Who wouldn't want to own a beachside condo in Bali? If you're living under lockdown, the prospect is tantalizing.
That prospect has moved a little closer.
Indonesia is looking at adapting its extremely complex rules for foreign ownership of real estate. If the liberalization proceeds as expected, shares in apartment developers are well worth watching. As are the property listings along Jimbaran Bay.
Southeast Asia in general has a weird set of restrictions governing what overseas occupiers or investors can own. Only in Malaysia are foreigners able to buy the freehold title to both apartments and landed homes, as long as the property is more than the equivalent of US$250,000. But, while land ownership may not be possible, condos can also be sold to foreigners in Singapore, Thailand and the Philippines.
In Indonesia, foreigners are restricted to a leasehold of up to 80 years. That has to be renewed after 30 years, and then again after 20 years. While this is a hassle in itself for owners, the bigger issue is that foreigners are restricted to property carrying a certain category of lease. Any Indonesian will be highly reluctant to buy a property that falls into this restricted lease category, limiting your capacity to sell.
The proposed change in Indonesia's law would allow foreigners to buy and hold the freehold title to apartments. This hak milik sarasun title is the same that Indonesians would own. For now, foreigners can only have a "right to use" for an apartment, and this lack of ownership would change.
I told you the rules are complex. There are actually three portions to the title of a property in Indonesia: the certificate of ownership; the building title; and the land title. Currently, foreigners are not allowed to own the building title in a building with a hak guna bangunan title, the kind that almost all condos carry. They are restricted to hak pakai property, also a "right to use" permit.
Opening up foreign ownership of Indonesian condominiums would give a boost to Indonesian developers, and their shares. The government appears to be working on language in its proposed Omnibus Law that would encourage foreign property ownership.
Key among the Indonesian developers who would benefit are Bumi Serpong Damai, which has a U.S.-listed ADR (BSPDY), as well as Pakuwon Jati, listed only on the Indonesia Stock Exchange as PWON. Those two companies have a particularly high exposure to higher-end high-rise developments, the kind that would appeal to foreigners.
PWON got 23% of 2019 sales from high-end condos, while the figure is 15% for BSPDY. Foreigners will likely be required to purchase apartments worth a minimum of 3 billion rupiah (US$212,000). So you can become not only a foreign owner in Indonesia, but also a rupiah billionaire!
There isn't much upside yet priced into the stock of the developers. "Market expectation on this catalyst is low, as foreign-ownership talks have been going on for years without coming to fruition, but we think current developments may provide its biggest chance in years," Ahmad Maghfur Usman writes for Nomura. The Japanese brokerage recently expanded its penetration of Indonesian stocks with a partnership with local brokerage Verdhana to provide research on 50 or so Indonesian listings.
The changes are included in the huge Omnibus Law currently making its way through the Indonesian parliament. The draft bill submitted by President Joko Widodo in February aims to transform the Indonesian economy and streamline legislation in a wide range of industries. One of the stated aims is to spur foreign investment and make it easier to do business in Indonesia, which has in the past put barriers in place that make life tough for foreigners and favor locals.
I'm a scuba diver, so I have a soft spot for the world's largest archipelago. I even like Jakarta, one of Southeast Asia's famously traffic-snarled capitals. "Welcome to my office," the heir to one of Indonesia's largest property developers told me upon offering me a lift to my hotel in his Range Rover.
Still, I see the potential for Indonesia, where 40.6% of the 267 million population are under the age of 25. It is a can-do place. The level of connectivity in big cities, particularly Jakarta, is improving significantly, to the degree that office workers have gone from no Internet to wireless Internet in one go, skipping the desktop/home computer stage we went through in the West.
Besides its tourist spots -- Bali chief among them in terms of a place foreigners might base themselves -- Jakarta attracts a host of expatriates working in resource-related industries. Indonesia is a major producer of commodities such as oil, natural gas, rubber and palm oil. But it has an increasingly influential middle class, making it an important consumer market, particularly for fast-moving consumer goods.
Unilever Indonesia has a U.S.-listed ADR that plays this space under (UNLRY). Marriott International (MAR) operates 40 hotels in the country, and in pre-Covid days began a major expansion of its portfolio last year, looking to build that out to at least 53 properties.
The world's fourth-largest country in terms of population is going through a tough time. Indonesia on Wednesday said that its economy shrank for the first time since 1999, when it was struggling through the dollar-debt disaster of the Asian financial crisis.
It has proved surprisingly resilient in recent years, though. In the wake of the financial crisis in the West in 2008-09, Indonesia, China and India were the only members of the G20 group of the world's largest economies to post positive growth.
The new figures show that Southeast Asia's largest economy receded 5.3% for the June quarter, compared with the same time last year. That was worse than the 4.6% drop predicted by a poll of economists, and is down from growth of 3.0% in the first quarter.
Indonesia reported absolutely no cases of Covid-19 until March, a figure that I felt was not believable whatsoever, given the outbreak elsewhere in Asia. It now has 115,056 confirmed Covid-19 cases, running neck and neck with the 115,980 cases in the Philippines for the worst outbreak in Asia.
Indonesia's case count has doubled since the start of July. Equally worrying is that the daily rate of around 2,000 new infections has shown no signs of abating. The very low death count of 5,388 almost certainly is far from a full tally, and is one only set to rise substantially.
Once travel resumes, though, an Indonesian island might make for a very attractive getaway. It may even be worth a trip to the local property brokerage while you're in town. The recovery phase for Indonesia will surely see those listings cut in price right at a time when you and I may be able to buy.