Indonesia Property - In Search of the End of the Rainbow - Conclusion - Pot of Gold

In this series under Smartkarma Originals, CrossASEAN Insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions outlined in this sector insight are based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.

Our visits to all the major property developers in Indonesia revealed, for the most part, a sluggish start to the year, with stronger sales of smaller sized units, as developers focus affordability. Developers have also been "filling the gap" through sales of commercial and land sales.

The 2H19 promises to be much more active in terms of project launches, now we have got through the Presidential Election and the Lebaran holiday. The last hurdle comes with the final decision from the Constitutional Court on the election result but complaints from the opposition do not look to have any foundation.

Township developers remain the most attractive ways to play the sector in the near term and connectivity continuing to improve, mainly in the shape of ongoing improvements to the toll road network but longer term through LRT connections.

Those with larger landbanks have more flexibility in launching new residential clusters, as and when activity picks up, although the market will continue to be centred around smaller-sized units. Ciputra Development (CTRA IJ) and Bumi Serpong Damai (BSDE IJ) look to be best positioned in this respect. Summarecon Agung (SMRA IJ) has the additional potential catalyst of spinning off its investment property portfolio.

High-rise developers such as Intiland Development (DILD IJ) may start to come into their own as the LRT near completion over the next year, with the potential for more transit orientated developments (TODs) around the stations.

Industrial Estate developers should benefit from a pick-up in investment activity as the dust settles post the recent President Election, with the recent S&P Sovereign upgrade a positive forward indicator. Puradelta Lestari (DMAS IJ) is well positioned to benefit from this pick-up, with the near term catalyst from a new Hyundai plant there, though it is close to fair value. Kawasan Industri Jababeka (KIJA IJ) has started to see a decent pick-up in demand in its Kendal Estate near Semarang, with a large Chinese Textile investor schedules to invest there. Bekasi Fajar Industrial (BEST IJ) has the most upside from here in our view.

The overall property sector should continue to see a positive benefit from Government regulation allowing an earlier booking schedule of sales from projects, as well as the easing of downpayment rules for mortgages.

Indonesian Banks continue to provide competitive rates on mortgages, as well as collaborating with developers on providing mortgages for new projects. Given the lower risk profile for mortgages, the major lenders continue to hold mortgages as a focused growth segment for loans.

Grade A Office continues to see large amounts of oversupply in central Jakarta but for retail, there is little or new no supply, which provides strong support for Pakuwon Jati (PWON IJ), which owns two of the most popular malls in central Jakarta.

With a more benign outlook on inflation and a more dovish tack from Bank Indonesia for 2019, with regulatory changes to support the property sector already in place, and a potential post-election tailwind from June onwards, there are good reasons to revisit this beaten up sector, as we start to see a pick-up in activity going into the end of the year. Our top three picks in terms of upside include Bumi Serpong Damai (BSDE IJ), Alam Sutera Realty (ASRI IJ), and Bekasi Fajar Industrial (BEST IJ).