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Property Sector Summary

Core Content

The Indonesian property sector is currently experiencing a short-term slowdown due to macroeconomic uncertainty, tighter mortgage regulations, and weak pre-sales in the first half of 2014. However, the sector is expected to resume growth in the second half of the year and over the long-term, driven by structural factors such as Indonesia's large young population and a sustainable economic growth outlook. The report highlights the importance of developers with strong balance sheets and conservative projects, especially in the low-middle segment, as demand for premium properties weakens.

Main Views

• Short-term Challenges: The sector faces a short-term hiccup in 2014, with weak pre-sales and macroeconomic uncertainty. This is expected to continue into 1H14, but pre-sales are anticipated to pick up in 2H14 as macroeconomic conditions improve.
• Long-term Growth: Despite current challenges, the long-term structural demand remains strong, supported by Indonesia's young population, rising income per capita, and a shift in lifestyle preferences towards modern, clustered housing.
• Regulatory Impact: The central bank has tightened regulations, including increasing the minimum down payment for mortgages and implementing a phased mortgage disbursement system. These measures aim to curb speculative activity and stabilize property prices.
• Currency Depreciation: The weakening IDR against USD has increased development costs, particularly for high-rise projects, which are more dollar-sensitive. This has led to a greater focus on low-middle segment properties.
• Affordability Concerns: Rising property prices have outpaced income growth, reducing the affordability for middle-income consumers. This is expected to drive demand towards more affordable suburban properties.
• LTV Regulation Changes: The revised LTV regulation requires higher down payments for second home buyers, potentially reducing pre-sales and investment activity in the property sector.

Key Information

Pre-sales Trends

• 2013 Pre-sales: Aggregated pre-sales grew by 11% YoY, primarily due to bulk sales by Bumi Serpong Damai.
• Organic Growth: Organic pre-sales growth was only 5% YoY.
• 2014 Forecasts: The report expects flat pre-sales growth for 2014F, with a target of 5% YoY growth. Some developers, like Ciputra and Lippo Cikarang, are forecasted for double-digit pre-sales growth in 2015.
• 2015 Outlook: Pre-sales are expected to grow more steadily in 2015 as macroeconomic conditions improve and the market recovers.

RNAV and Valuation

• RNAV Calculation: RNAV is calculated using DCF valuation of five-year operating cash flows and a residual value for the land bank. One-year forward P/E and P/B multiples are used as sanity checks.
• Discount to RNAV: On average, Indonesian property companies under coverage trade at a 51% discount to 2014 RNAV.
• Top Picks: Bumi Serpong Damai (BSDE IJ), Ciputra Development (CTRA IJ), and Lippo Cikarang (LPCK IJ) are highlighted as top BUYs due to their strong balance sheets and conservative projects.

Land Bank and Costs

• Land Bank Depletion: Developers' prime land banks are being depleted, with rising replacement costs forcing them to focus on higher price segments or high-rise developments to maintain profitability.
• Land Bank Sizes: Developers have varying land bank sizes, with some having significant reserves (e.g., Sentul City with 13,400 ha) and others facing land shortages (e.g., Alam Sutera with only 206 ha in 2013).

Economic and Demographic Factors

• Population Trends: Nearly 55% of Indonesia's population is aged 20-54, contributing to strong long-term demand for housing.
• GDP Growth: The Indonesian economy is forecasted to grow at 5.6% in 2014 and 6.0% in 2015.
• Household Size: The number of people per household in Jakarta decreased to an average of four, indicating a shift towards smaller, more modern homes.

Banking Sector Impact

• Liquidity Tightening: The central bank's measures to reduce the LDR to 90% have slowed mortgage lending, affecting pre-sales and project funding.
• Mortgage Rates: A 175bps increase in the reference rate has led to a 2-3% mortgage interest rate hike, impacting demand for investment properties and first-time homebuyers.
• Down Payment Requirements: The revised LTV regulation requires a 30% down payment for first-time homebuyers and 40% for second-time buyers, potentially reducing pre-sales and investment activity.

Summary Table

Conclusion

While the Indonesian property sector is facing short-term challenges, the long-term fundamentals remain robust. Developers with strong balance sheets and conservative strategies are preferred, particularly those focusing on the low-middle segment. The report emphasizes the importance of monitoring macroeconomic conditions and regulatory changes, which are likely to shape the sector's recovery and growth trajectory.