The lure of Indonesia to foreign investors

March 10, 2015 / By

Indonesia’s remarkable growth story in recent years made it the shining star of South East Asia. With strong domestic consumption from a population of approximately 250 million people with a favourable demographic profile, this allowed Indonesia to weather the economic turbulence relatively well during the global financial crisis in 2008.

However, in 2014 it suffered a minor setback due to the depreciation of the Indonesian rupiah against the US dollar along with investors biding their time due to the presidential election. While there is still some fluctuation in the currency, the political uncertainty has been removed due to the election of Joko Widodo as President – and foreign investors are eager to tap into the potential that the fourth most populous nation offers.

The interest from foreign investors is substantial. Regardless of their investment horizons, the challenges are similar for all investors, be it private equity group, a pension or sovereign fund. Market transparency and regulatory risk along with corruption are themes that continue to be at the forefront of their minds. The new administration vows to tackle these issues and ensure that they do not hinder the investment potential this vast archipelago has to offer.

Foreign entrants to the market have looked to mitigate these risks as much as possible. The easiest route has been through the formation of JVs with local players. We believe there will be further JV deals over the course of the year, not only to mitigate the risks already detailed, but also because of the significant increase in land prices over the past few years. Local partners on the other hand do not necessarily want or need a foreign partner for their capital. Their motivation stems from the value proposition that the foreign partner brings; the creation of a new product that could distance themselves from their competitors – thus creating a unique selling point.

While the main focus for most investors is still Jakarta, a select few have been seeking the untapped opportunities that other cities such as Bandung, Surabaya, Medan and Makassar have to offer. Unfortunately, a thorough understanding of the opportunities in these untapped markets proves to be a challenging task for most. As a result, the Jakarta and Greater Jakarta markets will continue to be the preferred areas of investment for now.

The apartment market is of particular interest given the relatively limited supply coming on stream alongside a shift from landed housing to high-rise living due to the rising cost of land. The office market is experiencing a flight to quality by MNC type tenants. We expect the owners of the new wave of Grade A supply to benefit at the expense of the Grade B and Grade C stock. Restrictions on retail development in Jakarta have resulted in opportunities in Greater Jakarta which is an interesting play given the increase in consumer spending and population catchment in this area. Finally, the logistics sector will be an interesting play, as it needs to cater to the rapid rate of urbanisation along with a growing middle class. However, it is critical that money saved from removal of the fuel subsidy is invested in the appropriate infrastructure projects to ensure that this sector will flourish.

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