Posted On : The Jakarta Post, 26 March 2020
Harizul Akbar Nazwar, B.Eng., M.Ec.Dev., MAPPI (Cert.)

Missed Prediction
At the beginning of the year, many predicted that the property market in 2020 would getting better. Several economic stimuli, both directly and indirectly related to the property market, have been issued. One of the policy packages that has become an effective strategy for the government to boost property growth is the relaxation of loan to value mortgages from 10% to 5%, effective on December, 2019. In addition, since mid-2019, the Minister of Finance has also reduced PPNBm (Value Added Tax on Luxury Goods) by issuing the minister of finance regulation number PMK 92/PMK.03/2019 from the 20 billion to 30 billion thresholds with the aim of boosting the middle to upper class property market.
But until the first quarter of 2020, there were no signs that the property market in Indonesia was improving. Colliers research results show that the growth in apartment prices in the Jakarta CBD in the fourth quarter of 2019 grew stagnant, while as year on year (yoy) it only grew by 0.8%. Bank Indonesia’s Residential Property Price Index (RPPI) recorded a decline in growth of only 1.77%, lower than 1.80% in the third quarter of 2019 (yoy). The slowdown was also shown in the commercial property market. The commercial property market in Indonesia has experienced a significant slowdown, from 3.12% (yoy) in the third quarter to only 0.04% (yoy) in the fourth quarter of 2019.
This condition was also exacerbated by the depressed condition of the Indonesian economy during the end of semester 2019. BPS noted that Indonesia’s economic growth in 2019 was only 5.02% lower than in 2018 which was 5.17%. Considering that the property sector has a linkage to 10 other sectors, the national economic slowdown will also directly impact the property sector slowdown.

The Storm is Coming
The global market responded very reactively to the outbreak of Covid-19. Stock markets in a several numbers of Asian countries fell by 2%-5% at the end of February 2020. Likewise, the Rupiah’s position was depressed against the Dollar and hit the level of 16,600 per USD as of March 23, 2020. The Indonesian Stock Exchange has even implemented a number of halt trading due to the stock market drop of more than 5%. So, will this catalyst have an impact on the property sector?
The impact of the COVID-19 outbreak is being felt across all aspects of work and life. Understandably, the implications for each sector are quite specific and different. In exceptional circumstances, like the current environment, it is difficult to view the longer-term repercussions. However, many predicted that global economy will experience an economic recession, even worse than 2008 global crisis. The key to this condition is uncertainty.
Speaking about offices, at this crisis time, Jakarta Governor has declared circular letter for the company to immediately closed their business activities in Jakarta area. With this condition, the company has difficulty running its business and increases the potential difficulty for rental payment. On the other hand, the increase in rental rates will be depressed because of a significantly reduced new demand. Office utilization rates will fall as remote working increases, and landlords with exposure to short-term leases are the most vulnerable. As a note, it is reasonable to expect the historical cycle of the property market during the outbreak of SARS almost two decades ago in Hongkong, when the office rental market dropped dramatically -17% yoy, followed by the other countries that affected.
The covid-19 storm also about to target the commercial property sub-sector such as hotels that officially prohibit MICE (Meeting, Incentive, Convention, and Exhibition) activities for an undetermined time. Hotel and tourism sector are predicted to be hit very hard given the restrictions on foreign tourism to Indonesia. The decline in hotel occupancy rates could touch the level of 20% – 40% in the coming months. At this very condition, hotels will be experiencing the most short-term volatility in performance. Thus, considering that hotel and tourism are the sector that have a large employee burden, the impact of the multipliers will be tremendous as well.
In the retail sector, social distancing policies force all retails in Jakarta and surrounding areas to have limited operating hours, and even some shopping centers choose to fully close their operations. This restriction will directly affect tenant income which in turn will affect the ability to pay rent. Domestic consumption should also weaken in the short term as citizens minimize their outdoor exposure. While online retailers and supermarkets should benefit during this period.
In residential property, the volatility about slowing property prices are unlikely to be shock as other sectors. But what needs to be worried is the purchasing power parity to pay the mortgage within this current economic. The Minister of Finance said the worst possibility of Indonesia’s economic growth in short term due to Covid-19 is about 2.5% to 0%. When compared to mortgage rates of 10% – 13%, the gap between economic growth and mortgage rates is too high, thus increasing the risk of default. This must be anticipated immediately by lowering the mortgage rates and stimuli the purchasing power.
Another matter that needs to be anticipated is the construction sector which is the main pillar of property sector. Some project progress, especially those using materials imported from countries affected by Covid-19 have a risk for its development sustainability.
With negative sentiments continuously capitalized on the impact of Covid-19, investors and end buyers tend to hold investments in the property sector and prefer to keep their cash as a preventive measure in the midst of global economic uncertainty. It is clear that we don’t want to hear “brace for impact” warnings, yet the cloud is getting dark.

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