Property Bad Credit

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PROPERTY GROWTH in 2008 will certainly hike along with credit growth in the banking sector that is estimated at Rp 210 trillion. Regardless of whether bank credit growth can be boosted up to 33% –so far it has recorded 24 percent only – financing in the property sector, mainly in landed houses and low-middle class apartments, will certainly remain active. The one thing that requires serious attention is property oversupply that will no doubt cause bad credits. The slash in interest rates (BI Rate) to 8 percent will certainly have positive impacts on credit growth in the property sector. Although banks still keep interest rates at 9-12 percent, it is almost certain that property credits will grow so rapidly this year, at least during the first semester. Optimists estimate that national property credits will grow higher in 2008 as compared with 2007 that recorded a 28.5 percent growth.

In the meantime, subsectors key to property credit growth will still be dominated by the housing subsector and low-middle class apartments. Although this year’s property credits will grow so rapidly, credit realization is viewed as relatively safe considering that 65 percent of property loans will go to house ownership (KPR). This situation differs from the pre-crisis era when property credits mainly flowed to construction financing and even to land clearance for developers. With such a property credit composition, non-performing loans/NPL in the property sector can be kept down.

Even, Bank Indonesia (Central Bank) estimates that bank NPL in 2008 will be 5-5.5 percent. This condition is suported with the application by banks of debt restructuring regulations. Last year’s bank NPL is estimated at below 5.75 percent, down from 6.31 percent in 2006. Indonesia Property Study Center (PSPI) estimates that this year’s property credits will only reach Rp184 trillion, or a growth of 24 percent, which is lower the 2007 level. “This year, property credit growth will be only 24 percent,” said center director Panangian Simanungkalit. Of the Rp184 trillion, about 20 percent (Rp36.8 trillion) will go to construction projects; 15% (Rp8 trillion) to the real estate sector for KPR-like houses that are priced at Rp250 million.

The remaining amount will be channeled for KPR houses valued at below Rp250 million. KPR contribution to capitalization in the housing sector was 69 percent in 2007, and it is estimated to decline to 66 percent this year. Beside landed houses, it is almost certain that a significant portion of this year’s bank credits will be allocated for the construction of 1,000 simple apartments, widely known as “people’s apartments”. The construction of 1,000 apartments is planned for completion by 2009. Other than Jakarta, Bogor, Depok, Tangerang and Bekasi, they will also be built in Bandung, Semarang, Yogyakarta, Surabaya, Makassar, Banjarmasin, Batam, Medan and Palembang.

Admittedly, people’s recovering buying power has helped push the significant growth of property credits. Property credits were dominated by consumptive loans like house ownership credits and apartment ownership credits. Aside from people’s recovering buying power, credit growth has also been pushed by a decline in credit interest rates. This was the reason why many developers have more ambitiously pushed the construction of their property projects. On one hand, credit growth will likely push credit expansion in the whole property sector.

On the other hand, the development of property like shopping centers and apartments needs to be carefully watched so as to prevent oversupply, which can cause non-performing loans. In 2007, the ratio of property credits to total credits is almost similar to the one before the 1997 crisis, namely around 16 percent. Accordingly, banks should carefully select debtors and projects to be financed. So far, developers have appeared to be able to identify market opportunities and determine whether or not they nearly reach an oversupply level.

Example, supply of office buildings and retail space in in Jakarta in 2008 will be higher than last year. New supply of office space is estimated at 356,000 sqm and retail space at 444,000 sqm. Office space, whose new supply mostly comprises Grade A type, seems to be significantly absorbed by the market as evidenced by rising occupancy. Demand for quality office space in Jakarta’s business centers is so high. In 2008, office space occupancy in Central Business District will reach an estimated 86.8 percent. How about retail space?

The incoming of foreign retailers to open new outlets or enter modern shopping malls here, as allowed by existing regulations, will certainly push retail space occupancy to 74.4 percent this year. Meanwhile, supply of condominiums and rental apartments will surely decline this year. Condominium supply will be only 6,700 units, while rental apartment supply will be around 3,100 units. They are much lower than new supply in 2007. This shows that developers have now become smarter in reading the market. (Deddy H. Pakpahan)