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ndonesia has become an attractive market for other ASEAN countries due to its stable economic growth supported by an increasing middle class.

The country'€™s property sector still has a very positive long-term view. The supporting factor is that the number of young people in Indonesia has reached 50 percent of the country'€™s total population, which amounts to 250 million people. Young populations consist of potential first-home buyers in the coming years. This will also increase demand for commercial properties such as shopping centers and office buildings. Thus, foreign developers will be attracted, tightening competition in the property market.

Heading toward the ASEAN Economic Community (AEC) by 2015, the Association of Real Estate Indonesia has encouraged developers to improve their competitiveness through strengthening the
funding side.

Funding is a crucial factor for the success of the property project. Insufficient funds can lead to delayed project completion and not achieving company targets. More than that, it is endangering to the development plan or expansion of the company. Until recently, most developers only used conventional financing from internal funds and the banking sector.

As seen from a Bank Indonesia (BI) survey in the second quarter, 2014 showed that most developer respondents used internal funds as their primary source of financing property projects, with a level of 62.4 percent. This figure increased from 2011 and 2012, which reached 56.8 and 53.6 percent, respectively.

The secondary financing resource is banking loans, with 27.1 percent. This figure is a decrease compared to 2011 and 2012, which reached 28.2 and 32 percent, respectively.

We expected that BI'€™s regulation regarding the prohibition of indent housing sales would drive the growth of bank loans, but on the contrary, real estate financing from the bank was decreased while internal financing increased.

Bank lending in the property sector is still growing despite its growth slowing in line with rising interest rates. As of June 2014, working capital loans to the property sector reached Rp 36.2 trillion, growing by 14 percent year-on-year (y-o-y). This figure slowed compared to 2011 and 2012, which grew 34 percent y-o-y and 38 percent y-o-y, respectively.

This slowdown was also in line with the slowdown in the growth of total loans from 24.6 percent y-o-y and 23.1 percent y-o-y in 2011 and 2012, respectively, to 17.2 percent y-o-y in June 2014.

Local developers are now facing competition from foreign developers, which enjoy more advantages such as large assets and equity, strong business networks, capital with a low interest financial base, and more sophisticated investment models. The largest local listed property'€™s company assets and equity of US$1.9 million and $1.1 million respectively are still far behind compared to Keppel Land, a Singapore-based developer that has assets and equity of $10.9 million and $5.9 million, respectively.

Other financing alternatives can be used by developers from capital markets. Currently, only big developer companies can be registered in the capital market. Based on data from the Indonesia Stock Exchange (IDX), there are 54 property developers listed as public companies. Aside from the stock issuance, developers can also take advantage of other capital market instruments, such as debt securities (bonds) through public offerings. The IDX listed 38 property companies that have made public offerings of bonds.

Another capital market product that can be used by developers to finance their projects is real-estate investment trusts (REITs). REITs are investment instruments in the form of securities that can be purchased by investors from the company that publishes property REITs.

REIT securities are similar to stock certificates that reflect ownership of a particular company, but its placements are in property projects instead of company assets. Tax regulations related to REIT transactions have been released since 2007. REIT products first launched in Indonesia in 2012. However, demand from investors for REIT products is still low.

REIT financing in Indonesia is still hampered by several factors. The first is a less than efficient banking system and capital market in Indonesia. This can be seen from the high costs of funds or bank-funding costs, which can be included in the category of a high-cost economy.

One way of lessening such high costs is through the improvement of the tax mechanism. In countries such as Singapore, Thailand and the Philippines, applying REIT instruments is done through special treatment that is free from income tax. Currently, a layered tax system that inhibits the use of REITs is imposed in Indonesia. The issuers of REIT products are subject to tax, either when buying property or selling REIT products to investors.

Collective Investment Contracts (CICs) to buy REIT products are subject to value added tax (VAT) of 10 percent and fees for the acquisition of land and buildings. In addition, the rental tax must also be paid by 5 percent. As for the developers, they are subject to an income tax of 5 percent.

The high cost of tax paid by investors has caused a low interest in REIT transactions. The second factor is the lack of disclosure of corporate information, particularly for company property. The current disclosure system is still difficult to be applied, since many companies in Indonesia originally come from a family company. So they did not feel the urgency to audit their companies.

Another factor is the number of daily workers in property projects. Up to 90 percent of construction workers in Indonesia are journeymen workers that receive their salaries on a daily basis. This condition will reduce the concentration level of the workers, so there are concerns that ongoing property projects will not be completed on time.

Through the improvement of the financing side, local developers can compete with foreign developers. Therefore, we see the need for the active communication of government and business in creating real solutions that can be done to improve developer financial capability and attract investors in the
property sector.

One of them is to simplify the technical regulations and tax incentives for capital market instruments such as REIT products.