In our Bali Real Estate Investment Planning Part 1 article, investors should be able to answer several questions, as follows:
- What is your profit strategy?
- What is your exit strategy and time horizon as an investor?
- How do you intend to finance the monthly installments?
Only after the above questions have been defined then move into the next phase
- Understanding Supply and Demand of the Market
- Defining the location that you are targeting
- Type of land (Freehold vs Leasehold)
- Existing infrastructure and future planned developments
Understanding Supply and Demand
1. Supply of Real Estate
Real estate is segmented into regions, provinces, etc. Within any development within a certain set region, most real estate or city development planning would have a certain portion of land allocated for commercial, factories, residential, agriculture, etc. Hence with that note, real estate supply is always limited.
2. Defining the location that you are targeting
There is also probably only a certain set of land that has a beachfront view, river view, etc. What might be overvalued for you might be undervalued for others as preference is subjective to every individual however there is always an indication for the valuation of the region/estate/province on the previous latest transacted price just as a benchmark purpose.
3. Type of Land (Freehold vs Leasehold)
As earlier mention, due to government planning and allocation, they have also sectored land-based on leasehold and freehold. Leasehold allows the government to further develop after the lease had expired hence helping increase the infrastructures around that area/region. If you want to know further information about the different types of land within Indonesia, Furo Property Bali has generated a very specific article that provides you full-insights about that; Different Land Types Within Indonesia.
4. Accessibility and existing infrastructure & future planned developments
How developed is a particular region would also impact supply and demand? There will be investors or buyers who want to be living beside or near a school, market, shopping malls, etc. Information about the future planned developments in a certain location can be your key point to acquire a property that has potential gain in the future projection.
What is more interesting?
You can acquire a property with less budget, compared to the property in the “already-developed” location. However, you have to concern about the possibility of changes in the planning. This is where you need the trusted property agents to collaborate. With the local smart ability that the property agents have, they can gain as much information about “almost anything you need to know” in a certain location.
Factors That Can Affect Real Estate Supply And Demand
Here are some other factors that can affect real estate market supply and demand that real estate investors should consider.
1. Mortgage rates
As bank mortgage rate rise and fall. so too does affordability and the purchasing power of the consumer, which directly affects supply and demand. If rates go low, more people can afford to purchase a home. In Indonesia itself, KPR (Kredit Pemilikan Rumah / House Ownership Credit) is the most popular mortgage program to own a house.
You can go to a credible bank in Indonesia, and ask about the KPR program. You need to underline that each bank could probably have different interest rates and terms & conditions. There are two types of banks in Indonesia; the conventional bank & Syariah bank. The big difference between those two types of the bank is the implementation of Islamic value in their business protocol.
(Note: KPR program requires you to have a bank account affiliated with the KPR program in Indonesia)
So, you have many options to choose from in order to acquire real estate in Indonesia by using a mortgage program. With these options, you have the flexibility to choose which option gives you the best value for your investment.
2. Building materials
The cost of materials will generally push housing prices up or down as builders pass on their costs or savings to buyers. If lumber now costs 1.2x more than what it was last year, then builders have to make up that cost on the sale to keep profits and production at stable levels.
Besides, the location determines the price of the building materials. For example, the price of concrete in Yogyakarta is relatively cheaper than in Bali. The logistics & the scarcity of the material really define the pricing of the building materials. So, before you invest your money in real estate. You need to acknowledge the cost you have to invest in order to build a house/villa in a certain location. In most cases, people don’t calculate this matter. At the end of the day, the spending on building a villa is no longer “optimal” in the budget (over budget).
Over budgeting can cause to take a longer time to achieve the Break-Even Point of your investment.
3. Household incomes
More or fewer people earn generally puts pressure on housing prices up or down. Low incomes are also symptomatic of an unhealthy economy, which is also likely to affect housing demand and prices downward. You can use the regional minimum wage (UMR) as the parameter. If the UMR in location A grows (in percentages) more than in location B, most likely people that work and live in location A have more purchasing power rather than location B. The increasing number of UMR represents the economic growth in that area.
You definitely don’t want to sell things that no one can’t purchase, right?
The more jobs a city, town, or state has available will dictate positive inward migration, incomes, and therefore demand for housing and what people are willing to pay for homes. If you have a net loss of jobs in your area, then people may need to move or may have less income. This increases housing supply and decreases demand, all of which will see home prices drop.
More jobs also indicate the production that grows. That means the area is productive which indicates the potential for economic growth. In Indonesia, the government actively opens 121 new industrial areas in 2020. You can basically research which location is the most potential growth. The latest news is Tesla will open their manufacture in Batang, Central Java. In this case, we can predict that there will be a lot of new jobs in that area. That will stimulate the migration of the people to come to Batang which will affect the increase of supply and demand of real estate in Batang.
5. Household debt
The more consumer debt someone holds, the less they can afford and the more susceptible they are to economic downturns. If credit card debt increases dramatically, households may put off home buying as they pay down that debt, decreasing demand for housing. The inverse is also true.
This is very personal. It means that you can’t make a parameter based on location. However, based on Tirto’s research, a lot of middle-class income tend to have more debts as they want to level up to the upper class. So then, the deficit is inevitable. As result, a lot of real estate companies target more the upper-class income rather than the middle one, even though in numbers (market potential) are less than the middle class, but in the end, the middle class still purchase the real estate for the upper class anyway.
6. Local market factors
Positive or negative migration into a geographic area will have a dramatic impact on housing supply and demand. An unhealthy economy or anchor employer shutting down is one example of local economic factors that will drive demand down and supply up as homes come on the market as people leave.
Besides, access to the local also affects the supply & demand of real estate. The logistics will determine how businesses can run in certain locations. If the cost of logistics is too expensive, that might not good for some businesses to run. It will affect the operational cost. Since the investment in real estate is very niche, the supply & demand of real estate in the location that has struggled with logistics will be limited based on which businesses can run & sustain.
For example, Bali is one of the most popular tourist islands in Indonesia. Mostly, the regional income comes from tourism itself. However, during the pandemic in 2020, tourism was one of the most suffering industries. Travel banned is everywhere. The mobility of the people was restricted, the logistics were limited. The island was almost empty from tourists. As result, a lot of real estate in Bali, such as villas, & hotels were on sale, most of them were with big discount.
Local and state-level legislation and rules can have a dramatic impact on the housing market supply and demand. Consider favorable tax incentives and low development fees for builders. This makes it more economically feasible for builders to build new homes, increasing the supply of below-market-value homes (due to the incentives), and therefore demand will rise assuming the local economy is healthy.
You like it or not, the policy is somehow can change over time. You need to ensure that the political situation in a certain location is stable enough.
In short, Bali Real Estate Investment Planning is very tricky. However, there will always be a way to get the optimum point of your investment. You have to answer some questions that have been explained in Bali Real Estate Investment Planning part 1. Then, you can continue to learn more about the supply and demand of real estate in Indonesia, alongside the factors that can affect it. This is where the skill of the professional real estate agents needed. Having a collaboration with a trusted partner can minimize the risks of your property investment.