Boston, MA -- (SBWIRE) -- 05/26/2014 -- We believe a large, youthful and growing population and a strong economic trajectory give Indonesia's real estate sector strong fundamentals which bode exceptionally well over the long term. However, there are a number of short-term risks which will subdue yield growth over the coming quarters. Increased interest rates to combat wider economic issues will see borrowing costs increases, subsequently subduing consumer demand in the retail sector. Additionally, office and factory expansion plans under consideration will increasingly put on hold as the increased costs make projects more expensive for companies to execute. Given the external risks to Indonesia's economy, although not as pertinent as some of it regional peers; we expect that rents will remain broadly neutral as landlords fear increasing rents may drive out businesses. We do, however, see opportunities for investors in new property, who may capitalise on lower prices, especially in the government's special economic zones.
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Indonesia's real estate potential growth areas are driven by increasing activity on the part of international investors, favourable fundamentals and the potential of the archipelago's consumption-driven economy, alongside corporate growth strategies looking to both domestic and international channels for growth. There is considerable optimism in the Indonesian commercial property market. The last few years have seen impressive growth in the Indonesian real estate sector. Rents were hardly touched by the global financial crisis (with the exception of the office sector) and have, in fact, generally increased over the past few years. However, in line with our view for short-term headwinds in light of broader economic conditions, according to new market data, the office space market in Jakarta slowed during Q313. As measured by the regional division of US real estate services company Jones Lang LaSalle, the net take-up of office space during this period totalled 61,000 square feet (sq ft), which compares to 93,400 sq ft in the previous quarter. The decline has been attributed to 'a depreciating rupiah and rising borrowing costs'.
One substantial hindrance to both the industry and the economy as a whole is that Indonesia's physical infrastructure is substandard. The extent of future growth depends very much on the government's ability to push through bureaucratic reforms that will allow much-needed infrastructure investment, and the approval of the land acquisition bill is an important step in the right direction.
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