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Analysis: The Jakarta office market: Full recovery ahead?
The impact of the financial crisis that struck the global economy in mid-2008 has shown some signs of improvement
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he impact of the financial crisis that struck the global economy in mid-2008 has shown some signs of improvement. For those affected economies, the contraction has slowed, owing to the various government stimulus packages that have helped spur domestic demand. For selected Asian economies the impact was muted and their economies continued to post positive growth — even during the crisis.
Unlike many other countries around the world, Indonesia is fortunate to have emerged through this global crisis relatively unscathed. The strong domestic consumption rooted in a huge population base of approximately 240 million people has been the main engine of growth for the Indonesian economy over the past ten years. This is one of the key reasons why foreign and international companies continue to invest in Indonesia.
This optimism has helped mitigate the negative impacts of the global crisis on the Jakarta property market, especially in the office sector. While most regional markets suffered a big slump in their office demand throughout 2008, the Jakarta CBD office market continued to record healthy demand levels and closed the year with the highest take-up rate since the Asian Financial Crisis in 1998.
However, the office market began to experience the effect of the global slowdown later that year. Since early 2009, corporate occupiers have been reviewing their expansion plans with some delaying them. A number of tenants have also started consolidating their offices to save on operational costs.
Nonetheless, these trends have not led office demand to fall into negative territory. With fewer tenant expansions and more consolidations, office demand in the Jakarta CBD in 2009 declined by around 50 percent year-on-year.
The positive demand in the office market thus far has been boosted by robust interest mainly from major foreign and international companies — as evidenced in the volume of foreign direct investment (FDI) into the country over the past few years. Based on our analysis, the Jakarta office market has a positive correlation with the national FDI trend. Jakarta is the launching pad and preferred location for foreign companies to set up their representative offices whenever they first invest in Indonesia.
Based on the historical correlation between FDI and office demand in Jakarta CBD (see chart), major drops in the FDI were usually followed by significant fall in office take-up albeit lagging around one to two years. Conversely, a strong pickup in FDI is usually followed by significant growth in office absorption, as seen in 1997 and 2008 period.
An exception was in the year 2000 when office demand slowed although the FDI had plunged continually for over a year due to the highly unstable political environment during that period.
Even though other Asian economies were contracting as a result of global financial crisis, FDI into Indonesia continued growing in 2008. The slowdown in FDI began to take place in 2009 as a lot of investors and corporations scrapped their expansion plans and took a cautious approach to the continuing crisis. Nevertheless, despite a decline in FDI in 2009, investor’s interest to Indonesia remains high.
The view from respected financial institutions such as Morgan Stanley and CLSA saying that Indonesia will soon join China and India as one of key regional growth centers is an indication that global investors’ sentiment towards the Indonesian economy has gradually strengthened.
The chart shows that despite a fair cut in FDI last year, general investment trends (in our analysis, it is represented by 2-year period moving average trendline on FDI) are still positive. As such, if we refer back to the correlation with office demand, this suggests that the potential increase in corporate tenants should be more likely to happen during the next few years and the drop in actual office take-up during 2009 may have been caused by “held back” enquiries.
Sooner or later, such pent-up demand will be released in the following years. On that basis, we
envision that office take-up in the Jakarta CBD will move upward quite strongly over the next two
to three years.
This optimism towards Indonesia’s economic and business outlook is also supported by a more conducive socio-political environment. The smooth and peaceful democratic election last year indicates that the country is gradually maturing. In addition, the second-term appointment of President Susilo Bambang Yudhoyono supported by the Democratic Party dominating the legislature, had bolstered the possibility for a better and stronger government, which in turn, will raise investor’s confidence.
Growing confidence amongst foreign and international companies can be seen in the current growth of local service sectors, particularly banking, insurance, telecommunication, IT and retail. Since mid-2008, prominent global and regional corporations such as Barclays, HSBC, RBS, ANZ, Prudential, Shell, Lotte and Axis have expanded their operations in Indonesia through new business establishments or acquisitions.
This trend is seen to continue moving forward and thus will support growth in demand in the Jakarta office market.
Last but not least, the relatively low occupancy costs (office rents in Jakarta are the lowest amongst
the markets in the Asia Pacific region), yet with comparable quality standards in office buildings could further attract major regional and international corporate tenants when they review their office expansion plans.
