July 4 (Bloomberg) — Indonesian presidential hopeful Joko Widodo plans to allow foreign investment in apartments to boost tax revenue, a move that could spur demand for property in the country’s luxury market.
Foreign investors would be able to purchase apartments worth at least 2.5 billion rupiah ($210,000) in the capital, other main cities and Bali island, Setyo Maharso, a member of his campaign team, said in an interview yesterday. Foreigners are barred from directly buying Indonesian property, leading to illegal transactions via proxies, so allowing them will enable a luxury tax to be imposed on sales, he said in Jakarta.
Widodo, known as Jokowi, is seeking to revitalize his chances with new pledges days before the July 9 vote, having seen a commanding lead against Prabowo Subianto evaporate in a race that survey company Roy Morgan says is “too close to call.” The property idea, not in Jokowi’s published policy manifestos, may be a political gamble in a campaign filled with anti-foreign rhetoric, yet would prove popular with investors.
“If the government opens this market to foreigners, it will benefit the government as they can get more revenue from tax and the property market will become attractive,” said Anton Sitorus, head of research at the Indonesian unit of Jones Lang LaSalle Inc. “Foreigners could buy 5 to 8 apartments in Indonesia, while in Singapore, Hong Kong and Australia they could only get one,” said Sitorus, referring to cheaper prices.
PT Ciputra Development, which owns luxury apartments such as Somerset Grand Citra Jakarta, gained 5.6 percent by 10.27 a.m., the most in over 3 months. PT Lippo Karawaci, which builds luxury complexes such as The St. Moritz in the capital that has swimming pools and a helipad, rose 2 percent. The Jakarta property and construction index rose 1.5 percent to lead gains on the benchmark index.
Foreigners would be able to buy property of at least 200 square meters in areas including Batam island near Singapore, and port cities of Surabaya and Makassar, Maharso said. Annual luxury apartment rents were an average $220 per square meter in the first-quarter, according to Jones Lang LaSalle.
“Foreigners buy houses using their Indonesian wives or husbands, so that Indonesia loses revenue from them,” Maharso said. “We will let foreigners buy apartments, not landed houses, in certain places such as in industrial and tourist zones.”
A youthful population, high inflation and property-price gains that outpace interest rates have spurred domestic real-estate sales in recent years. With foreigners restricted from owning property in Southeast Asia’s biggest economy, Indonesia has seen a surge in local demand rather than the capital inflows that spurred record home prices in neighboring Singapore and Hong Kong. The central bank imposed stricter loan-to-value ratios for mortgages last year.
The government needs to open this market with controls to avoid “wild” price gains, said Hasan Pamudji, associate Director at Knight Frank LLP in Jakarta. Foreign ownership of residential property could more than double if this plan is implemented, he said.
“This will benefit Indonesia as it will boost fund flows into the market and spending,” he said.
The next president will need to discard election rhetoric and focus on luring foreign investment to address budget and current-account deficits, outgoing Finance Minister Chatib Basri said last month. Economic growth slowed to 5.21 percent in the first quarter, the weakest in over 4 years, while the rupiah fell 4.2 percent in the second quarter to be the worst performer among 24 emerging market currencies tracked by Bloomberg.
Bank Indonesia sees residential property prices in the second quarter rising 7.9 percent from a year earlier. Jones Lang LaSalle forecasts demand in the luxury apartment market to soften this year due to last year’s interest rate rises, slowing business expansion and the 2014 elections.
Jokowi wants to move tax collection online if elected, in an effort to boost revenues, while Prabowo’s campaign targets an extra $300 billion from tax over five years.