Indonesia turning into world's favourite place to buy property stocks

JAKARTA (Bloomberg) - Falling interest rates, an expanding population and a government-sponsored building boom are turning Indonesia into the world's favourite place to buy property stocks.

Singapore's sovereign wealth fund GIC and Indonesia's state pension agency are both increasing investments in the nation's property market as President Joko Widodo boosts infrastructure spending and the world's fourth-biggest population keeps expanding.

GIC and a partner agreed in November to invest US$500 million in property projects in Indonesia, focusing on Jakarta's central business district. BPJS Ketenagakerjaan, Indonesia's state pension fund, said last month it plans to increase its investment in affordable housing by fivefold to fulfil demand from low-income workers.

Developers on the Jakarta stock exchange, including Alam Sutera and Lippo Cikarang, have the highest average analyst ratings among global peers and the most buy recommendations of any industry group in Indonesia, according to data compiled by Bloomberg. The Jakarta Construction, Property & Real Estate Index has advanced 25 per cent over the past 12 months, twice as much as the nation's benchmark index.

Indonesia's central bank cut borrowing costs in February for the first time in three years, improving the outlook for South-east Asia's largest economy as Mr Joko seeks to lift growth to 7 per cent.

The average consensus rating on Indonesian property companies with at least five analyst recommendations is 4.32, on a scale where 5 equates to a unanimous buy rating. That compares with 4.13 in the US and 4.1 in China. Shares in the Jakarta property index will probably climb 14 per cent over the next 12 months, according to price targets compiled by Bloomberg.

The gauge is valued at about 14 times estimated earnings. That's a 10 per cent discount versus the broader Jakarta Composite Index, compared with an average premium of 11 per cent since Bloomberg began tracking the data in 2006.

Indonesia's new-home prices probably climbed 5.7 per cent in the first quarter from a year earlier, following a 6.3 per cent gain in the final quarter of last year, according to a February survey by the nation's central bank.

Property companies will be beneficiaries of Mr Joko's infrastructure spending plans, estimated at US$433 billion through 2019, CLSA wrote in a March 31 report. They're also among the biggest winners from the central bank's interest-rate cut as financing costs fall, according to Ashmore's Wana.

"This is the best time to be in the property business in Indonesia," Mr Rainier Gunawan, a principal for realtor Ray White Indonesia in Jakarta, said in an interview.

But a rising supply of property may weigh on the market, according to Jones Lang LaSalle. About 1,500 new condominium units may open up in 2015, subduing rents, while office vacancy rates will probably rise into "double-digit territory" in 2015 as more than 260,000 square metres (2.8 million square feet) of Grade-A office space enters the market, the firm estimates.

Indonesia's property stocks still have room to rally, according to Mr Steven Gunawan, an analyst at Batavia Prosperindo Sekuritas in Jakarta. His buy recommendations include Alam Sutera and Lippo.

The population of Jakarta is forecast by the government to climb to 12.5 million by 2030, from about 9.7 million now. The urban growth rate in Indonesia, which has a total population of around 250 million, is the third-fastest among emerging Asian economies after Thailand and China, according to the World Bank.

"The size of our population, combined with the urbanisation rate, will keep demand for property strong," Batavia's Mr Gunawan said.

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