May 18, 2011 | Comments 1 The Indonesian property market is undergoing massive expansion, but most Indonesians will not be able to take advantage of

May 18, 2011 | Comments 1

The Indonesian property market is undergoing massive expansion, but most Indonesians will not be able to take advantage of it unless the government fixes the land laws, industry players have said.

The current growth of the market has seen prices rise some 20 per cent or more per year in major cities, the Jakarta Globe reported.

The country’s property market has rebounded strongly since the 1997 economic crisis, with price expansion of 100 per cent in 2001. Three years later, in 2004, prices shot up sharply again.

It’s a trend that is likely to continue. Growing consumer purchasing power has created a new segment in the market that is expected to grow exponentially in the future.

Commodity prices are unbelievable and they are pushing everything up,” said Harun Harjadi, managing director of Ciputra Group. “Land prices in Jakarta are crazy, and last year prices went up 30 per cent.”

Ciputra Group, one of the largest property developers in the country, has felt the ups and downs of the market. In 1997, the rupiah collapsed and demand dried up, leaving it facing huge losses and mounting debt.

Today, the group has projects in 23 cities across the country. It hopes to expand to 30 cities as it tries to harness the favorable economic winds, but it has learned the hard lessons of the past.

One thing that has changed is the way we do our business,” Harun said. “Land acquisition cannot be financed by borrowing any longer as such loans have been on Bank Indonesia’s negative list since 1997. As property developers are not allowed to borrow to finance land acquisition, we have to finance such activities through issuing equity and bonds through the capital markets.”

To do that, he said, the size of the issue needs to be substantial, giving only the largest developers access to the capital markets.

In addition, land acquisition has been difficult since 1997. “Most of our big projects now are on land that we acquired pre-crisis,” he said. “Post-crisis, acquiring large tracts of land has been almost impossible.”

Analysts said Indonesians are not putting their land or property assets to maximum use. In his book, “The Mystery of Capital”, Hernando DeSoto suggested the formalization of informal property rights.

They can be used to put in motion more production by securing the interests of other parties as collateral for a mortgage or by assuring the supply of other forms of credit and public utilities,” DeSoto wrote.

Other obstacles include relatively short windows of time to use property, which current laws set at a maximum of 25 years. Analysts said such regulations discouraged potential foreign investment. Neighboring countries such as Malaysia and Singapore provide 99-year land leases.