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Indonesia’s Industrial Property Market

Indonesia’s economic slowdown in 2013 has not been without impact on the market for industrial real estate. Lower GDP growth, higher inflation and a devaluing rupiah tainted the macroeconomic environment, leading to a decline in stock prices and making investors wary about the country’s near-term prospects (See Outlook: Indonesia’s Economy in 2014). Legislative and presidential elections in 2014 added an element of political uncertainty. As a result, the manufacturing sector lost some of the buoyancy it had displayed in the years 2010 to 2012, which in turn softened demand for factories and warehouses and the land they stand on. In the long run, however, Indonesia’s industrial property market has a lot of potential to grow, if the government supports the process.

Designated industrial real estate in Indonesia’s economic heartland of West Java has not kept pace with the country’s development over the past years

Almost stagnant supply in industrial heartland

Designated industrial real estate in Indonesia’s economic heartland of West Java has not kept pace with the country’s development over the past years. Bank Indonesia (BI) data show that industrial estates in and around the capital – namely in Jakarta, Bogor, Bekasi and Karawang (Jabobeka) – amounted to 6771 hectares (ha) in the fourth quarter of 2013, unchanged from a year earlier and only modestly higher than 6197 ha in 2010. Jakarta itself is hard-pressed to make more land available for industrial purposes; hence additional supply has to come from nearby municipalities. Industrial estates in the province of Banten to the west of Jakarta, most of which lie in the city of Tangerang, have expanded at an even slower pace. BI’s data show them growing from a total of 5388 ha in late 2010 to 5418 ha in the fourth quarter of 2013, again with no increase registered throughout 2013.

Industrial Estate Stock (ha)

Source: Bank Indonesia

Selling prices continue to rise despite current weakness

Given the insufficient increase in industrial estate supply at a time of fast economic development, it is unsurprising that prices increased substantially. In the Jabobeka areas, the selling price almost quadrupled from an average Rp730,315 per square metre (sqm) at the end of 2010 to Rp2,741,840 in 2013. In the estates in Banten (Tangerang, Cilegon and Serang), prices rose from Rp620,340/sqm in the fourth quarter of 2010 to Rp1,577,388 three years later.

While sales prices continued their upward trend unabated in 2013, rental prices, which more closely track current economic sentiment, slowed down in the second half of the year, reflecting a dent in investor confidence as some foreign capital was withdrawn from the market. This was primarily blamed on the expectation that central banks in developed economies would begin to wind down their liquidity programmes that had previously flooded global markets with cash. The depreciating rupiah and rising borrowing costs also tainted enthusiasm for real estate investment and uptake. BI data show that rents in the Jabobeka estates rose by less than 1% per quarter in the second half of the year, after increasing around 13% in each of the first two quarters.

Industrial Land Selling Price (Rp/sq m)

 

Source: Bank Indonesia

New growth frontiers

The price of land is closely connected to industrial estates’ proximity to major cities – especially Jakarta – and transportation links, e.g. toll roads. The sluggish development of supporting infrastructure, such as dependable electricity (See Indonesia's Electricity and Power Generation Sector) and efficient seaports (See Indonesia's Logistics Sector), is one reason for the slow expansion of industrial real estates in Indonesia over the past years. Recent changes to formerly cumbersome laws and regulations on land acquisition, along with increased government spending and greater commitment to public-private partnerships (PPP), nurture the expectation that infrastructure development will speed up (See Indonesian Infrastructure: Tremendous PPP Opportunities).

Industrial investors for obvious reasons prefer estates in or near Greater Jakarta, the most densely populated region of the country and the most affluent. However, other regions are gaining traction in terms of economic growth and hence as bases for manufacturing industries. The government’s long-term development roadmap stresses the importance of developing growth centres outside of Java, especially in eastern regions of the country. The so-called Master Plan for the Acceleration and Expansion of Indonesia’s Economy (MP3EI) lays out specific targets until 2025, including the establishment of industry clusters around the country and transport links between them. This should see increased demand and supply of industrial land near these clusters. The same is true for major secondary cities, such as Makassar and Manado, but also the North Sumatran capital of Medan, which in 2013 inaugurated its new airport.

Risk factors

Two risk factors for industrial activity, and hence, Indonesia’s industrial property market, warrant discussion. The first pertains to the price of industrial land, which until 2010 was considered quite competitive globally, but since then has increased so much that it has become a burden for domestic industries. The price of land in industrial estates in Indonesia is now among the highest in the region. The Jakarta Globe in October 2013 cited a concerned official from the Industry Ministry, who explained that a square metre in Bekasi and Karawang was priced at $191, compared to $119 in Bangkok and $52 to $102 in Manila.

The second factor pertains to Indonesia’s labour market. Rigid regulations make it very costly to lay off employees and at the same time seek to prevent companies from outsourcing some activities or hiring contract workers. In addition, the year 2012 was rife with industrial action, which led to massive minimum wage hikes for 2013 and emboldened an increasingly audacious labour movement. Large-scale strikes and rallies disrupted production at major industrial estates in 2012 and 2013, putting strain on formal sector employment, and prompting some manufacturers to consider moving to other ASEAN countries.

Both of these factors have driven drive up production costs in Indonesia beyond what was justified by productivity gains. If the trends persist, higher unit costs could jeopardize Indonesia’s competitiveness as a manufacturing base for industries like automotive and auto parts, food processing, textile and consumer goods (See Indonesia’s FMCG Sector), which are the main users of industrial estates. A study by commercial real estate company Colliers International appears to corroborate this risk, forecasting that industrial rents in Jakarta would rise by just over 2% in 2014, compared to an increase of 21% in Manila. By contrast, retail rents are expected to grow at the same pace of roughly 5% in either city.

Work to be done

To keep the country attractive for manufacturers, the government must speed up planned infrastructure projects that are vital for companies to produce and distribute their goods. Those seeking to purchase or rent industrial land must carefully assess the current state and future development of infrastructure around the plot in question and consider their own costs, as they may need to improve on existing facilities. Transport links across the country and to export destinations must improve to bring down logistics costs, boost efficiency and thereby justify high land valuations. The action in the industrial real estate sector will increasingly move away from the capital area and West Java. It is areas around the up-and-coming secondary cities and industrial or yet-to-be industrialized locations in the east of Indonesia that harbour ample potential for industrial real estate, both in terms of area and price growth.