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Declining interest rates, rising purchasing power and a
favorable demographic structure all would seem to be highly supportive
of growth in mortgage lending.
Data on Bank Indonesia's website shows that outstanding mortgage loans
amounted to nearly Rp 73 trillion as of December 2006. Despite the
doubling of fuel prices in 2005, this figure is up 30 percent year on
year -- higher than overall lending growth, which concurrently
increased by close to 14 percent. But just how large is the potential
and what are the obstacles?
Estimating the potential market for mortgage loans in Indonesia is not
easy given that the available statistics on the number of households
living in self-owned homes are limited, as is income data.
For a rough estimation, however, we can start with the number of credit
cards issued. A total of 8.6 million credit cards are in circulation in
Indonesia. Assuming that each person holds two cards, this means there
are potentially 4.3 million cardholders.
The Global Property Guide estimates that the home ownership rate
exceeds 80 percent in Jakarta, Taipei and Singapore. We then apply a
discount of 30 percent assuming Jakarta accounts for 40 percent of
Indonesia's credit cards. Another discount needs to be applied for
defaulting cardholders, say 10 percent, which leaves a potential 2.58
million cardholders.
Assuming a conservative estimate of Rp 100 million in average loan
size, the potential market would then be around Rp 258 trillion.
So, what is preventing mortgage lending from booming? Is there
inadequate housing supply or are there problems in the banking system?
Apparently, asymmetries exist in that domestic banks are more
risk-averse than foreign-owned banks.
Higher risk aversion in some domestic banks may be connected to
lingering trauma from the 1998 economic crisis, while not all foreign
bankers will have experienced the crisis firsthand.
Could this be the problem? As revealed in Infobank's February 2007
edition, the top three mortgage lenders account for 39 percent of total
mortgages. These three lenders are Bank Tabungan Negara (BTN) on Rp
13.9 trillion, Bank Mandiri on Rp 7.4 trillion, and Bank Niaga on Rp 7
trillion.
In our opinion, the problem seems to lie in the banking system.
Property loans are considered to have been the main culprits for the
fallout during the 1998 economic crisis.
Back then, every developer had their own bank, and banks were
double-leveraging on the same projects, financing both contractors (or
developers) and buyers.
To boost sales, most developers offered so-called buyback guarantees,
under which the developer guaranteed to buy back the property if the
buyer defaulted. Prudence seemed to have been forgotten as bankers
advanced loans willy-nilly to their own groups. Today, long after the
crisis, the trauma apparently persists, and real estate is lumped
together with textiles as one of the sectors best avoided.
Could the effects of the crisis be repeated? Probably not.
Foreign-owned banks now hold more than 40 percent of domestic
banking-sector assets, and the rest are mostly owned by state banks.
Hence, it is less likely for money to be channeled to own-group
developers nowadays.
Bank Indonesia also applies stricter rules to prevent a systematic
collapse. What needs to be watched out for at all times are multiple
leveraging and mark-ups.
Another problem impeding mortgage lending in Indonesia concerns the
legal aspects. As Indonesia drifts further away from authoritarian
rule, land problems are becoming pervasive given that government
institutions frequently lack proper land documentation.
Enforcement creates further headaches as legal documents can be
rendered useless by less authoritative documents. For example, land
titles are frequently contested by claimants holding nothing more than
girik (land documents signed by village heads).
This creates difficulties for the banks in repossessing collateral in
the case of defaulted loans. According to the Wall Street Journal,
quoted by the Global Property Guide, protection of property rights in
Indonesia is rated at 4 (low), down there with China, Cambodia, the
Philippines and a number of countries in Central Asia.
Transaction costs are another impediment to the expansion of mortgage
lending. According to the Global Property Guide, "roundtrip"
transaction costs in property transactions are generally below six
percent in China, Hong Kong, Japan, Malaysia and Singapore. On the
other hand, total costs in Taiwan, Thailand, Indonesia, the Philippines
and South Korea are above ten percent, with costs in Indonesia, in
fact, being close to 15 percent. For these countries, the bulk of the
costs is made up of real estate agent fees, and sales and transfer
taxes ("roundtrip" transaction costs in the sale of property are made
up of registration costs, real estate agent fees, legal fees, and sales
and transfer taxes).
An interesting side conclusion from the Global Property Guide is that
those Asian countries with higher transaction costs tend to have bigger
slums and less affordable housing.
So, legal problems are a major issue. But do they provide a compelling
reason for the bankers to shun mortgage lending? Ideally, a lack of
legal certainty should just add another layer to the loan screening
process, rather than discourage lending altogether.
Compared to other types of loans, the consumer sector has one of the
lowest non-performing-loan (NPL) levels. For example, consumer loans at
state lender Bank Mandiri have an NPL rate of approximately 5 percent,
while the commercial NPL rate stands at slightly over 24 percent.
Similar NPL rates are also found in the case of Bank Negara Indonesia
(BNI), at 7.4 percent vs. 17.5 percent (all figures are as per 30
September 2006).
Legal problems are not specific to the property sector. Banks still
hold the bargaining power as the loan amounts are small. Just reduce
the level of risk aversion and let the loans flow.
Disclaimer:
This article is for informational purposes only; despite utmost
attention to detail, PT Bahana Securities does not warrant the accuracy
of the figures given in this article.
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