A New Budget, a New Capital and New Opportunities

There is a shift occurring in Indonesia.

For several years, the largest economy in South East Asia has performed adequately but not spectacularly. Much of the economic malaise can be blamed on legacy issues of civil conflict, bureaucratic inertia and grappling with tried and true emerging markets issues like overpopulation, degrees of under and over regulation and a vaguely unified national budget and national strategy.

But signs point to change, real change and lasting change.

Enter President Joko Widodo (Jokowi). Recently bestowed a sizable mandate by one of the world’s largest and quickly evolving democracies, Jokowi has made infrastructure development and ambitious new projects like relocating the Indonesian capital city a platform priority for his second term.

This term has now officially begun, with the unveiling of sweeping new budget. The implications for the emerging nation, Indonesia’s wider economy and its real estate will be as sizable as they are ambitious.

On Friday, August 16, Jokowi fired the opening salvo in the blueprint for a new Indonesia, proposing a record-high Rp. 2,528.8 trillion (US$177.56 billion) budget to parliament for 2020.

Paired with the budget announcement, Jokowi outlined his vision for a more sustainable Indonesian economy, setting a reach 2020 GDP growth target of 5.3%, above the consensus of most independent growth projections which stand at between 5.0-5.2%.
 
So how will he achieve this longer-term feat? Five points or national projects, as Jokowi outlines.

The focus of the budget is on five main areas: infrastructure, human resources, social protection, regional autonomy and global uncertainty. Parliament usually takes until October to approve budget proposals, but we see this as a formally given the weight placed on the pillars by the President.
 
Curiously and perhaps the most conspicuous node of the broader budget, was a major announcement on the government infrastructure of Indonesia. Preceding the budget announcement, Jokowi formally requested permission from parliament to relocate Indonesia’s capital city from Jakarta to East Kalimantan on Borneo, marking an important milestone in this much-discussed initiative.

Citing the Washington-New York government and commerce split, Jokowi has long held ambitions to divorce the central government from the commercial and densely populated city of Jakarta. In the process, he aims to rightsize the megalopolis to become a more competitive and global commercial centre, complete with an infrastructure overall to aid its stretched roads, utilities and urban apparatus.
 
The billion question for many Indonesia watchers, is what does the budget and relocation of the capital – slated to begin in 2023 – mean for real estate? A workable hypothesis remains fluid, but we have some indications on what the most immediate implications may be. 
 
Yes, the budget was thin on real estate-specific measures. The fact that infrastructure remains a key policy objective in Jokowi’s next five-year term will come as a welcome boost for property investors and developers. It is not difficult to see many investors and developers to go long on existing relationships and projects, many of whom have capitalised on opportunities created by the massive investment in airports, roads, ports and railways over the past five years.

The sign of things to come are already present. Many of Indonesia’s leading developers have already taken advantage of the recently completed Mass Rail Transit (MRT) and Light Rail Transit (LRT) systems in Jakarta. They have been actively purchasing land and launching new projects near stations or strengthening the connectivity of existing schemes to the MRT and LRT networks.
 
More infrastructure is in the pipeline, boosted by the budget no doubt. Major new infrastructure projects due to be completed 2019-2024 include the final sector of the Trans-Java Toll-road; new sections of the Jakarta-Bandung High Speed Railway ; the Jakarta-Bandung High Speed Railway; a new medium speed railway linking Jakarta and Surabaya; Paiban Port in West Java; a new international airport in Yogyakarta; and additional MRT and LRT lines in Jakarta.
 
Bottom-lining these developments, real estate investors and developers are advised to pay close attention to announcements and progress on these projects. They will play a critical role in improving connectivity and unlocking new areas for development.
 
The formal proposal to relocate the new capital will also be a gamechanger. It will require the construction of new infrastructure such as roads, railways, offices, and housing. The new center of government will also require supporting infrastructure for the more than 1 million government employees expected to move to the new location over the next decade. This migration in itself will prompt further investors and developers to accelerate planning to capitalise on these opportunities.
 
Based on comments from senior government officials and Jokowi himself, the new capital will either be in Bukit Soeharto in East Kalimantan or the Triangle Area near Palangkaraya in Central Kalimantan, both on Borneo. A formal announcement is expected later this year.
 
When the relocation does proceed, CBRE expects that Jakarta will remain the business and financial hub of Indonesia, with the new capital playing host to political and administrative functions.
 
Any downside for the Jakarta property market will therefore be limited, as while some companies may set up a representative office in the new capital, most occupiers will retain their existing presence in Jakarta, which will continue to play host to the stock exchange, essential financial and business organisations and company headquarters.
 
The relocation may also create new investment and development opportunities in Jakarta, with senior government officials recently floating the idea of leasing out or even selling government-owned buildings to developers, who would then be obliged to build facilities and infrastructure in the new capital.

Clearly, this time around, this is much to consider in Indonesia’s new budget and with a new capital, a pledge for continual infrastructure investment and redevelopment of the major urban center in the country, longer-term real estate implications.

By Aldo Massali, Country Manager, Global Workplace Solutions, Indonesia & Jonathan Hills, Editor-in-Chief, Research, Asia Pacific, CBRE.