Indonesia Construction Industry Trends and Issues
- Indonesia’s construction sector has performed well during the review period, driven by strong economic activity and high levels of investment. Fixed investment has soared over the past decade, with its share of total GDP rising. The construction sector has been a clear beneficiary of this investment activity, and has grown on an annual average basis, in real terms, over the past 10 years, well above the GDP growth rate of 5.9%. It maintained this rate of growth in 2012, expanding by 7.5%.
- Despite some challenges, the outlook for construction is favorable, supported by urbanization, rising incomes and government efforts to improve infrastructure as a part of its multiyear Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI). To attract investment for the plan, which envisages spending of up to IDR4 quadrillion (US$428 billion) during 2011–2025, the government is taking steps to strengthen the regulation of public-private partnerships (PPPs).
- Indonesia has attracted massive foreign direct investment (FDI). However, the share attracted by the construction sector has fallen, Although FDI in the construction industry has been disappointing, domestic companies ramped up investment spending
- A new bill on land procurement was passed in December 2011. Under this law, the government is obliged to provide land and can purchase property at market value, reducing the potential for speculators to buy and sell property at exorbitant rates and cause delays in projects.
- In early 2013, the Indonesian government increased minimum wages in different provinces, with the average increase being around 18%. Given the large proportion of informal-sector workers in construction, changes in actual wages for construction workers are lower than the increase in minimum wages. However, the sharp upward trend in wages in the formal sector will still exert pressure on construction companies’ profit margins. Added to this, electricity tariffs were also revised upwards by 4.2% per quarter from January 2013, with the annual increase expected to be around 15%. Cost pressures are expected to slow growth in investments in industrial construction.
- The government of Indonesia announced a new regulation in May 2012 which allows foreigners to own property in Indonesia. However, ownership has been limited to condominiums only. According to the new regulation, foreigners must first apply for a Building Ownership Certificate (SKBG) and then they can own an apartment unit without the need to own land. The SKBG may be held for 60 years, with a provision to extend it for another 60 years. The move is expected to attract considerable foreign investment in the housing sector.
According to BI’s Residential Property Price Survey, the Residential Property Price Index grew by 3.81% (quarter-on-quarter) and 6.98% (annually) in the fourth quarter of 2012. Growth was driven by both demand- and supply-side pressures, with low interest rates and rising incomes boosting demand, and higher construction material prices and permit fees increasing costs.