Fitch: Easing Property Rules in Indonesia Unlikely to Boost Demand in Short Term

Fitch Ratings says that the Indonesian government's deregulation measures for the property market will take time to translate into significant and sustained improvement in demand.

Activity in the Indonesian property market has waned in the past 24 months as potential buyers delayed purchases and developers put off launching new projects for sale. This was due to slowing economic growth, several increases in the central bank's policy rate since mid-2013 to rein in inflation expectations, and regulatory uncertainties.

Recent developments suggest that the government is eliminating uncertainties and relaxing regulations, especially those pertaining to the ability of consumers to purchase property. This marks a shift from the government's previous policies to cool the market.

Fitch's Indonesia Property Watch 2Q15 report outlined these measures, which were designed to boost domestic growth. For instance, Bank Indonesia in June 2015 relaxed the down payment requirement for property purchases by an average of 10%. This was followed by a proposal by the Ministry of Finance in September 2015 to change the threshold for the imposition of the 20% luxury tax to a property value of IDR10trn from a previously planned IDR2trn and from the current threshold that is based on property size.

In addition, the finance ministry has proposed to allow foreigners to own property valued at more than IDR10trn. This compares with current rules that allow foreigners to hold a property in Indonesia only under a "right to use" title, versus Indonesian citizens who may own property under a "freehold" title.

These revisions are generally positive for the property sector, and form part of the government's broader range of reforms to attract investment and boost demand for property. However, drafting of new regulations in Indonesia has historically been slow, and therefore Fitch believes that the reforms will take time to translate into significant and sustained increase in property demand. Furthermore, the ban on taking a mortgage on unfinished properties remains in place, although the down payment requirement has been relaxed - and this is likely to continue to keep the lid on demand. Fitch also expects domestic purchasing power and consumer confidence to continue to be weak in the near term as economic growth falters.

Thus, we expect larger property developers with a stronger track record and strong recurring income streams - PT Bumi Serpong Damai Tbk (BB-/Stable), PT Lippo Karawaci Tbk (BB-/Stable) and PT Pakuwon Jati Tbk (BB-/Stable) - to continue to outperform their peers and to be more resilient in the face of operating challenges.