Property Investment in Trend-driven Market of Indonesia
By: Regawa Paramasiddi
Property investment has been increasingly accessible to Indonesians, especially with the boom of middle class in Indonesia seen over the last ten years or so. This phenomenon ignited new spending powers translated into new lifestyle from a daily cup of Starbucks, to a 2-week leisure trip to Japan, to a new apartment unit in a mixed-use compound. The high inflation rates in Indonesia, however, pushed prices up from lunch menus to taxi fares. The new lifestyle spending spree is definitely not helping savings get any better. This increasing need to beat high inflation rates, supported by various radio talk shows that convinced the working class to start investing in property (mainly for capital gain), gave birth to a great demand for property assets.
Major cities such as Jakarta, Surabaya, and Bandung have been lucrative markets for property developers. But one thing about most Indonesian people is that they are very sensitive to shifts in trend. In the property market, the tendency to quickly follow trend, for instance, has led to some trend-buying as seen in the condotel boom in Bali from 2006 to 2012. The increasingly popular unit booking number or NUP (Nomor Urut Pemesanan) has also exploited the reactive manners of many Indonesians, as it allows a project to sell hundreds of units in only a few days by gathering buyers with pre-booked purchase orders at a single time. Flocking hundreds of willing buyers in the same location at the same time ignites fear of not getting a good unit and afraid of missing out on golden opportunity. These are some of the exploited feelings, which in the end resulted in impulsive buying; buying more than what they planned to do or buying a unit they later realised was not worth it.
A trend in demand leads to a trend in supply and after a while leads to the most feared word for any seller or buyer: oversupply. This is not to say that the boom of property investment in the last decade was a bad thing for buyers, but there are some key words that people should really understand, such as timing and market knowledge. In an environment driven by trend, what best to follow than what other people are doing or buying? Of course, we all know that the risk of being a follower is that if you are in the last train car the future may not look too rosy. It is always difficult to talk about property investors as there is a wide spectrum of buying powers and buying motives. Nonetheless, the best gain can be achieved by buyers who clearly understood what their buying motives are. Clear target on what they want to achieve will ease the process of selecting which property would best match their requirements, objectives, and financial limitations. Are they buying for long-term capital gain or short-term flipping? Are they buying for recurring rental yield income? Will they be okay with a low rental yield as long as the capital value keeps increasing or will they really need a higher rental yield? Buyers should also be sensitive and aware of the property options they have. Are there enough options to consider? Or are there slightly too many options offering pretty much the same thing?
With property investments becoming increasingly accessible, we, as buyers or investors, often ask this question: If my friend can do it, I can do it too. But, buying powers can be different, and the same goes with buying motives; not to mention the different financial backings. If we are talking about mid-segment working class buyers group, the financing help from parents can definitely set different price affordability. So, what works for other people may or may not work for us.
The similar situation is faced by property developers. The increasingly accessible property investment applies also to people who want to develop a project. The availability of pre-sales, the accessible bank loans, and the option to do land cooperation, allowed the birth of new developers big and small. The same trend-driven market characteristic was also found among developers. It normally takes around 4-5 years between a location claimed as sexy and an oversupply of certain property market in that same ‘sexy’ location. The five years of sexiness is normally followed by a long wait for another decade or so for the location to be as attractive again. People are reactive, both buyers and sellers. In situations like these, understanding the timing (read: where you are in the trend cycle) is vital. This can only be achieved with the help of sound market knowledge. Big players or developers can boost their marketing campaigns in tough cycles, but smaller ones may not have the privilege to do the same.
Back in early 2011, when Real Estate Strategy was commissioned to do a market study for a condotel development in Bali, we have already given the recommendation to sell only part of the total number of units. This was a time when new condotel projects were still entering the market with high optimism. A similar case happened in 2014 in Samarinda when we found that the decline in mining activities of East Kalimantan will require a housing development to alter its target markets quickly if it were to survive.
In a trend-driven and reactive market like Indonesia, timing is almost everything. Potential buyers, of course, will need to be cautious of news from media, marketing gimmicks, and even those marketing-driven property market reviews. Property developers or investors should also understand the main goals of the project, the internal team’s financial strength, and up to the design and engineering aspects. The more unfavourable the project’s position in the trend cycle is, the more it needs help from various aspects from precise market positioning/ pricing, suitable architectural design, to phasing strategy for longer-term development. In the end, everyone wants a profitable and sustainable project. But, in a sensitive market like in Indonesia, sometimes that small extra work of objective self-assessment is the difference-maker between a failed project and a successful one.