
In 2001, Goldman Sachs’s Jim O’Neill coined the term BRICs to entail the world’s four largest emerging-market economies. The OECD later added Indonesia and South Africa into the list (forming BRIICS). In particular, China and India account for a third of the global population and are key drivers of the Asian economy. Given the size of its peers, relatively little has been written about Indonesia, which has a population of 250 million and economic growth averaging more than 5% over the past decade. In fact, foreign investors have attributed a significant risk premium to investing in the country, resulting in outsized gains for domestic players. This is most prevalent in Indonesian real estate, where public listed developers can have EBITDA margins averaging 40%.
The political development of Indonesia over the last 2 decades coincided with its economic story. Post 1997, Indonesia underwent a period of stagnant economic growth, partially due to the strict terms of its IMF bailout and banking restructuring. From 2004-2014, economic growth averaged more than 5.5% including a respectable 4% economic growth during the Great Recession of 2009. This period of growth coincided with the commodities boom and strength of domestic consumption, the latter constituting 56% of Indonesia’s GDP. With the rise of the middle class (Indonesia’s GDP per capita is ~USD 4000) and young demographics (50% of the population is below age 30), Indonesia is forecasted by McKinsey to become the world's 7th largest economy by 2030.
Foreign investment in Indonesia had come in waves over the last 15 years. The early and mid 2000s saw an influx of investments in the commodities sector, most notably coal and palm oil. Over the last 5 years, the consumer sector had become highly favored due to domestic consumption. Since the 2014 presidential elections, infrastructure has become a key priority for the government to reduce logistic costs and support productivity growth; Oxford Economics estimated spending on infrastructure to increase from $25 billion to $165 billion over the next 10 years.
However, real estate has been relatively untouched by foreign investment due to various issues. This article aims to highlight key elements of real estate in Indonesia, and critically analyze the potential for foreign investment in real estate to play a more significant role in the next decade.
The real estate sector in Indonesia has benefited from consistent economic growth over the last decade. Given increased emphasis on real estate as an asset class globally, Indonesian real estate provides opportunities for investors seeking a long-term allocation in the sector. The road to success is fraught with various challenges, including rule of law and perceived lack of information transparency. This is similar to emerging markets such as Mexico and India, where short-term challenges can provide opportunities for foreign investors to dip their feet into Indonesia.
To successfully penetrate Indonesian real estate, investors must not become over-confident in their ability to acquire land and navigate local regulations. Due to restricted investment horizons that foreign investors may seek, local real estate players often found it attractive to source capital on more friendly terms. To effectively engage local partners, foreign investors need to offer more than just equity; the capabilities in repositioning assets, improving management of existing operations, and introducing new product types will be key value propositions that will create more balanced joint ventures.
Foreign investors can benefit significantly from a first-mover advantage into Indonesia. Given its flexibility in the flow of foreign capital and opportunities in second tier cities, Indonesia is likely to shift from an alternative to a major real estate destination in Asia. Once foreign investors adapt to the experience of navigating local conditions, they can gain a distinctive competitive advantage and generate attractive risk-adjusted returns.
Download the full article here : Real Estate in Indonesia
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