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How will the 11% VAT increase and the plan to increase interest rates impact the property market in Indonesia?

MarketCommentaryPPN111536x1040
1. Will the VAT increment to 11% and inflation, alongside the increase in interest rates outside of Indonesia have an impact on the property market in Indonesia?
Last year was actually a pretty good period for the property market, especially for the residential sector. With attractive incentives, it was considered favourable in generating enthusiasm for property purchases in the midst of unstable conditions.

The increase in VAT to 11% starting this April will affect various aspects of the market, especially on people's purchasing power. In the midst of slow economic conditions that are still struggling to recover, people's purchasing power has not fully recovered. The increase in VAT coupled with several other increases, such as that for basic electricity and fuel tariffs at the same time, clearly have an impact on the business world and public consumption in general. The increase in VAT will be an extra challenge for the property sector.

There has been a strong correlation between Gross Domestic Product (GDP) growth and property absorption. The decision to buy or invest in property will likely be postponed in the near future due to the weakening in purchasing power and sluggish investment momentum amongst property investors. For investor type of buyers, the expectation for potential yield produced by the property is the ultimate consideration when purchasing a property.

In addition to factors other than the increase of VAT, there are also other external factors that could pose challenges for the growth of the property sector; one of those is soaring inflation. If inflation rises, it is most likely that interest rates will also be adjusted upwards, which will add pressure to the property industry.

In general, the impact on all sectors, whether residential, office, retail or industrial, is all the same. However, the cycle is somewhat different for each sector. One sector may have passed through the bottom of the cycle while another still needs some time to recover. All in all, property business is about the cycle, with most of the sectors having already hit bottom and expecting a positive trajectory.

In the office sector, we still see a slowdown, so there is a possibility that this year the clock position will remain at six and it will need a slightly longer time to recovery than other sectors.

The hospitality industry has indicated a gradual improvement, mainly in occupancy rates, however is still facing a number of challenges going forward.

We maintain our positive outlook for the residential sector given the on-going VAT incentive. If this can be prolonged, the residential market will continue its upward momentum, especially in the lower to middle segments.

The reduction in visitor traffic (mainly due to the policy limiting the movement of people) within malls has led to decreasing occupancy. Further, the increase in VAT will add more pressure to both landlords and retailers because the price of merchandise will be subject to additional costs. The additional VAT will be reflected in the price of the goods, becoming an additional burden for both the landlord and tenant because transactions between these parties will also be subject to VAT.

2. In line with the government's plan to increase VAT to 12% in 2025 amid the current conditions and polemics, what are the projections for the property market itself towards 2025?
When we look at the property market, we see not only external factors, such as economic factors that include rising costs such as we are currently facing now, but also internal factors from the supply side. Sectors with over-supply conditions currently see the policy as an additional challenge. All in all, we expect property business to gain traction over the next two or three years on the back of strengthening economic.

3. How optimistic are we that the property market will remain stable while still facing the challenges?
We are still optimistic, so far. This is all about the cycle. We think that the policy that adds more burden to the recovery might possibly be reviewed, particularly when the economic situation becomes even more challenging.

Right now, the most important thing is to adapt to the abilities, appetites and needs of today's market. Maybe it's not only just related to the product, it could be in terms of payment, or by other offers that could be given to the market.

Considering the current market condition, the other important thing is to not focus too much on making big margins, but rather, put more attention on product absorption.

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Ferry Salanto

Senior Associate Director

Research

Jakarta

As Head Research Department, Ferry is in charge in providing property market knowledge for internal purposes and for clients. The scope of sectors covered in the quarterly market report comprises office, apartment, retail, hotel and industrial estate.

In regional tasks, the Heads of Research of each country work together in providing regional market reports covering the Asia Pacific region and globally. Currently Research Department is not only operating as a cost-centre department, as he and his team have been assigned by the Central Bank to provide monthly market information.

On the consulting front, the task involves providing a wide range of advisory services to our clients. Working closely with Consulting Department, we help clientsby preparing feasibility studies to determine whether their property projectsare viable from both financial or marketing aspects. 

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