Investors see a lack of transparency and concrete investment opportunities in Indonesia, missing the chances, writes John van Oost

Anumber of recent research papers have outlined the progress made by the
 Indonesian economy and the vibrancy of its retail sector. McKinsey Global Institute forecast in a recent report called ‘The Archipelago Economy: Unleashing Indonesia’s Potential’ that the country is on target to become the seventh largest global economy by 2030, from 16th today. Indonesia benefited from a real GDP growth rate of 5.2% during the period 2000-10, the third best performer globally, and its real GDP is now forecast to grow at a rate of 6.5% in the years to come. McKinsey predicts that the consumer class of 45 million members today will triple to 135 million by 2030.

Jones Lang LaSalle ranked Indonesia as the third most attractive retail market globally in its 2012 Retail Real Estate Momentum index and predicted a flurry of consumer, retailer and investor activity.

There is little doubt that Indonesia represents a long-term opportunity for global real estate investors in search of portfolio diversification, secured rental income and steady capital gains. However, despite the sheer size of its population of 242 million and its recent phenomenal economic growth, the country is not commonly understood.

We can address some of the concerns raised by global real estate investors and developers looking at Indonesia by tackling some of the pre-conceived ideas about its economy, as well as highlighting how a new generation of property entrepreneurs is using the changes taking shape in Indonesia’s retail property sector to develop profitable projects.

Since President Suharto’s resignation in 1998, Indonesia has been improving its democratic credentials. The country’s growing middle class is relatively young, increasingly educated and highly aspirational. This section of the population strongly supports political decisions and investments that improve the country’s governance, infrastructure and educational system. Its members are increasingly impatient and ready to flex their democratic muscles.

Efforts need to continue, no doubt, but significant progress has been made already. Indonesia is more stable politically and its economy more diversified than at any other point in its history. In its latest competitiveness report on Indonesia, the World Economic
Forum ranked the country 25th on macroeconomic stability. It was ranked 87th in 2007.
It is often assumed that Indonesia’s economic growth is solely reliant on exporting natural resources. The country has indeed ample reserves of natural gas, coal, tin, bauxite, cocoa and palm oil, which it increasingly exports to China, India and the rest of Asia.

However, as the report from McKinsey outlined, Indonesia’s economy growth is driven by domestic consumption and services rather than natural resources and exports. Services represent 49% of the country’s GDP, manufacturing 25% and ‘resources’ 26%. The GDP is driven by government and private consumption, not by exports of agriculture and mining products.

In its economic master plan released in 2011, the Ministry for Economic Affairs described in detail the 22 economic activities that the government intends to promote. It ranges from defence equipment to tourism and from food processing to ICT. Most comments have been made on the whopping $188bn (€141bn) of infrastructure projects listed in the report, the planned improvements in domestic and international connectivity and the creation of economic corridors and industrial clusters.

The GDP per capita hides the huge disparities in Indonesia. That is particularly true for urban centres like Jakarta, where it reached $10,629 in 2011 versus $3,495 for the country as a whole.

Indonesian consumers are increasingly sophisticated, brand-driven and tech-savvy. They look for multiple sources of information before purchasing anything, be it apartments or the furniture and appliances that go in them; the latest fashion of domestic and international designers or their first motorcycle or car. They are avid users of social media. According to Socialbakers, a digital analytics firm, Indonesia has 47.3 million Facebook accounts, the fourth largest market globally.

Despite the property market’s attractiveness, a number of global real estate investors seem to be frustrated by the perceived lack of concrete investment opportunities in Indonesia, often referring to the dominance of well-connected conglomerates and the lack of market transparency. Digging a bit deeper, one realises that investment opportunities are abundant.

A new generation of entrepreneurial property developers is emerging in Indonesia. They don’t take their lack of corporate clout, harder access to bank finance and connections as a curse but as an opportunity. It forces them to be astute, gather insightful market intelligence, and assess the pulse of the market in a faster manner. Most of them have spent time abroad, and are well aware of global best practices and governance rules. They are willing to partner with foreign investors to access capital, but even more importantly, to access specialised expertise.

With a current population of 26 million inhabitants, Jakarta’s conurbation, known as Jadebotabek, is the world’s second largest metropolitan area, behind Tokyo. Its population density of 9,400 inhabitants per sq km is one the highest globally. And the area continues to attract people.

Urban centres across Indonesia are expected to somehow absorb 70.5 million more people over the next 20 years. That is more than the entire current population of countries like France, the UK, or Thailand.

Leading domestic and international retailers, including leading department stores like Parksons and Sogo, supermarkets like Hero and Super Indo and multi-brand retailing groups like Mitra Adiperkasa have all initiated geographical expansion programmes across the archipelago. This, in turn, creates new opportunities for domestic and global property developers and investors.

Indonesia, like all emerging markets, is still full of contradictions and challenges. It requires colossal political determination to execute and finance the necessary investments in infrastructure and mass transportation systems, to improve the skills and productivity of its workforce, as well as to spread the benefits of its economic gains broadly.

But looking at the facts, beyond old beliefs, global real estate investors can grasp the still untapped investment opportunities in Indonesia today. The country has changed tremendously over the last 10 years, and continues to do so at an ever-accelerating pace.

John van Oost is managing partner at Yishan Capital Partners