Paryono Ramadhan
The Indonesian government’s policy framework governing the property business in the country is increasingly perceived by developers as not fully supportive of their operations. Regulations issued by Bank Indonesia (BI), particularly the prohibition of "inden" (pre-selling or off-plan sales) for mortgage financing, have been cited as significant burdens on developers. However, regulatory bodies like the Financial Services Authority (OJK) assert that these policies, including the "loan to value" (LTV) regulations and the inden ban, have been meticulously considered to safeguard the public interest and ensure market stability, alleviating concerns about potential negative impacts.
Probo Sukesi, Head of Licensing at OJK Regional Office IV Central Java-Yogyakarta, speaking in Semarang last week, firmly stated that there is no likelihood of a slowdown in the housing sector due to the LTV and inden policies. According to Sukesi, these decisions were meticulously calculated by the government from the outset, primarily to ease the financial burden on the public. He elaborated that the inden ban, for instance, aims to ensure that prospective buyers have a clearer understanding of the product they intend to purchase before committing. This increased transparency is expected to empower consumers to make informed decisions. Furthermore, the OJK encourages developers to be transparent in communicating risks, potential impacts, and product specifications to future consumers. Sukesi believes that such transparency will ultimately boost public purchasing power, including in the context of the government’s inden prohibition.
Background and Chronology of Key Policies
The policies surrounding LTV and the inden mechanism are not isolated measures but rather part of a broader regulatory evolution aimed at fostering a healthier and more sustainable property market in Indonesia. Historically, the property sector has been prone to speculative booms and busts, often leaving consumers vulnerable to unfinished projects, fraudulent developers, or inflated prices.
The LTV policy, which dictates the maximum percentage of a property’s value that banks can finance through mortgages, has seen several adjustments over the years. These adjustments are typically made by Bank Indonesia as a macroprudential tool to manage credit growth, contain asset price bubbles, and ensure financial stability. For instance, during periods of rapid property price appreciation, BI might tighten LTV ratios (requiring higher down payments) to cool the market. Conversely, during slowdowns, LTVs might be relaxed to stimulate demand. The current discussion often revolves around how these LTV adjustments interact with other regulations.
The prohibition of "inden" for properties financed via KPR (Kredit Pemilikan Rumah or home ownership loans) is a more direct consumer protection measure. Inden refers to the practice of selling property units that are still under construction or even in the planning phase. Traditionally, developers would use funds from these early sales, often through down payments or initial mortgage disbursements, to finance the construction of the project. The ban, particularly for properties acquired through KPR, mandates that the property must be substantially completed or fully built before KPR funds can be disbursed to the developer. This policy gained prominence following a series of consumer complaints and high-profile cases where developers defaulted, abandoned projects, or delivered substandard units after buyers had already committed significant funds. While an exact timeline for the definitive implementation of the KPR-linked inden ban isn’t always publicly detailed in a single document, it has been progressively reinforced by BI and OJK over the past decade as a response to market failures and consumer grievances. The core objective is to shift the risk from the consumer to the developer and the financing institution, ensuring buyers receive what they paid for.
Developer Perspectives: Financial Strain and Operational Hurdles
Despite the regulatory bodies’ assurances, developers voice considerable apprehension. Eddy Ganefo, Chairman of the Association of Indonesian Developers and Housing (Apersi), articulated that the inden ban inherently strains developers’ finances. He explained that a significant portion of project funding for property construction traditionally originates from KPR applications submitted by buyers. "This creates confusion when we intend to build property," Ganefo stated, highlighting the sudden shift in financing models.
The prohibition compels developers to seek alternative funding sources, primarily through bank loans. Unlike the direct and often interest-free cash flow from KPR disbursements tied to inden sales, borrowing from banks incurs interest and requires collateral, complicating the financial viability of projects, especially for smaller and medium-sized developers. This increased reliance on commercial bank financing not only raises development costs but also introduces additional layers of financial risk and administrative burdens.
Teresia Rustandi, Corporate Secretary of PT Intiland, echoed these concerns, emphasizing the critical issue of working capital. She explained that for a company like Intiland, a substantial portion of property development historically relied on inden-based KPR financing. The current policy, she asserted, significantly burdens the company’s operational flow. "We are left scrambling when we want to start if there’s a new project," Rustandi commented, illustrating the immediate impact on project initiation and continuity. She argued that the policy should be balanced with compensatory measures, such as easier access to working capital loans and construction loans from banks, potentially with more favorable terms.
Unintended Benefits and Broader Market Implications
Despite the financial challenges, developers acknowledge certain positive outcomes from the inden ban. Eddy Ganefo conceded that the prohibition on inden sales could effectively curb the activities of "mafia tanah" (land mafia) and property speculators. He elaborated that these illicit actors often inflate land prices, creating significant hurdles for developers of subsidized housing intended for low-income communities (Masyarakat Berpenghasilan Rendah/MBR). Inflated land costs directly impact the production expenses of subsidized homes, ultimately rendering them unaffordable for the target demographic. By restricting pre-sales, the policy makes speculative hoarding of land less profitable, potentially stabilizing land prices and improving the feasibility of affordable housing projects.
Anton Sitorus, a property observer from Jones Lang Lasalle, reinforced the primary objective of the inden ban: consumer protection. He noted that the policy is designed to prevent instances of developers absconding or abandoning projects mid-construction, thereby safeguarding buyers’ investments. This measure aims to instill greater confidence in the market, ensuring that consumers are not defrauded by unscrupulous developers who fail to deliver on their promises. With the policy in place, buyers can expect properties to be completed before they make significant payments, offering a much-needed layer of security.
However, Sitorus also acknowledged the policy’s double-edged nature, recognizing that while its intentions are sound, its implementation poses significant funding challenges for developers at the initial stages of a project. "Because developers need funds at the start of construction," he highlighted, pointing to the inherent cash flow requirements of any large-scale development.
Economic Analysis and Market Balance
Enny Sri Hartati, an economist from the Institute for Development of Economics and Finance (Indef), offered a broader economic perspective, stating that the LTV policy and the inden ban are intricately linked and serve complementary purposes. On one hand, the LTV policy, particularly when relaxed (e.g., allowing lower down payments like 20%), aims to stimulate demand and make property more accessible to a wider segment of the population. This acts as a stimulus for the property market. On the other hand, the inden ban is designed to prevent a massive surge in property purchases that could lead to a "bubble effect," where asset prices become unsustainably inflated due to speculative buying rather than genuine demand.
Hartati views these policies as an attempt by the government to create a delicate balance in the property market. The goal is to provide a stimulus through measures like reduced down payments via LTV adjustments, while simultaneously preventing market overheating and speculative excesses through the inden ban. "So I think these policies complement each other," she concluded, underscoring the government’s intent to foster sustainable growth without compromising market stability or consumer welfare.
Supporting Data and Broader Context
Indonesia’s property sector is a significant contributor to the national GDP, reflecting its importance in the broader economy. However, like many developing economies, it faces challenges related to urbanisation, housing affordability, and regulatory compliance. According to various reports, the sector’s contribution to GDP typically hovers around 3-4%, with its multiplier effect impacting numerous other industries, from construction materials to financial services.
Data from the Central Statistics Agency (BPS) and Bank Indonesia often show fluctuations in property sales and prices, influenced by economic growth, interest rates, and regulatory changes. For instance, in the first quarter of the year, the property market experienced a decline, with some segments reporting a decrease in sales volume by up to 40 percent. This downturn, potentially exacerbated by broader economic uncertainties or high interest rates, fuels the developers’ calls for a re-evaluation of current policies. In comparison, some regional neighbours like Singapore or Hong Kong have historically implemented even stricter LTV ratios and property cooling measures to combat rampant speculation, suggesting that Indonesia’s policies, while impactful, are not necessarily the most severe internationally. The Indonesian government’s approach reflects a tailored response to its unique market dynamics, balancing the need for growth with the imperative of financial stability and consumer protection.
The rise of the middle class and rapid urbanisation continue to drive demand for housing in Indonesia. However, a significant housing backlog persists, particularly for MBR segments. Government programs like the One Million Houses program aim to address this, but such initiatives rely heavily on developers’ capacity and willingness to build affordable units. The current regulatory environment, while addressing historical issues, must also be evaluated for its impact on the long-term supply of diverse housing options.
Implications and Future Outlook
The ongoing debate highlights a critical tension: the government’s role in protecting consumers and ensuring market stability versus the need to foster a conducive environment for property development and economic growth. For consumers, the inden ban offers greater security, reducing the risk of financial loss from unfinished projects. It promotes a "what you see is what you get" principle, which is beneficial in a market where trust has sometimes been an issue. However, the potential for increased development costs, if passed on to buyers, could indirectly affect affordability.
For developers, particularly smaller ones, the policy shift necessitates a fundamental change in business models and financing strategies. It requires greater financial resilience, potentially favouring larger, more established players with better access to conventional bank financing. This could lead to consolidation in the industry or a slowdown in new project launches if alternative funding mechanisms are not adequately addressed. The call from Intiland’s Teresia Rustandi for compensatory measures, such as easier access to credit for developers, underscores the need for a holistic policy approach that supports both supply and demand sides of the market.
The reported 40 percent decline in the property market during the first quarter of the year serves as a compelling argument for developers advocating for a review of the policies. They argue that easing the inden ban, even temporarily or with specific conditions, could re-energize the market and stimulate sales, which in turn would boost construction activity and contribute to economic recovery. This perspective suggests that while the original intent of the policies was laudable, the current economic climate might warrant a recalibration to prevent undue contraction in a vital sector.
In conclusion, Indonesia’s property market is at a crossroads, navigating a complex regulatory landscape designed to promote sustainability and consumer welfare. While the OJK maintains that policies like LTV and the inden ban are well-considered and essential for market health, developers argue for greater flexibility and support to mitigate the financial strain. The challenge for policymakers lies in striking a nuanced balance that continues to protect consumers and prevent market volatility, while simultaneously ensuring the viability and growth of the property development sector, which is crucial for addressing the nation’s housing needs and contributing to overall economic prosperity. Continued dialogue and adaptive policy adjustments will be key to fostering a resilient and equitable property market in Indonesia.
