JAKARTA PROPERTY REVIEW

A look at property market performance in the first half of 2018 courtesy of Jones Lang Lasalle.

Co-working space operators expand

• The leasing market remained active in 2Q18, driven by technology and co-working firms. At the time of writing, WeWork had publicised three CBD locations for their Jakarta offices – Revenue Tower (SCBD), Gama Tower (Rasuna Said) and Sinarmas MSIG Tower (Sudirman).

• While some other CBD tenant types were also active, demand remained diluted by the huge volume of recent and upcoming supply. Certain locations, particularly the Sudirman Central Business District (SCBD) area, continued to outperform the rest of the market and given that rents continue to fall, some tenants remained price sensitive.

Two premium Grade A buildings complete in 2Q18

• Two more completions in 2Q18 were such that almost

1.5 million sqm of Grade A supply has now been completed since the current wave of supply began in early 2015. This year is set to be the fourth record Grade A supply year in succession.

• Menara Astra, developed by Astra Land, comprises over 70,000sqm of premium Grade A space on Sudirman in the CBD. World Trade Centre III (also around 70,000sqm and also premium Grade A) is Jakarta Land’s fifth offering at the World Trade Centre complex on Sudirman.

Rents continue compressing

• Another strong quarter for lease enquiries and healthy net absorption figures indicate that demand has continued to improve in Jakarta’s Grade A office market. However, the volume of recent supply is such that vacancy continued edging up in 2Q18 (34 percent) and landlords continued lowering rents (-3.1 percent q- o- q) to attract tenants.

• Investors continued to express interest in both development sites and existing assets. The market is tightly held in Jakarta and deals involving stabilised assets are relatively rare – no major investment deals were closed in 2Q18.

Outlook: More new supply expected in 2H18

• Four new buildings comprising more than 330,000sqm have been completed so far in 2018 and more are in the pipeline. Around 520,000sqm of new space is expected in the whole year meaning that 2018 is likely to be another record year for new supply.

• We continue to expect extremely strong net absorption levels as technology, co-working and other CBD tenant types continue to expand. However, the volume of supply is such that vacancy rates are likely to move up further and rents are expected to continue to compress.

Footfall strong in prime malls

• Landlords of Jakarta’s prime malls continued to adjust tenant mixes to accommodate more attractive occupier types. Restaurants, bars and family friendly entertainment facilities continued expanding. Several department stores have closed in recent quarters.

• In addition to F&B and entertainment tenants, international fast fashion brands remained popular with shoppers. Footfall in many malls was strong, and while recent retail sales figures are unavailable, many retailers were expecting an increase in sales in the run up to the Lebaran break.

No new supply

• A moratorium on new shopping mall development, which has been effective since 2011, remains in place. There was only one completion in 2017 and no new projects have been completed thus far in 2018. The future supply pipeline remains extremely thin. There is greater scope for development in locations outside of Jakarta city limits, which are unaffected by the moratorium.

• Vacancy rates, particularly in Jakarta’s prime malls, remained extremely low (5.2 percent) in 2Q18 despite relatively low net absorption levels.

Rents flat q-o-q

• Limited supply and low vacancy rates are such that rents have edged up over the past few years, and annual growth of five to six percent could be considered typical. This scenario remains likely in 2018, although rents were flat q- o- q in 2Q18.

• Given the low vacancy environment and rising rents in Jakarta, investor interest in the retail market is consistently strong. However, the tightly held nature of the market means that opportunities to purchase existing assets are rare.

The moratorium on development is such that potential development sites are limited but not non- existent.

Outlook: Vacancy to fall further

• Given the lack of expansion opportunities in the market, we expect net absorption levels to remain relatively low in the remainder of the year. However, with no new supply expected, vacancy rates are likely to fall further, edging below four percent by the end of 2018.

• As such, landlords are likely to remain in a position to push rents upwards as F&B, entertainment and fast fashion tenants continue to seek out expansion opportunities. We expect rents to increase by around five percent in the whole year, and while investors are expected to remain interested, opportunities are likely to be limited.

A seasonal lull in demand

• While demand remained healthy for certain types of condominium developments (those offering smaller, cheaper units in a good location with good amenities), the Ramadan period is typically slow in terms of condominium sales, and 2018 was no exception. Next quarter figures will provide a more accurate assessment of current demand.

• Serviced apartment demand continued to be driven by embassies and expatriate arrivals from Korea and Japan, although the high price point compared to the secondary condominium market is a difficult proposition for some potential tenants.

Three condominium towers physically complete

• Two condominium towers (Eternity and Infinity) were physically completed at District 8 in the prime Sudirman Central Business District (SCBD) area while Pondok Indah Residence Tower 3 (Amala) finished construction in high- end South Jakarta. These three towers contributed another 712 units to the condominium market and many are likely to be offered to the leasing market.

• No new upper-tier condominiums were launched for sale in 2Q18 and no additional serviced apartments were physically completed.

Condominium prices mostly flat

• Serviced apartment rents are significantly higher than those in the secondary condominium market and with the market vacancy rate at 23 percent, rents continued to fall in 2Q18 (-1.8 percent q-o-q). The average serviced apartment rent came down by almost five percent over the past year. Upper-tier condominium prices were broadly flat in 2Q18.

• There were no major investment deals in 2Q18 but the residential sector remained favoured by both local and international developers. Both core CBD and decentralised sites were on the radar for investors.

Outlook: Investors eye upcoming election

• The next presidential election is set to take place in mid-2019, which investors hope will pass off without major incident.

Recent depreciation of the Rupiah against the US dollar (amidst a broader sell- off in many emerging markets) is also a key factor in the residential market. Sentiment in the market would be boosted by stability of the currency.

• We may begin to see a small uptick in the upper tier condominium market as sentiment improves while serviced apartment rents may moderately compress in order to boost competitiveness with the secondary condominium market.