Investing in Indonesian Property

Should I Invest My Savings in Indonesian Property

Property is seen as one of the best long term safe investments but how safe is investing in property in Indonesia? While interest rates have remained relatively low, property prices have ballooned over the past two decades making property a tempting investment. In recent years, however, property prices reached a peak and have slowed. They have been further affected by concerns over the government's crackdown on tax evasion, increased surveillance over bank accounts and the ongoing concerns over corruption and moneylaundering.

Seeking Investment Opportunities

The fallout from the activities of over zealous American real estate "experts" who were selling mansions to rag and bone men continues and in Britain, to try and get things moving again, interest rates are being kept very low. Great for business but, for Mr Average, that nestegg is not getting the 5% interest that the whole idea of a retirement income was based upon. In addition governments are increasingly eyeing pension funds as money they can plunder as sources of extra cash.

Where do you put your money these days?

All over the world there are people who saved all their lives for a comfortable retirement only to find the goalposts have moved. Realising their nestegg will be plundered by governments or by pleonectic financial institutions, people across the world are simply not bothering to save for their pensions anymore. The ageing of populations makes matters worse with fewer and fewer people having to support more and more people.

Governments seem to have forgotten their role as referees protecting the not so bright from the very bright amongst us and so our world economic systems with an inbuilt principle of unfettered competition means that as soon as someone acquires a bit of wealth they have advantage over others and are far better equipped to make even more money. Inevitably the rich are getting richer and the poor are getting poorer and recent figures suggest that the 85 richest people own more wealth than the poorest 20% of the world's population put together. These people don't want to pay taxes so they aren't helping the pensioners very much.

There is an ever increasingly desperate search for sensible places to invest and, since the financial crisis first hit, ordinary people's trust in many financial institutions and some of their more "creative" investment ideas has hit rock bottom. Probably more than ever property is being seen as the safest option, second only to the cardboard box under the bed strategy.

How safe is it to invest in property in Indonesia?

The Bali Post recently reported that, after 4 years of very healthy growth the property market across Indonesia has slowed significantly (up to 49%) in 2014 and developers particularly are under pressure finding it difficult to sell their properties. It has to be said that Bali is often considered to be independent of national trends and has seen incredible price rises in recent years but on the streets of Bali there is plenty of evidence to suggest that sales are hard to come by at the moment.

It is probably an understatement to say that the property market in Indonesia is a bit of a jungle, there are many ethical people around but sadly also many unethical people ready to take advantage of the many naive people caught up in the magic of this place. There is also a lack of the safeguards you would expect in other countries.

Corruption and Money Laundering

On top of all this and probably the thing that brings uncertainty to everything in this country is corruption. Those courageous people at the KPK (the Corruption Eradication Commission) are doing a great job but they have a long way to go. In recent years they have convicted a surprisingly large number of high profile people including politicians, judges, lawyers, senior police officers and government officials.

There are those who thrive in such an environment and it has been suggested that much of the boom in property we see in Bali is the result of money laundering.

This puts insecurity into the situation. People who have large sums of money they wish to stash away somewhere might not be so much concerned with the return on their investment, in fact a loss might even help them somewhere else in their business enterprises. It is believed that this is one of the reasons why property prices in Bali have been going through the roof.

This situation may change, there is an election coming up. The vast majority of ordinary Indonesians want corruption to be eliminated. SBY won the presidential elections in 2004 and 2009 and for one very simple reason (a fact that appears not to be fully appreciated by the leadership of most of the major political parties): because the people knew him to be honest and the best bet for saving them from the endemic corruption that surrounds them.

During his first term the KPK worked hard and the people's confidence was high believing the President was working hard to stamp out corruption. Unfortunately during his second term a series of major scandals involving many of his senior party officials has left the people disillusioned.

Joko Widodo - A new President, a new hope

But suddenly from nowhere has come a new player, Joko Widodo, who has consistently shown that he is a man with integrity, with the people's interests at heart and, most importantly, does not appear to be a man with personal wealth or power as his political motivation.

If he does win the election he has a huge task ahead of him but, if he can start to change the mindset of the people, this may have major ramifications for the investment climate in Indonesia perhaps providing higher levels of security for people who wish to invest here. It is to be noted that the Indonesian stockmarket rallied on the day his party endorsed him as their presidential candidate.

As a result there is a renewed sense of hope for the future. Don't hold your breath, If you speak to anyone who has lived in Indonesia for many years they will tell you that for decades there has been an awareness of the huge untapped potential of this country and a sense of hope that sadly has never really materialised.

It is known that the banking system is not managing money laundering as well as it could. If this tightens up we may see property prices fall in Bali. This may however be cancelled out by increased investment in what may be perceived to be a safer investment climate.

Other factors that affect the investment climate

There are many other factors that could affect the investment climate in Indonesia.

The Indonesian economy is getting stronger and recent figures state that Indonesia is now the 10th largest economy in the world.

Workers across Indonesia are becoming stronger in their demands for higher pay and each year we see demands for increases as much as 30% or 40%. These rates of increase will very quickly destroy the competitive advantage of manufacturing in Indonesia and seriously damage exports. This is a short sighted view, as Australians will know, because when pay goes up prices also go up leaving the people no better off but the country disadvantaged as an exporting nation.

The Indonesian economy has been badly hit recently by a government ban on the export of unprocessed ore such as copper, zinc and tin. The idea is sound that by processing ore in Indonesia the adding of value generates more jobs and income for the people, the harsh way the measure has been introduced is, however, a shock to the system.

Against this in the long term the Indonesian rupiah continues to fall in value against other currencies.

These and many other factors will affect the property market and its role as an investment option. Will the value of property increase? Certainly the cost of building is very likely to increase but it is the value of the land that is the more important factor and is what is increasing most. Will a declining rupiah remove much of the capital gain? Is the pope a biped? When did he last cut his toenails?