As Southeast Asia’s largest economy, Indonesia is one of the world’s major emerging markets and with a population of more than 250 million people, is the world’s fourth most populous nation. The urban population is growing rapidly and the middle class is expected to more than double between 2012 and 2020. The scale and potential offered by Indonesia are such that the business case for logistics is strong but the sector remains in its infancy. Why is this the case?

Logistics – an emerging market with huge potential

The logistics sector has seen gradual development over the past 20 years with recent growth driven by international Fast Moving Consumer Goods (FMCG) and Third Party Logistics (3PL) groups. However, supply chain networks remain inefficient and modern logistics facilities are limited. As such, many market entrants have gone down the build-to-suit route although an active leasing market is likely to emerge as the market matures. Over the past five years we have seen moderate, single digit annual rental growth. However, in the same period land prices have grown by approximately 300% resulting in a disconnect between expected and achievable yields. Meaning, for investors and developers looking to enter the market, sourcing cost-effective land is a key consideration.

Inhibiting growth

While the government appears to be loosening restrictions on foreign investment, which have traditionally held the sector back, the regulatory environment is perhaps the most significant obstacle to growth; customs procedures are time consuming and costly and protectionist policies place limitations on freight forwarding operations. Infrastructure is also lacking; road and rail networks are underdeveloped and existing port facilities are insufficient.

Despite these challenges, interest remains strong so what does the future hold?

Opportunities remain

There is a strong sense that the future is bright for the logistics sector in Indonesia. Infrastructure spending is a priority for the current administration and road, rail, and port projects are underway countrywide. Indonesia’s favourable demographics, emerging middle class and growing e-commerce sector are likely form the backdrop to growth going forward. We expect to see strong demand for supply chain solutions and associated real estate, in the form of modern logistics warehousing with demand coming from third-party logistics firms, FMCG’s and e-commerce companies.

JLL Indonesia recently launched a logistics white paper which can be downloaded here along with a short accompanying video.

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