Bali Beach-Pad Boom Makes Developers Top Asean Gainers

Indonesian real-estate dollar bonds are gaining the most among emerging Asian developers as the presidential front-runner seeks to allow apartment sales to foreign investors.

U.S. currency securities from the companies returned 13 percent this year, the most in the region, according to a Bank of America Merrill Lynch index of emerging-market property borrowers. Bonds of PT Modernland Realty, which builds luxury townships in Indonesia, reached their highest level since an October sale. Notes for PT Lippo Karawaci, which operates malls in Bali and plans to open a hotel in the resort island next year, are near a one-year high.

Rising urbanization and a young population will drive property sales in Southeast Asia’s most-populous nation even after the government’s attempts to cool prices, Standard & Poor’s said in a July 6 report. Developers may get a further boost if the new president is confirmed as Joko Widodo, who’s pledged to let foreigners buy apartments worth at least 2.5 billion rupiah ($214,427) for the first time in areas including Jakarta and Bali.

“The planned policy change would add to demand for luxury property, supporting larger expansion and potentially increasing bond sales from this sector,” Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas, the nation’s largest underwriter of bonds last year, said in a July 11 interview. “Property sales have declined on the back of higher interest rates and more stringent down-payment rules, so this new policy may help pick up demand.”

Highest Returns

Indonesian builders sold $543 million of dollar-denominated notes in the U.S. currency in the first half, compared with $280 million for the whole of 2013, according to data compiled by Bloomberg. Returns on the nation’s debt in the U.S. currency are at 19.4 percent, the highest in Asia this year after Pakistan, according to JPMorgan Chase & Co. indexes.

Modernland’s $150 million of 11 percent notes are trading at 105 cents on the dollar, the highest since they were sold at par in October, according to Bloomberg prices. Lippo Karawaci’s $250 million of 2019 securities are trading at a yield of 5.7 percent, a 14-month low, after they were issued at a seven percent coupon in May 2012.

Builders in the country are recovering after the central bank raised interest rates by 1.75 percentage points to 7.5 percent from June to November last year, in the most aggressive monetary tightening since 2005. That was teamed with the bank imposing stricter loan-to-value ratios on mortgages.

The Jakarta Stock Exchange Construction Property and Real Estate Index has climbed 34 percent this year, about twice that of a Bloomberg-compiled gauge of large-cap U.S. real estate investment trusts.

New Condominiums

While the unresolved election and tighter regulations have created a “short-term challenge” for Lippo Karawaci, it plans to launch projects in township developments and market new condominiums in the second half, Mark Wong, an executive director, said in e-mailed responses to questions July 14.

PT Pakuwon Jati, developer of the Pakuwon City gated residential complex in eastern Surabaya that offers a private clubhouse, plans to start marketing a similar Grand Pakuwon project in the city’s west in the second half, according to Minarto Basuki, the company’s finance director.

“We will market more aggressively in the second half,” he said in a July 11 phone interview from Surabaya.

Pakuwon Jati sold $168 million of 7.125 percent five-year bonds June 25, the first time it tapped the U.S. dollar market since 2009, according to data compiled by Bloomberg. The notes, issued at par, are trading at 100.6 cents on the dollar.

Unofficial Lead

Widodo, known locally as Jokowi, and rival candidate Prabowo Subianto both claimed victory last week after elections in Southeast Asia’s largest economy. Widodo has a lead of between two and six percentage points, based on most unofficial counts of the July 9 presidential elections. The official results will be announced in Jakarta by July 22 and any subsequent legal challenges will be ruled on by late August.

Demand for houses in Indonesia is running at about 1.2 million houses a year, compared with the 400,000 units being built annually, according to the S&P report. Almost 55 percent of the population are aged 20 to 54 and are more likely to move out of their parental homes or relocate for work.

“The slew of regulatory actions that came out last year damped the market,” Kah Ling Chan, a Singapore-based analyst at the ratings company said in a July 11 interview. “Since then, however, there’s been more clarity on how the regulations would pan out and sales have improved.”

Bali Boom

The price of luxury property in Jakarta led worldwide gains, rising 38 percent in 2013, with Bali coming in third place on 22 percent, according to a report by Knight Frank LLP. Auckland secured second place with 29 percent. That compares with a 6 percent drop in property prices in Saint-Tropez and 2 percent fall for Lake Como.

Seeking foreign investment in Indonesian industries to help build the nation is a “regrettable reality,” Prabowo wrote in a January editorial in the Jakarta Post, adding that he plans to renegotiate contracts with foreign companies to “hammer out” fair terms for the state. Jokowi would respect existing deals to build confidence in investing in the nation and renegotiate contracts only if the agreements allow, he said in a June televised debate.

Either administration is unlikely to enforce more regulation to temper the property market, said S&P’s Chan.

“Indonesian developers usually seek overseas debt to replenish their land banks,” she said. “With the market and sales picking up, developers will continue to return.”

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