Market Situation

In line with the rest of the national economy, the real estate market in Indonesia is not in good health. In 1998, the country's GDP shrank by 14% and the Jakarta stock market lost half its value. Bank interest rates went up to 50-60% that year. The inflation rate hit 75%. As far as the characteristics of the real estate marketplace are concerned, Indonesians prefer to own homes rather than apartments. A domestic market for apartments was only legalized in 1992. They were popular as investments, especially in the metropolitan capital, Jakarta. However, activity in this sector froze in 1998 with the decay in the national economy.1

The chief economist of the World Bank for East Asia and the Pacific Region, Masahiro Kawai, is projecting that Indonesia's external debt will equal 98% of its GDP in 2000, a 100% increase since 1998. The World Bank is also estimating that the cost to the Indonesian economy to fix its corruption-tainted and financially troubled banking sector will total up to 30-40% of the country's GDP.2 The Indonesian Bank Reconstruction Agency (IBRA) has been actively taking on many of the bad real estate debts of Indonesian banks, and by mid-1999 had accumulated US$6.6 billion in real estate assets.3 The OECD, in its autumn 1999 report on the world economy, predicted positive GDP growth for Indonesia in 2000-2001, but with concerns about the problems in the banking and corporate sectors.4

Political Environment

The political environment in Indonesia is strongly negatively affected by the economic problems of the last few years. 1999 also saw the violent and highly publicized secession of East Timor, and 2000 will see a referendum over some level of autonomy for another separatist region, Aceh.

An improvement in the national economy will undoubtedly help to secure a more stable domestic environment in Indonesia. The Indonesian economy is now seen as a higher risk on a long-term basis than many of the other regional economies. The autocratic rule of former President Suharto (1968-98) still shadows both the political and economic landscape of the country, and not in a positive way.

Indonesia is a country of 220 million people spread over 7,000 islands who speak some 300 languages and dialects. Even with a thriving economy political cohesion cannot be taken for granted. For example, ethnic Chinese make up an important part of the country's business community, yet violent attacks on this community have escalated greatly in recent years, damaging internal social peace, economic development, and the country's reputation in the region.

The new president, Abdurrahman Wahid, is seen as a conciliator and consensus-builder. This is essential as not only does the country have problems with separatist regions and other internal social divisions - it must also lessen the power of the army in civilian politics. Positive developments in Indonesia's political institutions after the reign of the Suharto regime are needed at least as must as economic recovery from many of the same ills of Suharto's rule. The two may likely be interdependent for sustained domestic development in Indonesia to occur.5

Real Estate Practices

In Indonesia, real estate salespeople are not required to hold a license in order to conduct a real estate transaction.

Real estate salespeople represent either the buyer or the seller, but not both.

The usual commission on a residential real estate sale in Indonesia is 5%. For a commercial sale, the commission is generally 3%. The commission is paid by either the buyer or the seller but not both.

Business agreements between foreign and Indonesian real estate salespeople are made in writing.

Land Rights/Usage

Land speculation has been both more intensive and more unfettered in Indonesia than in the rest of Asia. The metropolitan area of the capital, Jakarta, has been the particular focus of speculation. One reason is that Indonesia does not have a progressive tax system, which some see as having been a source of significant encouragement to the private accumulation of land. In the 1980s and 1990s, land speculation became so intense in Jakarta that Indonesian banks competed to provide credit for it.

Culturally, land has been a traditional focus of investment for Indonesians. Land is not just an investment, but a symbol of one's social position and economic success. It has been reported that one result of the corruption of the Suharto era was competition between private developers and government officials for land. An official's holdings of land grew with his rank of office, with each reinforcing the person's prestige and wealth.

The development of Jakarta has been predicated on the eviction of the former tenants of many sites. Many middle- and lower-class Jakartans lost their homes through forcible eviction - often involving collusion between developers and the police or military. These evictions were carried out on many properties that were legally constructed and owned. In their place now are high-rise developments, skyscrapers, and other large real estate complexes.

In one 5-year period, between 1993 and 1998, the Indonesian Land Agency issued developers appropriation permits to some 250,000 hectares (2500 square kilometers). The permits give the developers the right to negotiate with residents in a target area for the purchase of their property.
It is alleged, however, that in practice the residents are forced to sell to the developers under threats of personal danger. And these homeowners are comparatively lucky. The Center for Indonesian Property Studies has estimated that 4.5 million people were evacuated from their homes in this manner between 1968 and 1998. While the government provided some compensation to evicted homeowners, it was generally only worth 1/20th of the market value of the property lost.

Land speculation was one of the driving factors behind the "Asian flu" that has beset all of the region's economies in recent years. However, Indonesia's economy and real estate market remain the hardest hit. The practices cited above have proved counter-productive to successful development. According to the Indonesian government's own Ministry of Public Housing, by 1999 the amount of land brought into the market by appropriational development is sufficient to meet the country's need for new homes for the next 100 years. And yet only 5% of Jakarta's population of 10 million people has access to clean water.6

Foreign Ownership

The restrictions in Indonesia's laws for foreign ownership of real estate have been a major disincentive to foreign investment in that sector.7 It typically takes around six months for a foreigner to get the permission required to engage in a real estate transaction. Most foreigners own real estate in Indonesia through joint ventures with a local company.

Foreign individuals and corporations have no legal rights to freehold or fee simple ownership of real property in Indonesia. Mortgages and secured interests in chattel and real property have legal recognition, but without an official recording system. The way foreign investors acquire land holdings is through long-term lease agreements with the government. These leases are usually for 20-25 years and are renewable for up to 100 years. Foreign investors need to be aware that there are difficulties in enforcing property rights/interests in Indonesia. The local court system is not effective for pursuing fair resolution of property disputes.8

Recommended Resources

Persatuan Pengusaha Real Estate Indonesia (REI)
Jl. Gatot Subroto 53, Slipi
Jakarta Design Center, 5th Floor
Jakarta Pusat 10260,
Tel: 62-21-549-5190
Fax: 62-21-549-5185

Indonesian Association of Real Estate Developers
Asosiasi Real Estate Broker Indonesia (AREBI)
PT. Arkajasa Propertindo
Jl. Lamandau IV No. 11.
Kebayoran Baru,
Jakarta Selatan 10710,
Tel: 62-21-720-2046 and
Fax: 62-21-726-5208 (@8 rings)

1 - Purgwowigati, Monica, I., PT Colliers Jardine Indonesia, "Jakarta Metropolitan Area," ULI Market Profiles 1999: Pacific Rim, Urban Land Institute, Washington, DC, 1999.
2 - "Indonesian debt seen at 98% GDP in 2000 - World Bank," Reuters, November 15, 1999.
3 - "Indonesia's turnaround attracts foreign investors," Real Estate Finance & Investment, International Focus, Southeast Asia, vol. 5, no. 29, p. 10, July 19, 1999.
4 - "OECD sees Asian recovery, but Indonesia blackspot," Reuters, November 16, 1999.
5 - Moreau, Ron, "Indonesia's magic man," Newsweek, vol. 134, no. 18, p. 54, November 1, 1999; "Leaders: Goodness, it’s Gus Dur," The Economist, vol. 353, no. 8142, p. 17, October 23, 1999.
6 - Harsono, Andreas, "Jakarta's dispossessed; The Big City of Bust; Land ownership problems in Jakarta, Indonesia," UNESCO Courier, p. 26, June 1, 1999.
7 - "Indonesia's property ownership restrictions deter investors," Asia Pulse, December 14, 1998.
8 - U.S. Department of State, Country Commercial Guide, Fiscal Year 2000: Indonesia.

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