Indonesia’s new regulations could make or break the property sector

Rolled out to slash Indonesia’s excessive red tape, Joko Widodo’s sweeping new set of laws could break a stasis in the property sector and potentially define his legacy

After winning a second term as President, Joko Widodo is hoping to seal his legacy courtesy of a raft of radical reforms. ImanSatria/Shutterstock

Months after winning an electoral rematch with old rival Prabowo Subianto, an empowered President Joko Widodo rolled out the big guns to fire up Indonesia’s listless economy: sweeping laws designed to blast through the excessive red tape and complicated regulations perennially deterring investment in the country.

Yet in what will decidedly be the final chapter in Widodo’s plan for economic reform once his two-term presidency ends, the bills have drawn a mixed response, with property analysts questioning whether they can bring lasting change.

The “omnibus laws”, sent to the House of Representatives for deliberation in February, contain more than 1,000 proposed amendments to simplify 82 existing laws that diminish Indonesia’s appeal as an investment destination.

It’s action that is long overdue. The real estate market is sluggish, the labour force is growing as slow as it did two decades ago, and the country is sliding dangerously into the middle income trap. Last year, Indonesia’s economic growth was at its weakest in over two years, mainly due to slow global trade amid the US-China tariff dispute.

“Drivers of growth have shown deceleration in all productive engines, while the drop in imports have held overall economic growth afloat,” Wisnu Wardana, a Jakarta-based economist with the Bank Danamon, tells reporters.

The squeeze to the economy has placed Widodo in a tight spot. His options for fiscal and monetary stimuli have dwindled as the government’s income has been hit by weak corporate earnings, with several cuts already made to interest rates. Faced with this, the new laws could even potentially attack the economy’s problems from a different angle.

Compared with other ASEAN countries, Indonesia still has so many regulations that are a headache to the business community and investors

The bills are chiefly concerned with easing or simplifying laws around foreign workers, wages, work hours, and redundancy. Under the new laws, severance payments beyond basic allowances will be either reduced or scrapped completely, and corporate income tax lowered from 25 percent to 20 percent by 2023. There are also provisions on lowering tax penalties and easing stringent income tax regulations for expats.

The laws align with Widodo’s efforts to reform business since taking office in 2014. His economic policy package of deregulation, which includes subsidized loans with low interest rates to small companies and accelerating funds to local governments, have been well received. However, they remain limited in their impact: Indonesia has consistently ranked 73rd in the World Bank’s Ease of Doing Business index.

Anton Sitorus, a consultant at Savill’s Indonesia, says the government has made good efforts to support the economy and property sector, with “Indonesia’s position much better with stronger fundamentals.”

While “the president is very concerned about the bureaucracy in Asia,” Sitorus points out more needs to be done to eliminate the “very big problem” of red tape. “Compared with other ASEAN countries, Indonesia still has so many regulations that are a headache to the business community and investors,” he says, adding these are largely due to the many vested political interests in business.

Recent years have thwarted Indonesia’s attempts at reviving its former glory as one of Asia’s most investable destinations. At its peak, both the economy and real estate markets were booming. High rental yields and rapid price gains were luring foreign investors to new high-rise developments as Jakarta became one of the strongest real estate markets in the world. While speculations of an inevitable crash in the market never happened, a prolonged stagnancy followed amid a slowdown in global commodities, leaving Indonesia’s property industry out of gas.

Now analysts are wary that in his haste to push desired reforms before his second and final term ends, Widodo is taking short cuts.

One of the few property-related articles the laws aim to simplify is the need for building permits. Permits would not be required for so-called simple structures such as two-storey buildings or for standard buildings that are already regulated. But complex buildings would still require certification of occupancy or a building permit.

Indonesia’s sluggish residential market has been hampered by excessive red tape. Property watchers believe the new laws being introduced will help to roll away unnecessary regulations. CreativaImages/Shutterstock

Hasan Pamudji of Knight Frank’s Jakarta office asserts the government must take care to avoid the possibility for loopholes by taking the time to get the regulation right. Getting rid of unnecessary documents for such things as building permits “may confuse end-users in terms of what the important requirements are,” he says. “Therefore, this law must be made very carefully, and time should be taken to draft it, and not to rush it.”

An area where the laws have come under heavy criticism has been on their perceived lack of transparency and public participation. Legal experts, labour unions, and environmental groups have slammed the bills for their potential to do more harm than good by eroding Indonesia’s already tenuous protections for the environment and workers.

Equally important is getting local and central governments apply the laws consistently—which has rarely been their strong point. “Consistency of the law is very important. Meaning the local and central government must be saying the same thing instead of differing on rules and regulations,” states Hasan.

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Yet more than waiting for a change in regulation to boost the property market, many say developers need to drop their prices if the country’s oversupply of units is to be absorbed by investors and end-users—currently one of the biggest obstacles to the market’s ability to rebound.

“We have the same perspective for the next two years,” says Sitorus. “We don’t really see prices going anywhere, so a lot of investors have chosen to stop spending their money on property, while end-users, especially millennials, don’t have the capacity to buy property they like, in the cities.”

For Widodo, the laws could indeed be a defining legacy. Indirectly, any overall boost to the economy should create the wealth and buzz that might feed into real estate. But whether that legacy will remain a positive one in the long run is the bigger question.

For Cornelius Beny Juniarto, a senior partner at law firm Hermawan Juniarto & Partners, one of two things could make or break the Indonesian President’s legacy: postponing the bills to allay growing concerns, or taking the gamble at the “risk of a public backlash”.

This article originally appeared in Issue No. 159 of PropertyGuru Property Report Magazine