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Jakarta until 2024: offices and

industrial may outperform

Regina Lim
January 2017

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1 Positive outlook for Indonesia until 2024
As global growth slows in 2016-2017, only a few Indonesia is now expected to be the fastest growing
bright spots with reasonable growth and stable economy in Asia, ahead of the Philippines, Vietnam and
governments remain globally. In Southeast Asia, China. The reasons behind the optimism are
growth in Thailand, Indonesia and Philippines is still improvements in a few key areas:
accelerating and is surprising on the upside.
Political situation has improved markedly: The second
largest political party, Golkar, has realigned itself with the
Figure 1: GDP growth for Indonesia, Philippines,
government, improving the governments ability to
Thailand is surprisingly on the upside
8 implement policies decisively. Golkar has also endorsed
7 Jokowi for another term in 2019, laying the ground for a
6 decade of stable government and long-term policy making
5 at least until 2024.
3 Successful tax amnesty could improve fiscal room and
upgrade in credit rating: Early reports on Jokowis tax
amnesty point to a surge in declarations that have reached
half the target set for March 2017. If confirmed, the inflows
could ease fiscal pressures. S&P maintained its BB+ rating
in June 2016, but could upgrade Indonesia to investment
2015 2016 forecast in Jan 16 2016 forecast in Sep 16 grade in 2017. This would boost investment into Indonesia
Source: IMA Asia
and increase credit growth.

Why Indonesia? Currency could stabilise on lower inflation and current

In the last two decades, Indonesia has been seen as a account deficit: In 2010-2015, GDP growth slowed while
large, underdeveloped country with enormous potential for inflation rose and the Rupiah depreciated consistently. With
growth. Yet, until recently, political instability, high inflation slowing to 3.4% in 2016 and Bank of Indonesia
government debt and low credit rating, high inflation and a lowering its reverse repo rate to 4.75% in October 2016,
depreciating currency have deterred investments and there is scope for the Rupiah to stabilise from here. We
hampered growth. In the last 12 months, economists have expect inflation to stay at 3-4% and the BI reverse repo
substantially turned more positive about its economic policy rate to stay at cca.5% for the next few years.
growth until 2024.

Figure 2: GDP forecasts for Asia until 2020 Figure 3: Inflation and BI policy rate
8.0 8.0
7.0 6.9
Philippines 7.0
6.5 6.5
Vietnam 6.0 6.0

4.0 China 4.2 4.5
Malaysia 3.9
3.0 Thailand 3.0 3.5
Singapore 3.0
2.0 2.6

2016E 2017E 2018E 2019E 2020E 2021E Inflation rate Bank of Indonesia policy rate
Source: IMA Asia, Sep 2016 Source: IMA Asia, Sep 2016

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 2
2 Office sector best way to play into growth
Office oversupply to ease after 2017 As a result, DKI Jakarta vacancy rate rose from 7% in
2014 to 20% in 2016, and we expect it to peak at 25% in
DKI Jakarta Grade A office rents have fallen by 8.4% and 2017 before falling in 2018-2021. We also expect CBD
capital values have slid 11.6% over the last 12 months, due office rents and prices to recover from 2018.
to significant supply and low demand. We expect rents to
correct by a further 11% in 2017 to Rp 383,000. Landlords Current market conditions present a
with buildings that are completed in 2016-2018 are trying buying opportunity
to secure pre-commitments and are cutting rents to attract
anchor tenants. While current conditions are challenging, we see this as a
buying opportunity, especially if one expects a more stable
Figure 5: Jakarta Grade A office rent and capital value political environment over the next decade to boost
400,000 60.0 economic growth and foreign direct investment. IMA Asia
350,000 expects Indonesias GDP growth to accelerate to cca.7%
300,000 by 2020. This could boost office demand growth to 8-10%
250,000 40.0 y-o-y. Historically, office demand has tracked GDP growth.
200,000 30.0 In 2010-2011, GDP growth exceeded 6% y-o-y and office
150,000 demand increased by 9% p.a.
50,000 10.0
Figure 6: DKI Jakarta office demand and Indonesia GDP
0 0.0

13.00 7.0

CBD office rent IDRpsmpm 11.00 6.5

CBD capital value million IDRpsm (RHS) 9.00
Source: JLL 5.5
Rents are declining due to a severe oversupply situation. 3.00 5.0
DKI Jakarta office supply rose 20% over 2015-2016 and is
1.00 4.5
expected to grow by a further 12% in 2017. Thereafter,




supply growth will decline to 4% p.a. in 2018-2020.

Coincidentally, office demand has weakened in 2014-2016
Demand growth % GDP growth % (RHS)
due to the elections, slower economic growth and the
decline in the oil, gas and commodities sectors. Source: JLL

Figure 4: DKI Jakarta office demand, supply, vacancy

1,200,000 30%

1,000,000 25%
Office space sqm

800,000 20%

600,000 15%

400,000 10%

200,000 5%

- 0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Ch in stock Ch in occupied stock Vacancy rate

Source: JLL

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 3
Future supply likely lower due to New development charges that cream off the majority of
the development profit are now levied for all plot ratio
development charges increases. This is likely to deter developers from new
initiations of large office buildings. Thus, we expect office
The increase in office supply in 2015-2017 was a result of
completions after 2018 to be much lower than previously.
the sharp increase in rents in 2011-2013, when rents rose
three times from Rp 100,000 psmpm to Rp 330,000
psmpm. Capital values also increased from Rp 15 million Comparing Jakarta and Singapore
psm to Rp 51 million psm within three years.
Even after all the office developments in the pipeline are
With construction cost for high quality office buildings at completed, the stock of modern office buildings in Jakarta
Rp 9-11million psm, the sharp increase in rents and capital will be just slightly higher than the stock in Singapore (Fig.
values allowed for much healthier profit margins for 8). In contrast, the Indonesia economy (excluding
developing office buildings. agriculture and mining sectors), at USD640bn, is double
the size of the Singapore economy at USD293bn (Fig. 9).
In 2010-2013, developers were able to secure planning Employment in the financial, real estate and business
permission to redevelop older assets into office buildings. services sectors in Indonesia is also four times that of
Some of these projects secured a substantial increase in Singapore (Fig. 10).
plot ratio without payment of significant development
charge. Since 2014, however, it has become challenging to In the last six years, employment in financial, real estate
secure planning approval to increase plot ratios, according and business services in Indonesia doubled but occupied
to the developers we spoke to. office space in Jakarta grew by just 50% (Fig. 11),
according to Statistics Indonesia.

Figure 8: Office stock in Singapore and Jakarta Figure 10: Employment in financial, business services
120.0 109 4.0
100.0 3.5
Occupied office space msf

80.0 70

60.0 2.0
1.5 1.1 1.3
40.0 0.9
20.0 0.4 0.5
- -









Jakarta Singapore Indonesia Singapore

Source: Singapore dept of statistics, Statistics Indonesia Source: Singapore dept of statistics, Statistics Indonesia

Figure 9: GDP excluding agriculture and mining Figure 11: Office demand and employment
800 120.00 4.00
700 640 100.00
600 80.00
60.00 2.00
USD bn

400 1.00
274 293 20.00
- -
200 148
Occupied office space
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Employment in financial services, insurance, real estate
Indonesia Singapore (millions) (RHS)

Source: Singapore dept of statistics, Statistics Indonesia Source: JLL, Statistics Indonesia

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 4
3 Increase in stock to boost investment sales
As we expect Greater Jakartas office stock to increase by Figure 12: Effective rents USD psm p.a.
40% over 2015-2020, we think there would be more 600
opportunities for investors to buy more assets as well. So 500
far, asset sales in Jakarta, Manila, Kuala Lumpur and Ho
Chi Minh City have been low, largely reflective of the low 400
stock of commercial buildings in these cities. 300
Over the last 5 years, Jakartas property market
transparency has improved significantly, faster than the 100
progress made by other Southeast Asian cities. The 0
market is now more transparent than the Philippines and 2014 2015 2016 2017 2018 2019
similar to Thailand market. Due to this, more international KL Jakarta Bangkok
investors have entered the market, including GIC and
Manila HCMC
Mitsubishi Estate.
Source: JLL

Figure 14: Real estate transparency score (1 to 5)

4.50 Our capital value forecasts are conservative, as they
assume office yields are maintained at 7.8% over the next
four years. If Indonesia inflation remains moderate and the
3.50 seven-day repo rate is maintained at 4.75-5.0%, there is
potential for cap rates to compress.

2.50 The Bank of Indonesia shifted its reference rate to the

seven-day reverse repo rate in August 2016, as it sought to
2.00 improve the transmission mechanism between the policy
rate and bank rates. This is a positive move but it could
2010 2012 2014 2016 take time for its effectiveness to be felt due to other
Singapore Malaysia Thailand challenges, such as the lack of interbank credit lines and
Indonesia Philippines Vietnam uneven distribution of liquidity, in the banking sector.

Source: JLL
Figure 13: Effective rents USD psm p.a.
Jakarta rents and capital values are 5,000
affordable vis--vis comparable cities
After the office rent correction, Jakarta is now very 3,500
affordable vis--vis comparable cities in Southeast Asia. In 3,000
2014, Jakarta rents were cca.50% higher than in Bangkok 2,500
and Manila. We expect this gap to narrow and Jakarta 2,000
rents to be close to that of these cities by 2018.
Similarly, for capital values, we expect Jakarta office prices 1,000
2014 2015 2016 2017 2018 2019
to be more competitive than Bangkok and just 20% higher
than Manila in 2017. In 2014, Jakarta office capital values KL Jakarta Bangkok Manila
were 40-70% more expensive than Manila and Bangkok.
Source: JLL

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 5
4 Demand for industrial property rising
Growth in the logistics sector upgrades to ports, roads, toll roads and power plants.

Although the logistics sector remains in its infancy in The Jokowi administration has also prioritised cutting red
Indonesia, it is growing rapidly and interest from tape and easing bureaucracy. Several economic policy
international developers and investors is strong. packages have been implemented with direct positive
implications for the logistics sector. Restrictions on foreign
Existing modern warehouse space is extremely limited in participation in several logistics related sectors have been
comparison to other markets in the region and, historically, loosened and licenses have already been granted to
supply has largely been demand driven. FMCG, 3PL, operate bonded logistics centres.
manufacturing and pharmaceutical groups have typically
commissioned projects to be delivered on a bespoke basis Outlook
and few developers have taken on the risk of building
projects speculatively. Encouraged by regulatory support, potential improvements
in economic growth, favourable demographics, Indonesia's
Demand has been driven by a variety of sectors. While sheer scale and the rapid emergence of e-commerce,
2015 was a year of limited growth in the consumer goods interest from investors picked up rapidly in 2016.
space, FMCG groups enjoyed strong growth in prior years.
Unilever have a long-established presence in Indonesia In early 2016, GIC announced a partnership with local
and their flagship 90,000 sqm mega-distribution centre in group Mega Manunggal Property (MMP) to develop
Bekasi is one the largest of its kind in Indonesia. Indonesia 500,000 sqm of high-quality warehouse space over the
has a large manufacturing base with several large auto next five years. Reportedly, the partnership already has
groups such as Toyota and Honda operating out of facilities three projects under construction, including a 60,000 sqm
in Greater Jakarta. 3PL groups such as DHL have a mega distribution centre for Lazada in the South of the city.
countrywide presence and a cluster of pharmaceutical
facilities is located South of the city. While build-to-suit and sale and leaseback deals remain
the most likely point of entry for market entrants, we expect
While e-commerce has grown rapidly in many markets to see more speculative builds and the emergence of an
regionally and around the world, the sector remains active leasing market. Mitsui & Co., as part of the SLP
underdeveloped in Indonesia. Historically, e-commerce has group, has two for-lease warehouses in Karawang, to the
been held back by ailing infrastructure, a prohibitive East of Jakarta, while Daiwa House has one warehouse on
regulatory environment and relatively limited access to the the open leasing market and another in the pipeline.
formal banking system. However, the sector is growing Growing interest from private equity groups, sovereign
rapidly. Lazada is arguably Indonesias leading e- wealth funds and specialist logistics developers is likely to
commerce platform, and in 2016, Alibaba acquired a mean more open market investment transactions.
controlling stake for USD1 billion. Several traditional brick- Regulations to encourage the creation of local REITs could
and-mortar retailers such as Matahari (part of the Lippo also provide more exit options in the medium term.
Group) and MAP are also making an online push. Amazon
is likely to enter in the medium term as part of an Rapid land price growth, more than 300% between 2010
expansion strategy across Asia. and 2015, and much more moderate rental growth (high,
single digit annual growth over the past five years) has led
to a disconnect between expected and achievable yields.
Government upgrading infrastructure
As land prices have started to flatten out and growing
President Joko Jokowi Widodo was elected in 2014 and a demand is expected to drive rental growth, JLL believes
priority for his administration was upgrading Indonesias that this gap could narrow in the medium term. This is
ailing infrastructure network. Capital spending began to expected to further boost the investment case for
gain traction from late 2015 and high-profile infrastructure warehouse property in the medium term.
projects are now underway countrywide, including

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 6
Indonesia and Vietnam most For example, Samsung, Nokia, LG Electronics, Intel
and Wintek Corp have shifted supply chains to
compelling for industrial demand growth Vietnam from 2014. Taiwan-based manufacturer
Foxconn announced plans to move its low-end
Economists expect Indonesias manufacturing sector
manufacturing from China to Indonesia to enjoy cost
to grow by 6.5% in 2021, up from 5% in 2016. This is
savings and provide diversification.
based on the improving political situation, stabilizing
The pace of growth of Southeast Asia as a
currency and social economic policy changes that are
manufacturing hub depends partially on the extent to
being put in place. Middle income population in
which Chinas costs increase, but also on the rise of
Indonesia is expected to grow by 18% CAGR in the
domestic consumption in Southeast Asia, provision of
next 5-10 years, driving consumption and
physical and talent infrastructure in the region.
manufacturing activities.
Domestic consumption: Southeast Asia enjoys
In the last 5 years, China started to restructure its
strong demographics with a median age of 30 years
economy towards higher value exports. Due to higher
and 40% of the population is in the 15-39 year-old
cost of labour, land and other factors, multi-national
age group. As more of the population move from
manufacturing firms started to shift their facilities to
agriculture into manufacturing and services jobs, we
cheaper locations, including India and Southeast
expect the middle income population to rise by 9%
Asia. In 2010-2015, exports growth from Indonesia,
CAGR in the next 5 years. About half of these people
Malaysia and the Philippines accelerated to 5-6%
will be in Indonesia, where the middle income
annually, while exports from Vietnam and India
population is expected to increase to 80 million by
increased by 9-10% p.a. in the last two years.
2020, from 46 million in 2015.
We expect the trend to continue and gain momentum.
Minimum local content laws in Indonesia apply to
Deloittes global manufacturing competitive index
the telecommunications, energy and modern retail
projects that Indonesia, Vietnam, Malaysia and India
sectors. These rules are likely to drive even more
will rise the fastest in attracting more global
manufacturing activities into the country as
manufacturers over 2016-2020. The index is gleaned
companies seek to reach Indonesian consumers. For
from a survey of CEOs of manufacturing firms as well
instance, from 2017, laws require at least 30% of the
as subject matter specialists.
components in smartphones sold are made in

Figure 2: Global Manufacturing Competitiveness Index Figure 6: Middle income population (millions)

120 7 250
100 200 193 mil
80 4
3 150
124 mil
60 2
1 100
40 0
-1 50
0 -3 0
2015 2020
Indonesia Thailand Philippines
Malaysia Vietnam Singapore
2016 2020 Change in rank (RHS)
Source: Brookings Institute
Source: Global CEO survey by Deloitte, 2016

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 7
5 Luxury residential market recovery takes time
While we are optimistic about Jakartas office and industrial Investors are wary of buying units above Rp 5 million as
markets, we are more cautious about the residential sector. they are concerned about audit checks. Since President
Jokowi took office in 2014, more efforts have been made to
Since the government adjusted loan requirements and combat corruption. The tax amnesty program launched in
raised luxury residential property taxes in 2013, both 2016 is seen as one more step in cleaning up the system
volumes and prices have declined. While the mass and before a deeper crack down on corruption.
middle market have remained, luxury residential projects
with units above Rp 5million are still facing slow sales and Indonesia has worked hard to reduce corruption and has
flattening prices. made improvements on this front. Indonesia was ranked
highest in East Asia in the Corruption Perceptions Index in
Figure 15: Softer high-end residential volumes
2000, but successfully reduced corruption over the last 15
and prices
years. Corruption in Indonesia is now perceived to be lower
1800 45.0 than in the Philippines and Vietnam, and similar to India
1600 40.0
1400 35.0
and China (Figure 17).
IDR million/sqm

1200 30.0
Condo sales

Figure 17: Corruption Perceptions Index

1000 25.0
800 20.0 100
600 15.0 90
400 10.0 80
200 5.0 70
0 - 60
Sales* Upper price (RHS) High-end price (RHS) 20
Source: JLL -

While mortgage restrictions have been relaxed, interest

rates are likely to decline and home loans for pre-sales are 2000 2005 2010 2015

now allowed, we believe these alone are not sufficient to Source: Transparency International
bring investors back into the luxury residential market in
the short term. Mass market volumes could increase if Relaxation on foreigner ownership will
mortgage penetration rises. While interest rates in help recovery, but not high on agenda
Indonesia are as high as those in Vietnam, mortgage
penetration is extremely low. Amongst the Southeast Asian countries, Indonesia has the
Figure 16: Mortgage penetration in Southeast Asia strictest rules on foreigner ownership of residential units.
Subject to some conditions, non-resident foreigners are
20.0% generally allowed to buy private apartments in Singapore,
15.0% Kuala Lumpur, Bangkok, Manila and Ho Chi Minh City.
10.0% Indonesia stands out as an exception, as only foreigner
5.0% residents in Indonesia can buy residential units, and limited
0.0% to Hak Pakai leasehold tenures.

However, we do not expect this to be a high priority on the

policy agenda for Indonesia in the short term, as the
Mortgage debt to GDP Mortgage rate government remains focused on more pressing socio-
Source: World Bank
economic issues.

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 8
6 Issues Indonesia still needs to address
Lack of quality education and skills Due to the lack of skills, labour productivity is low, yet
minimum wages are some of the highest in the region.
In the immediate term, Indonesia is focusing on moving out Minimum wages in Jakarta rose by 44% in 2013 and this
of the middle income trap, reducing economic inequality placed Jakarta minimum wages higher than the rest of
and improving infrastructure and ease of doing business. Southeast Asia. Indonesias labour market regulations are
one of the most rigid in the region. For instance, it is costly
To address economic inequality, Indonesia needs to to dismiss workers, with a minimum severance pay of 100
improve the quality of education. In rural areas, children weeks of wages. As a result, companies are less likely to
are less likely to attend schools and schools are less likely formally employ workers.
to have trained teachers or appropriate facilities. This Figure 21: Minimum wage in East Asian countries
drives down the average quality of education outcomes.
74% of Indonesian 15-year olds lack basic mathematics 1,000
and science skills, according to PISA international tests. 800
This is the 5th worst score out of 82 countries. US$ per month 700
Figure 19: Percentage of 15-year olds with PISA 500
math/science scores below level 2 (basic skills) 400
90% 200
80% 100
70% -
20% Source: World Bank, 2015
0% Figure 22: Labour market legislation index






Hong Kong

S. Africa







Source: OECD, 2015 6.0

Need to improve the ease of doing business
In East Asia, Indonesia lags behind the Philippines, China,
Vietnam, Thailand and Malaysia on ease of doing
business. Firms encounter difficulties in securing
construction permits, enforcing contracts, payment of Regulation on temporary employment Requirements for collective dismissal
taxes, getting electricity and registering property. Protection against dismissal

Source: OECD, 2015

Figure 20: Regional ranking for ease of doing business
Construction Getting Registering Getting Paying Enforcing Resolving
Country permits electricity property credit taxes contracts insolvency
Singapore 2 2 2 2 2 1 2
Hong Kong 1 4 14 3 1 2 3
Malaysia 8 9 10 3 5 5 4
Thailand 3 3 3 17 10 4 5
Vietnam 7 22 5 5 25 7 14
China 24 20 6 11 19 6 7
Philippines 20 6 16 19 20 16 6
Indonesia 23 16 17 11 24 21 8
Source: World Bank, 2014

Southeast Asia Capital Markets Research Jakarta until 2024: offices and industrial may outperform 9
For further information, please contact:

Regina Lim
National Director, Singapore Capital Markets
+65 9783 3297

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