Indonesia’s economic situation remained challenging in the fourth quarter of 2015, according to research from real estate firm Savills, and the effects of the slowdown were felt in the property market.
Throughout 2015 all property sectors suffered a drop in demand however, the office market faced the biggest challenge due to a significant rise in supply. By the end of December 2015, total existing stock in the Jakarta CBD had reached 5,187,114 sqm, representing around a 10 percent increase year-on-year (YoY).
The spike in supply alarmed landlords, causing some anxiety regarding the level of competition they will have to face going forwards. Moreover, developers are also paying close attention and bracing themselves for lower rents and a difficult and protracted battle to attract occupiers as the market is expected to favour tenants for quite some time.
The downward pressure on rents can be seen across all office grades.
In 2H 2015 the average rental rate (average for all grades) stood at IDR 220,231 per sqm per month, representing a drop of 4.2 percent compared with 1H 2015. The greatest drop in rents took place in the Premium Grade and Grade ‘A’ segment, where the decline in rents reached 7 percent and 7.9 percent on a half-on-half (H-o-H) basis repectively.
Furthermore, with the large number of Premium and Grade ‘A’ buildings entering the market in the future, office rents for these two grades are expected to decline further.
Meanwhile, the domestic credit growth in 2015 slowed amid the nation’s overall slowdown. The slower loan growth resulted in a softening property market, especially in the residential sector, as consumers and investors were deterred by the high interest rate environment.
The Central Bank’s benchmark interest rate remained at 7.5 percent throughout Q4 2015. Loan disbursements in the country’s property market grew 12 percent in 2015 YoY to IDR 620 trillion, lower compared with 2014’s growth rate of 17 percent YoY. The lower credit growth was caused by weak demand in the construction sector as well as a weak mortgage demand, Savills noted.
In addition to the tight credit conditions, the residential market was also negatively impacted by the government’s decision to impose strict tax measures on the luxury segment.
A similar story played out in the retail market. This sector faces real challenges as general consumer spending remains weak and the country’s buying power was eroded further in the last quarter of 2015. Responding to the slower economic growth, most retailers chose to be cautious, postponing or scaling back on expansion plans. The challenging conditions lead to a lower absorption rates during Q4 2015. Nevertheless, despite the decrease in demand, mall occupancy remained healthy at around 92 percent, which performed better compared with other property sectors. In contrast to the office market, the limited amount of new supply as a result of the strict issuance of government permits to build new malls in town is keeping new competition in check.
