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ased on data amassed in May from five property developers — Bumi Serpong Damai, Lippo Karawaci, Summarecon Agung, Ciputra Development and Alam Sutera — there is a persistent strong demand for domestic property products with marketing sales reaching Rp 4.9 trillion (US$568.4 million) year-to-date (ytd), about 38 percent of a total sales target of Rp 13.5 trillion for 2011.

This robust trend is supported by historically low interest rates and the appreciation of the rupiah. While the sector has slightly underperformed so far this year, strong 2009-10 marketing sales should result in higher earnings in the second and third quarter, allowing for improved price performances of the property counters ahead in our view.

On individual performance, Ciputra Development (CTRA) has outperformed the most following aggressive launches in four new cities so far this year with upcoming projects in five new cities later this year.

As banks plan to push loan growth above 20 percent this year, we find more favorable mortgages being offered this year. With only a 2 percent mortgage-to-GDP ratio, there is more room for mortgage financing growth in Indonesia, we believe. In this regard, growth is supported by property companies’ active mortgage distribution in the form of joint promotions through buyback bank guarantees as well as interest rate subsidies.

We found three factors supporting our positive view of Indonesia’s property sector. First, growing demand versus land scarcity translated to higher selling prices in the property market. Going forward, we believe property companies will have the ability to keep their selling prices high due to land scarcity compared to growing housing demand. Growth in selling prices should continue this year, but slower when compared to 2010’s peak level.

The second supporting factor is Indonesia’s low mortgage penetration with plenty of cash transactions. Huge financing in property transactions that might create property bubbles is not happening in Indonesia given a low mortgage-to-GDP ratio coupled with plenty of cash transactions by the middle-middle up buyers, suggesting ample liquidity in the market. Based on the companies we cover, property cash transactions (i.e., soft and hard) could be as high as 70 percent.

Low cost land bank coupled with internal cash/pre-sales fund for project financing is the third factor that should support property sector. Currently, the five property companies own a sizeable and low cost land bank totaling 23,700 hectares. These developers capitalize on growing land selling prices, but conservatively use internal/pre-sales cash to finance their project developments. We believe this should minimize risk of default.

Last but certainly not least, we believe Indonesian property companies are moving toward sustainable revenue growth in the coming years as they currently develop more projects that will generate recurring income to offset volatilities in the property market. On average, we estimate 30 percent recurring income contribution in 2011 stemming from leased commercial and healthcare businesses.