Fitch: Indonesia Low-Cost Housing Stimulus, But Potential Curveballs for Developers

The Indonesian government's recently launched stimulus package includes looser regulations that should boost construction of low-cost housing and the government's "one million houses programme", Fitch Ratings says. However, there might be some curveballs ahead for larger property developers seeking to benefit from participation in the programme.

This package announced on 23 August 2016 is unlikely to be the end of the changes for this segment of the housing market. Instead, Fitch believes it could be followed by more adjustments that could prove unfavourable for the developers' business, given the current government's emphasis on welfare improvement, especially for low-income earners. An example would be tougher enforcement of the 3:2:1 rule that requires developers to build three low-cost and two mid-priced houses for every high-end home they sell.

The stimulus package removed a number of regulations on low-cost housing developments under five hectares; effectively removed rules stipulating the location of housing and requirements on minimum land height in flood-prone areas; and eased the process of approving master plans and removed the need for formal studies on the impact on local traffic. It also clarified previous areas of uncertainty, such as building on land on which ownership rights have yet to be established, and allows for concurrent applications. The government estimates a significant reduction in processing time to 44 days from 769-981, and fees to just 30% of the previous amount.

These measures were introduced in a bid to boost low-cost housing construction, a crucial plank of the government's plan to provide homes for low-income earners under its "one million houses programme", and to reduce Indonesia's housing shortfall, which stands at around 13.5 million homes. The measures also followed mounting cries from private-sector developers that participation in the government's low-cost housing programmes was not feasible due to regulatory and administrative hurdles that inflate development costs.

However, Fitch expects developers to face difficulties in raising the prices of low-cost housing in the short term - even if the prices of building materials were to rise - as the government will expect developers to absorb such costs in return for participation in the low-cost housing segment.

In addition, enforcement of the "3:2:1" rule has been weak thus far, due to the vagueness in the definitions of the houses themselves. A mid-priced home is defined as one with 60-200 square metres (sq m) in land area with a minimum building area of 36 sq m; while high-end homes cost 4 times more. The regulation also lacks specifics on penalties for non-compliance.

Greater clarification and enforcement of the "3:2:1" rule would disadvantage developers as it could limit their ability to maximise monetisation of their land banks.