October 22, 2024
JAKARTA – The “emerald of the equator”, a popular tagline for Indonesia, conjures the vision a nation rich in natural beauty and abundant resources. Yet data from Statistics Indonesia (BPS) reveals a long-standing decline in the middle class and a persistent drop in formal employment opportunities.
These issues are even more critical as concerns about the middle-income trap grow, a situation where economic growth is too slow for the country to reach high-income status before its workforce ages. Therefore, it’s crucial for Indonesia to recalibrate its approach to avoid this trap. Moreover, data from the Finance Ministry shows that the peak of debt maturities will occur in the next few years, making it even more important to implement strategic measures that spur economic growth without burdening the national budget.
Whether the emerald of the equator shines in its golden era in 2045 depends on today’s choices.
One feasible solution lies in unlocking the potential of “dead capital” and transforming it into “live or active capital” by further developing the real estate sector. By creating an inclusive and dynamic property market, this sector has the capacity to significantly boost economic growth.
Data from Statista shows that in developed countries, the real estate sector makes a substantial contribution to GDP. For example, in Singapore, real estate contributes around 3 percent to GDP, even though the country’s land area is just 0.04 percent of Indonesia’s.
In the United States, with a land area of about 9 million square kilometers, the sector contributes about 20 percent to GDP. In contrast, Indonesia, with 1.9 million sq km, sees its real estate sector contribute only around 1.9 percent. This highlights the immense room for growth in Indonesia’s real estate sector.
Combining this approach with initiatives supporting sustainable energy, such as the installation of solar panels and creative financing schemes for residential properties, can help the middle class grow and achieve a future with net-zero carbon emissions, allowing Indonesia to shine once more as the emerald of the equator and reach high and environmentally sustainable economic growth.
Dead capital is a term coined by Peruvian economist Hernando de Soto to describe assets that are difficult to utilize or optimize for various reasons. For instance, many people own land or buildings but lack official certificates, or potential buyers may have purchasing power but are hampered by bureaucratic obstacles.
According to de Soto, the poor and middle class in many countries accumulate dead capital, while wealthier nations tend to accumulate active productive capital. This leads to trillions of dollars in economic potential being trapped in stagnation.
The Indonesian government has already taken steps to address this issue through various initiatives, such as land ownership certification programs. However, more needs to be done, including creating a dynamic, transparent and secure property market, whether commercial, industrial or residential, alongside incentives and streamlined bureaucratic processes that can build trust and stimulate market participations.
“Reviving” dead capital is just the first step. To ensure that the real estate sector can drive both short-term and long-term growth, it is essential to create a property market that is dynamic, secure, inclusive and sustainable. A system that enables property transactions to occur efficiently, without complex bureaucratic hurdles, is essential.
The principles outlined by Nobel laureate Alvin Roth for Market Design could be applied here: markets should be thick (many participants), safe (secure transactions) and simple (easy to participate in).
A thick market means having many buyers and sellers who can easily connect. To encourage wider participation, the legal process for land certification must be made safer, more convenient and as simple as possible.
According to research by PT SMF, every Rp 1 trillion invested in the housing sector can increase GDP by Rp 1.9 trillion, reduce poverty by up to 6,017 people and activate 185 other sectors, such as cement and transportation services. Statista estimates that the real estate sector’s contribution to Indonesia’s GDP is currently only around 2 percent, compared to 20 percent in the US, showing significant growth potential in this sector.
Data also suggests stagnation in Indonesia’s property market, which requires urgent attention. For instance, since 2017, the average yield on Jakarta apartments has tended to be lower than deposits or government bonds. This unusual risk/reward allocation could harm both current and potential homeowners.
With deposit returns higher than apartment yields, individuals might delay purchasing property and keep their money in deposits instead. At the same time, sellers may struggle to find buyers if they need liquidity. Prospective buyers are also uncertain whether property price inflation will outpace the returns on their financial investments, limiting their purchasing power.
Indonesia stands at a crossroads between economic development and environmental responsibility. Seizing this opportunity to transform the economy by unlocking dead capital and creating a dynamic, sustainable property market is essential. Indonesia faces a housing backlog of 12.7 million units.
With an estimated average house price of Rp 200 million, this represents a potential economic value of Rp 2.5 quadrillion, about 50 percent of Indonesia’s total GDP, which stands at around Rp 5.5 quadrillion. Currently, the real estate sector contributes only 2 percent, or around Rp 110 trillion. If other sectors remain stable and 10 percent of this housing market potential is realized, Indonesia could gain an additional Rp 250 trillion, potentially driving economic growth up to 7.5 percent.
Furthermore, if new housing developments incorporate solar panels and financing solutions, these homes will not only serve as residences but also help reduce carbon emissions and environmental pollution. This step would support Indonesia in reaching its future net-zero carbon targets.
The potential contribution of the housing sector to GDP growth, poverty reduction and strengthening the middle class is substantial. It could also boost government tax revenues from property transactions.
To support this growth, the Public Housing Ministry could set clear targets (KPIs), such as improving the ease of property transactions, increasing transaction frequency and involving more small and medium enterprises (SMEs) as developers.
Though there are significant challenges ahead, it’s undeniable that revitalizing dead capital through real estate development could be a powerful engine to combat poverty, strengthen Indonesia’s middle class, create jobs and catalyze higher economic growth without adding to the state budget burden.