Down and Dirty with the Property Recovery - Indonesia

When the US financial crisis started to show its true global teeth, all the talk of markets being immune to it quickly died...

When the US financial crisis started to show its true global teeth, all the talk of markets being immune to it quickly died - round about the final quarter of 2008. Indonesia filed in with the rest of Asia in ending its talk of avoiding the crisis, in the final quarter of 2008, Bank Indonesia noted that 'In Q4/2008, Indonesia's economic performance began to show signs of impact from the global economic downturn'. Around the same time, the stock market plummeted reversing all the gains that took place between 2005 and 2008 and the exchange rate depreciated significantly.

Projections for 2009 were that growth would slow from over 6% in 2008 to 4-5 percent in 2009, with the private sector stating 2.5% as a worst case scenario. In early 2009 the World Bank called Indonesia a 'high exposure' country that faces significant crisis-induced deceleration of growth and a significant increase in poverty, and every man and his dog with an opinion was questioning the government's policy response.

It couldn't have been that bad though because the Indonesian economy grew by 4.5% in 2009, before accelerating to 6.1% in 2010, and again to 6.4% in 2011 according to the CIA World Factbook. In fact, as it turned out the notion that some economies would survive the international crisis unscathed wasn't completely wrong, just that we were looking in the wrong place for the survivors.

The BRICs had their hey-day heading into the financial crisis. Brazil was hit, Russia was hit, India suffered but managed to maintain positive growth albeit much slower, and China kept growing but has since had to act on a bubble. Several more of Asia's biggest hitters also inflated bubbles in stimulating their economies around the financial crisis, so hardly unscathed. Meanwhile the next wave of emerging markets have proven that they are shaping up to be the next leaders of global emerging market growth, and Indonesia is one of those markets.

HSBC CEO Michael Geoghegan coined the CIVETS grouping (Columbia, Indonesia, Vietnam, Ecuador, Turkey, South Africa) as leading the world out of recession, but for others the MINT (Mexico, Indonesia, Nigeria and Turkey) grouping is the one to watch. Indonesia is in both so it seems you really can't go wrong in Indonesia.

The theory is that these markets have populations that are growing rapidly in number and affluence leading to massive numbers of people transitioning from poverty to middle class, and with it soaring demand for quality property, which is usually in short supply in markets so early in their development. This is because property has previously been something that only the wealthy few can afford, as it now comes into reach for more and more people you have demand outstripping supply, leading to rent increases, price increases, and of course development opportunities. At the same time you have mass migrations from rural areas into the larger cities where employment is growing quickest, and these are easily identifiable as the investment hotspots.

Indonesia has the fourth largest population in the world at 245 million, and as we have already seen its economy is growing strongly. It is also worth noting that only 13% of Indonesia's population lives below the poverty line, compared to 70% in Nigeria. So, it is surprising that Indonesia's property market did in fact suffer a downturn as a result of the financial crisis, despite huge pent up demand. According to the Global Property Guide index Indonesian property prices fell by 3.21% in the year ending 2010, although this is after inflation has been taken into account.

According to Bank Indonesia's Residential Property Survey prices then grew by 4.5% in the year ending Q3 2011, but again, after inflation the Global Property Guide index shows prices grew by just 0.36%.

This is because of several factors hampering growth, including high interest rates, restrictions on foreign ownership, high tax rates, high build costs and political red tape. But investors needn't particularly be put off by the low capital growth of Indonesia property, a: because investors choosing young markets like this should only ever be looking long term, and b: because it also means that Indonesia property is undervalued making for high rental yields. According to the Global Property Guide Jakarta apartment yields are currently between 7.9% and 11.3%.

- Wednesday 04 April 2012

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