New Market Report: Indonesia Real Estate Report 2016

Economic reforms, infrastructure spending, a growing service s sector and rising income s should provide a boost to Indonesia's commercial real estate sector in the medium term, increasing its appeal to investors .

Indonesia is set to see real GDP growth of 6.0% a year between 2016 and 2020. Incomes and household purchasing power are expected to increase and favourable demographics will continue to drive the retail sector and support the warehousing and logistics sectors, as consumer demand increases.

As the capital, Jakarta is the country's cultural, business and commercial centre and is home to most of its financial and political institutions. This is reflected in the city's commercial real estate markets, which tend to be more developed than elsewhere in the country. Both Bandung and Bali, the other two cities we cover in our report, are smaller centres. Bandung's economy is supported by agriculture and manufacturing, including pharmaceuticals and textiles, while Bali is driven by tourism as well as agriculture.

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The office market has been affected by the recent slowdown in economic growth. Leasing activity has been lower as companies have become more cautious about expanding. Substantial development activity is taking place, and more than 2mn sq m of new space is set to come onto the market in Jakarta between 2016 and 2018. This significant rise in supply is likely to push vacancy rates up even if demand remains healthy. Bandung and Bali are not at risk of oversupply due to a lack of development, but the office market in these two cities is unlikely to see growth given the modest levels of demand forecast.

Jakarta is home to a rapidly diversifying retail market, and a large number of global brands are establishing stores in the city. Elsewhere in Indonesia, including in Bali, the retail sector benefits from Indonesia's vibrant tourism industry. In general, changing patterns of consumer behaviour and rising incomes will remain key factors in generating demand for space in the retail real estate market. However, more space will be coming on the market in Jakarta and we expect this to temper rental rate growth.

The industrial real estate market has been suffering as a result of an under-performing external sector. Trade has been sluggish due to the slowdown in the Chinese and the world economy, dampening demand for space, while supply remains low due to build-to-suit dominating the development market. That said, demand for warehouse space is likely to pick up due to an improving trade outlook and growing manufacturing and retail sectors.

Overall, the investment prospects for Indonesia are positive due to stable economic growth over the next five years. An increase in infrastructure investment as well as government efforts to speed up the pace of deregulation in order to attract more foreign capital should begin bear fruit over the coming years.

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