Mixed Signals from Indonesia’s Housing Boom

Mixed Signals from Indonesia’s Housing Boom

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jakarta-skyline | credits:aditchandra
Jakarta Skyline

Property stocks are hot property in Indonesia right now as reported by Reuters last weekend. Investors can get huge reduced gifting stakes in retail hotel complexes, commercial development and housing projects.

Some of these gifting (schemes) are reduced with a 70% discount against the property’s own selling price. While share prices have skydived in the country, reflecting a market crash, property stocks still provide investors with ways to make profits.

This strategy seems to pay off well right now as homes are sold like there is no tomorrow.

The model offered by companies such as Ciputra Development CTRA.JK, takes market capitalization, then deducts cash and value for recurring income, while offering land bank for investors. With these high reduction in prices, it is no wonder that property moves faster than freshly baked bread right now.

Investors can get land, property and shopping malls for incredibly low prices but since they are tied up in stock, they are not liquid.

The risk behind this investment strategy is clearly with the investors, since they risk losing it all if the developer goes bust before they cash in on the profits.

So while it sounds rosy to acquire cheap and potentially very profitable real estate, it could still end in disaster.

Right now, property developers are flourishing in Indonesia with Ciputra Development more than doubling their home pre-sales in the first half of 2008. Rival PT Bakrieland Development ELTY.JK also powers ahead with 76% growth.

Jakarta’s home prices have risen by some 15 % since last year, giving developers the chance to push margins up, even though the cost of construction and land has kept similar proportions.

Indonesian home buyers also like the new introductions to fixed rate mortgages. Mortgage rates currently stand at 10.25 %, which might seem expensive compared to other parts of the world, but a couple of years ago they were 18 %.

Despite this tendency in property shares, Ciptra Development shares only rack up around $1 million a day in trading at the moment. This equals the non existence of liquidity of funds.

Developer Bakrieland trades with around $10 million of daily volume and has the biggest liquidity potential at the moment.

The housing sales growth is expected to weaken over the coming months because interest rates are set to rise further. Despite this, the market seems steady, since there are plenty of resources within the country to balance it.

Developers who got caught in the horrible 2005 inflation, have even signed price agreements with steel and cement suppliers to cap cost rises to a maximum of 3 percent this year, opposed to the shocking 8 percent in 2005.

This will give them some financial protection should the worst become real. It will certainly be interesting to see how this all pans out over the coming months.