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Chinese investments drive growth of Indonesian real estate sector

Chinese property buyers’ interest in Southeast Asia’s biggest country picks up after governments cooperate.

When someone mentions Indonesia, it is mostly about Jakarta, the capital city, or the island of Bali, popular with tourists the world over. But Indonesia is more than that. It is actually the fourth-largest country in the world and the largest ASEAN country by both population and GDP. The country spreads across a sprawling archipelago made up of 18,306 islands (more than half have not been named), which spans 5,271km from west to east.

In recent years, steady investment flows have allowed Indonesia’s economy to expand at a rapid pace, growing at about five percent. According to a PwC report, by 2050, Indonesia is expected to be the fourth largest economy in the world, after China, India and the US, if various government-led policies, aimed primarily at providing new opportunities for foreign investors, take shape.¹

Is Indonesia next big property investment hotspot?

Despite its strategic location, Indonesia has not benefited much from the Belt and Road Initiative (BRI), a trillion-dollar effort by China’s President Xi Jingping to create a modern-day Silk Road that will link parts of Asia, Europe and Africa through trade and infrastructure networks. But all that is about to change.

In October 2018, Indonesia and China finally agreed upon the terms of cooperation under which the BRI would roll out and leaders of the two countries signed an agreement to jointly promote economic cooperation. Analysts agree that the partnership, though still in its infancy, is bound to attract more Chinese investors and in turn more Chinese home buyers. ²

In fact, since 2015, China has stepped its investments in the Indonesian economy. From being a peripheral investor, it is now Indonesia’s third-largest investor, having contributed an estimated US$10.2 billion into infrastructure projects.

Chinese interest in Indonesia’s real estate has also picked up, according to Juwai.com, a leading Chinese property website. The website saw a 26.2 per cent increase in enquiries between the first and last quarter of 2018.

What makes Indonesia attractive to foreign home buyers?

While property in Indonesia has proven to be a desirable asset for foreign investors – particularly from China – the performance of the real estate market continues to be influenced by political developments and fiscal reform, such as changes to the luxury property tax. In a bid to support property investments, policymakers announced plans in late 2018 to cut taxes on luxury properties and revise other tax rules associated with the real estate industry.³

The luxury levy of 20 per cent on bungalows or high-rise condos will now apply only to properties valued at 30 billion rupiah (US$2.1milion) or more. Previously, the luxury tax applied to houses with a sale price of IDR20 billion (USD1.5 million) and apartments priced at IDR10 billion or more.

To further encourage more foreigners to invest in Indonesian real estate, the government now allows foreigners to own landed properties for a period of up to 80 years. Previously, land titles can only be held by Indonesian citizens. Foreign land ownership is against the constitution. The new regulations have buoyed investor confidence and expand the local real estate market to international home buyers.

Property hotspots in Indonesia

Jakarta is set to become a major economic contributor, the city with 30 million people is the capital of a nation with 260 million people. It is expected that Jakarta’s economy and property market still perform fairly well in the future once mass transit and light rail lines go up. Property price appreciations are expected to follow suit.

In Bandung in West Java, China Railway Engineering Group is now building a high-speed railway linking the city to Jakarta. The railway will greatly help Bandung’s economy as well energise property sector once it is completed. Chinese working on this project have expressed interest in investing in local real estate.⁴

In Bali, China ranks second after Australia in terms of international tourist arrivals. As the number of Chinese tourists increases, so too is the interest from Chinese home buyers. Last year, hundreds of Chinese attended a Bali investment forum in Macau. Most of the Chinese attendees focused on property.⁵

Lombok is another desirable property becoming desirable among property buyers too. As Bali as starts getting crowded and noisy, many expats are choosing to live off the main island.

What’s ahead?

The Indonesian government’s infrastructure and pro-investment reform efforts bode well for Chinese property investors looking at emerging markets in the east to expand their asset portfolios. Experts say Indonesia is a long-term play and a fairly safe destination for property investments. As the country continues to grow, early buyers of Indonesia property should also start seeing gains well before its real estate market becomes “mainstream”. Chinese home buyers should find Indonesia appealing if they are looking at long-term capital appreciation, diversification of assets and provision of a safe haven for their investments.

Sources: 1. pwc Global: The world in 2050; 2. The Jakarta Post: The struggle to define Belt and Road Initiative in Indonesia; 3: Oxford Business Group: Foreign investment flows drive growth in the Indonesian real estate sector; 4. The Star: Bandung Jakarta HSR back on track; 5: Garupa Bali: Hundreds of Chinese investors in Bali