The condominium market in Jakarta has enjoyed rapid growth over the last 15 years spurred by aggressive expansion by local developers and strong demand from Jakarta's growing affluent population.
Historically, the first development euphoria took place during the 1995-1997 period, which is known as the golden period of the Indonesian economy. A significant number of new projects were launched to accommodate high demand from local investors seeking to capitalize on the robust expatriate leasing market.
Later on, the sector suffered quite a long stagnancy following the economic crisis in 1998. The condominium market began to show some activity in 2002 but it was not until 2004 that this sector registered a significant increase in new development.
The smooth and successful general election in 2004 provided a boost to the business sector, including to the condominium market. New development grew rapidly in the 2004-2007 period with an annual supply growth double that in the pre-1998 period.
Unlike in Singapore and Hong Kong, the Jakarta condominium market is almost entirely dominated by local buyers. These local buyers can be classified into two groups: End-users and investors. End-users acquire condominiums for self-occupancy, while investors purchase condominiums to get rental stream and/or capital appreciation.
For both groups, interest rates play an important role. Low interest rates are preferred by end-users as they minimize buying costs. Similarly, low interest rates push investors to park their money in alternative instruments, including property.
The strong correlation between interest rates and the condominium market is reflected in historical growth patterns over the past seven years (see chart).
Following the drop in interest rates in 2002, the condominium market rose significantly in both supply and demand. When the rates plummeted in 2004, developers' appetite to build new projects peaked, as evidenced by a high number of new launches in that year.
Subsequently, the increase in interest rates in 2005 was also followed by a drop in new launches. What about 2006 and 2007? Despite gradual cuts in interest rates over the period, condominium demand did not increase, but instead sales slowly decelerated. The correlation seems to break up.
As mentioned earlier, some of the buyers in the condominium market are pure investors -- they would only invest if the return were better than in other sectors.
A major surge in the stock market during the 2006-2007 period is believed to have impacted the condominium market during those years. As one of the best-performing markets in the world, the JSX (now IDX) attracted a lot of interest from investors, steering their investment from the condominium market to the stock market.
Poor market sentiment, as a result of sluggish economic recovery following the massive fuel price hike in late 2005, is also seen as a factor that constrained demand growth in the following years. Our analysis led to a conclusion that although interest rates have declined to a significantly low level, they have not been balanced by a sufficient growth in potential buyers.
As such, although developers regained their appetite to a healthy extent, slower sales in 2006 forced them to reduce new launches in the subsequent year. The low rate would only benefit the condominium market if there were an adequate ready pool of buyers. In short, low rates act more as a catalyst for demand rather than a driver of demand.
With the recent increase in prices of fuel and other basic necessities, many analysts predict inflation will rise to around 11 percent in 2008 before slowing down to around 7 percent in 2009.
An anticipated environment of high inflation and accordingly high interest rates over the next two years is expected to create a more challenging situation for the business environment.
We expect the Jakarta condominium market to experience modest growth over the next one to two years. High development costs triggered by rising prices of building materials will potentially reduce new launches in the market.
On the demand side, end-users will be more selective in their purchases during tight economic conditions, while investors will continue to exploit higher interest rates to obtain better return.
Nevertheless, the medium and long-term prospects of the Jakarta condominium market appear positive. Expensive land prices in the city are a major factor that will push residents to live in high-rise condominiums. Chaotic traffic in Jakarta will also continue to spark demand for accommodation near to the workplace.
The concept of "back to the city" living has prompted more of Jakarta's affluent residents to consider buying condominiums near their office as a second home.
More young families, especially those who have studied overseas and are familiar with apartment living, have also begun buying condominiums as their first home. For this reason, we believe condominium development in the central business district is still prospective and appealing.
The writer is head of research at Jones Lang LaSalle Indonesia
