Restrictions on foreign investment in Indonesian residential property market may be eased 

Indonesia is near the top of the most beautiful countries in the world and is projected to overtake Germany, Japan, and the UK by the size of its economy, securing 4th place globally by the middle of the century.

Gross Domestic Product (GDP) is growing at an impressive rate of over 5% per year, well above the global average. The nickel ore export ban, introduced three years ago, seems to have been a success, attracting significant foreign investment into the country and turning Indonesia into a global battery-making industrial hub. The number of city dwellers is growing at an impressive pace too, boosted by high fertility rates and ongoing urbanisation.

The World Bank estimates 780,000 new household formations per year up to 2045, driving long-term robust demand for housing.

At first glance, then, Indonesia’s property market is an ideal place to invest.

According to Numbeo, a cost-of-living database,residential property prices are significantly lower than in other nations of comparable incomes.

It says that the average price of a square meter of residential property in a city centre in Indonesia is just above $1,600,significantly less than in Vietnam or the Philippines where it is as high as $2,800 and $2,500 respectively.

Demand is boosted further by rising incomes and families moving out of substandard houses to better newly built places, while the supply side appears to be reaching the ceiling of its capacity as most of the country’s major developers and builders are overleveraged with looming maturities and limited room to grow.

All in all, the prices' upside looks very attractive.

Yet, prices remain relatively low for a good reason.

With only one in five of the Indonesian families being able to afford buying a home on an open commercial market and over 2% of the population (about 6 million) being effectively homeless, the Indonesian government's top priority has long been protecting the market from affluent foreigners who would push housing prices higher, especially in places like Jakarta or Bali.

Up to 2015, no foreign national was effectively allowed to own residential property in Indonesia; all purchases were done via local nominees.

National laws still effectively ban foreigners from full ‘freehold’ ownership of the property, limiting their rights to a leasehold of a maximum 80-100 years with no access to mortgage finance. The government also set a minimum price of property a foreign investor could buy, which ranges from about $65,000 for a flat in places like Northern Sumatra to $325,000 for a house in Jakarta, Bali, or parts of Java.

It is a luxury segment by Indonesian standards; everything cheaper is left for locals.

While the restrictions have ostensibly succeeded in keeping property prices affordable for Indonesians, they have, coupled with massive bureaucracy and overstretched infrastructure development targets, limited the profitability of the construction sector.

Companies grappling with rising debt have been unable to generate sufficient free cash flows, ringing alarm bells not dissimilar to those in China.

This, among other considerations, prompted a historic move towards liberalisation of foreign ownership.

In 2021, Indonesia scrapped the requirement for a foreign buyer to have a long-term residence permit in place before proceeding with a deal and introduced some further changes in the ownership laws benefiting overseas investors.

The reform so far, though, has hardly resulted in the hope-for breakthrough.

It is estimated that so far only about 200 foreign owners have bought residential property in Indonesia directly, without a nominee, over the last several years, with just about 40 of them in 2023.

Experts blame implementation delays: local authorities are reported to still require resident IDs and keep the ownership registration process long and convoluted.

But all this is expected to soon change.

As the construction sector accounts for about 20% of GDP growth,improving domestic demand for everything from metals, energy, and concrete to services, Indonesia has no other choice but to further open up its housing market to foreign investors, at least in the premium segment.

Some speculate that eventually the government will enable fully fledged freehold ownership for foreigners as well, at least within limited, free-zone style, territories and streamline the registration process.

The government is trying to attract well off migrants too.

It recently launched a ‘second home’ visa scheme which grants a permit to stay in the country for up to 10 years for those with a stable income and more than about $130,000 in savings, a ‘golden visa’ for millionaires, and is looking into starting a ‘digital nomad’ visa aiming at young professionals working remotely.

But even the current, limited leasehold ownership appears attractive.

According to Housearch.com, a leading property search platform, average rental yield in some ‘hot’ areas reaches as high as 15%.

It means a less than 8 years payback period, and even with a modest price increase over the term of the lease, would secure a decent double-digit return on investment.

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