Indonesia Real Estate Report - Q2 2013

Q2 2013
www.businessmonitor.com
INDONESIA
REAL ESTATE REPORT
INCLUDES 5-YEAR FORECASTS TO 2017
ISSN 2040-7629
Published by:Business Monitor International
Indonesia Real Estate Report Q2
2013
INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMIs Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: March 2013
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Indonesia Real Estate Report Q2 2013
CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 8
Political ................................................................................................................................................. 10
Economic ............................................................................................................................................... 12
Business Environment .............................................................................................................................. 14
Industry Forecast .............................................................................................................. 15

Table: Forecast Rents - (USD per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table: Forecast Net Yield, 2010-2017 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Construction And Infrastructure Forecast Scenario ........................................................................................ 19
Table: Indonesia Construction And Infrastructure Industry Data, 2011 - 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table: Indonesia Construction And Infrastructure Long Term Forecast, 2017 - 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
. Dampened By Pertinent Risks .............................................................................................................. 29
Macroeconomic Forecasts ............................................................................................... 33

Economic Activity. ................................................................................................................................... 33
Trade Deterioration Slowing ................................................................................................................. 33
But Risks Seen In Portfolio Account ........................................................................................................ 34
Risks To Outlook .................................................................................................................................... 36
Industry Risk Reward Ratings .......................................................................................... 37

Asia-Pacific Risk/Reward Ratings ............................................................................................................... 37
Table: Asia Pacific Real Estate Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Business Environment Outlook ................................................................................................................... 38
Table: BMI Business And Operation Risk Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Table: BMI Legal Framework Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table: Labour Force Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Table: Asia, Annual FDI Inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Table: Trade And Investment Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table: Top Export Destinations, 2001-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Market Overview ............................................................................................................... 51

Office .................................................................................................................................................... 57
Table: Historic Rents - 2011-2012 (USD per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Table: Net Yield, 2011-2012 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Table: Terms of Rental Contract/ Leases - H212 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Retail .................................................................................................................................................... 59
Business Monitor International Page 4

Table: Net Yield, 2011-2012 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Retail Sales Indicators .............................................................................................................................. 62
Table: Indonesia Retail Sales Indicators, 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Industrial ............................................................................................................................................... 63
Table: Net Yield, 2011-2012 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Competitive Landscape .................................................................................................... 65
Company Profile ................................................................................................................ 68

PT Adhi Karya ........................................................................................................................................ 68
Jakarta Propertindo ................................................................................................................................. 72
Lippo Karawaci ...................................................................................................................................... 75
Pakuwon Jati Tbk .................................................................................................................................... 77
Demographic Forecast ..................................................................................................... 79

Table: Indonesia's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Table: Indonesia's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Table: Indonesia's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Table: Indonesia's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Methodology ...................................................................................................................... 83
How We Generate Our Industry Forecasts ................................................................................................... 83
Construction Industry ............................................................................................................................. 84
Bank Lending ........................................................................................................................................ 85
Real Estate/Construction Business Environment Rating ................................................................................. 85
Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Sources ................................................................................................................................................ 88

BMI Industry View
The Indonesia Real Estate report examines the commercial office, retail and industrial segments in the
context of a market which is outperforming regionally.
With a focus on the three principal areas of Jakarta, Bandung and Bali, the report covers the rental market
performance in terms of rates and yields over the past 24 months and examines how best to maximise
returns in the commercial real estate market while minimising investment risk and exploring the impact of
international headwinds on a market that has historically proven itself to be resilient. The key potential
growth areas driven by increasing activity on the part of international investors, favourable fundamentals
and the potential of the archipelago's consumption-driven economy are also explored, alongside corporate
growth strategies looking to both domestic and international channels for growth.
That said, there is considerable optimism in the Indonesian commercial property market. The last few years
have seen impressive growth in the Indonesian real estate sector. Rents were hardly touched by the global
financial crisis (with the exception of the office sector) and have, in fact, generally increased over the past
few years. Our latest data collection in December 2012 revealed that rents continue to soar across the
majority of cities and commercial real estate sub-sectors. One substantial hindrance to both the industry and
the economy as a whole is that Indonesia's physical infrastructure is substandard. The extent of future
growth depends very much on the government's ability to push through bureaucratic reforms that will allow
much-needed infrastructure investment, and the approval of the land acquisition bill is an important step in
the right direction.
Key Points
We are cautiously optimistic about the outlook for Indonesia's construction sector in 2013 and have
maintained our real growth forecasts of 7.2% for the year. Besides favourable macroeconomic
fundamentals, we expect conducive monetary conditions, increased government expenditure and the
approval of a new land acquisition bill to drive construction activity in 2013. That said, this construction
growth of 7.2% is still a slowdown from the estimated growth seen in 2012 (7.6%). Several downside
factors (ie, deepening deficit, bottlenecks in project execution and the 2014 presidential elections)
continue to prevent the sector from maximising its growth potential.
We continue to hold a neutral bias on the Indonesian rupiah over the short term, as our expectations for
the currency to hit stability have played out well. Although Indonesia's external position has deteriorated
markedly over the course of 2012, it too appears to have found some stability, and we believe that
pressures from the country's weakening trade position have eased somewhat.

SWOT
SWOT Analysis
Strengths
PT Perusahaan Listrik Negara (PLN)'s 20-gigawatt (GW) electricity generation
expansion plans.

Coal mining companies have pledged billions of dollars for railway investment.

A total of 367 infrastructure projects, worth US$440bn, are to be launched between
2011 and 2025, according to the 2011-2025 Master Plan for the Acceleration and
Expansion of Indonesian Economic Development (MP3EI).

Received presidential approval for a new land acquisition regulation, which could
pave the way for greater speed and clarity in Indonesia's land acquisition process.

There is strong political will to make public-private partnerships (PPPs) and
concessions a mainstream means of procuring new infrastructure.

Presence of some of Asia's largest construction companies.
Weaknesses
The country's power sector is running a supply deficit and is managing its shortfall
with outages.

Poor business environment scores due to entrenched corruption, red tape and a lack
of transparency.

Contract enforceability is dubious.

High levels of corruption.

High foreign exchange risk.

Significant lack of legal rights (such as collateral and bankruptcy laws) that protect the
interests of borrowers and lenders.
Opportunities
There are opportunities for international companies to compete with the fragmented
domestic industry for major projects, particularly in the housebuilding, energy and
transport sectors.

SWOT Analysis - Continued

The government is improving PPP regulations and expanding access to financing.
Cement majors are implementing expansion plans, indicating strong demand for
construction materials and resulting in a growing construction sector.

Demand for Indonesian coal is driving investment into infrastructure by international
investors - including those from India, China and the Middle East - to meet strong
demand for coal for electricity generation.

New state-owned infrastructure guarantee agency and amendments to PPP/
concessions legislation are steps towards addressing deep structural problems in
Indonesia's infrastructure market.
Threats
Continued electricity shortages could threaten the pace of investments.
High inflation in the construction sector due to rising costs for cement, could make
projects economically unfeasible.
Political risks remain high, with the country's rule of law extremely fragile and
presidential elections due in 2014.

Political
SWOT Analysis
Strengths
Indonesia managed a successful transition to democracy in 2004. In addition, the
2009 parliamentary and presidential elections passed peacefully, signalling the
consolidation of the democratic process. Following 2009, the government showed
further signs of improvement in both efficacy and engagement, but progress has
stagnated since 2012.

The military's role in politics has gradually been reduced. The prospects of a military
coup - which seemed a real possibility in the late 1990s and early 2000s - have
diminished substantially. As the military's role in politics continues to wane,
Indonesia's political stability should likewise improve.
Weaknesses
Indonesia's domestic political scene is characterised by a proliferation of minority
parties, and formal and informal coalitions are necessary to govern and legislate.
Moreover, the efficiency of state institutions is encumbered by bureaucracy and
corruption. Prospects for reform are beset with numerous challenges, such as the
long-running practice of politicians promising government positions to campaign
supporters.

The country was impacted by separatist rebellion and ethnic violence in the late
1990s and early 2000s, which took great efforts to bring to heel. In the event of a new
economic crisis, calls for regional secession could re-emerge.
Opportunities
President Susilo Bambang Yudhoyono's Democratic Party had a strong showing in
the 2009 parliamentary elections. Coupled with a strong mandate following his re-
election in the same year, the implementation of policies in the legislature should
become less problematic.

Indonesia's status as the world's most populous Muslim country leaves it well
positioned to speak out on global Islamic issues and act as a bridge between the
Middle East and the Asia Pacific region.

Threats
Regional militant group Jemaah Islamiah (JI) poses a lingering threat to security in
Indonesia. JI is blamed for a series of attacks, including the Bali bombings of October
2002 and the Jakarta bombings of July 2009.

The fact that Indonesia subsidises basic goods means that when the government
raises prices, there is a risk of public unrest, or at least a political backlash.
Additionally, Indonesia's population is extremely young, with more than 50% of
Indonesians younger than 30. Younger populations have historically been a predictor
of political instability.

Economic
SWOT Analysis
Strengths
Indonesia's strategic location between the Indian and Pacific Oceans and its
adjacency to major east-west trade routes make it an important economy in the
region. Indonesia is also resource-rich and is the world's largest producer of palm oil.

Indonesia has a low cost and large supply of available labour resources. Its labour
force, the fourth largest in the world, is also one of the world's youngest.
Weaknesses
Indonesia's economy is not growing fast enough to reduce unemployment, with the
rate still relatively high at 6.2% as of August 2012. Many are forced to work in the
informal sector. Of particular concern is the youth unemployment rate, which is five
times the overall rate.

Indonesia's physical infrastructure is considered sub-standard. The archipelagic
nature of the country makes it difficult to weave national infrastructure together.
Despite an ambitious infrastructure revitalisation plan, the country currently compares
unfavourably with its Association of Southeast Asian Nations peers.
Opportunities
Indonesia could attract much-needed foreign investment by strengthening its
business environment, particularly through reform of its unreliable legal system.

Indonesia stands to benefit from the rise of Islamic financing, having adopted new
legislation in early 2008 designed to tap into this rapidly expanding sphere. With an
overall market share of only 3%, growth prospects for Islamic banking in the world's
largest Muslim country are enormous.
Threats
Production at Indonesia's ageing oil fields has been in decline since the mid-1990s.
The country has therefore become a net importer of crude oil in recent years, putting
downward pressure on its current account position. Furthermore, rising oil prices
have begun to pressure Indonesia's current account, where it typically runs a healthy
surplus. The resumption of the Cepu field in late 2009 may help to alleviate
Indonesia's dependence on foreign oil.


Indonesia is perceived as one of Asia's riskier destinations. This leaves the economy
vulnerable to sudden capital outflows at times of risk aversion, which can lead to
sharp swings in the currency.

Business Environment
SWOT Analysis
Strengths
Indonesia is South East Asia's largest economy with a nominal GDP of US$880bn and
is the world's fourth most populous country with more than 240mn people. It thus
offers investors a vast home market in which to do business.

As a member of the Association of South East Asian Nations' Free Trade Area,
Indonesia is committed to lowering tariff and non-tariff barriers to trade.
Weaknesses
Corruption remains a major problem. Indonesia ranked 118th out of 174 countries
surveyed in Transparency International's 2012 Corruption Perceptions Index, where a
low ranking denotes a higher degree of corruption.

Indonesia's excessive bureaucracy makes it a difficult place to do business. Among
Asian economies, Indonesia has the longest period to start a business. Labour laws
are also considered excessive.
Opportunities
President Susilo Bambang Yudhoyono's administration has gradually been reforming
the business environment, particularly by strengthening the legal system and fighting
corruption. If sustained, this would boost investor interest in Indonesia. However,
reform has been slow, and divisions within the government could curb progress
ahead of 2014 elections.

Indonesia has been amending its debt and banking regulations, with the aim of
attracting Islamic financial activities. Over the past five years, Islamic banking growth
has averaged more than 65%.
Threats
Recent high-level business disputes between the government and foreign investors
demonstrate that even after investments are up-and-running, there is still scope for
legal problems or obstacles posed by legal wrangling.

Industry Forecast
Office According to Jones Lang LaSalle, Jakarta's property market has bucked a muted trend observed since
2008 and is now at risk of overheating. Occupancy rates in the city's 'golden triangle' are up 91%, while top
quality buildings now command 98% occupancy.
It is our view that this demand will in the medium-to-long term drive a notable amount of office
construction over the coming quarters and, as organisations relocate closer to their bases of production, we
will witness a wider geographical spread of development, notably in Indonesia's south. Demand for
residential units will also drive an uptick in construction around the megacity's periphery.
Nevertheless, over the coming year, we anticipate the market to remain broadly flat as supply and demand
dynamics remain absent significant catalyst or detriment.
Table: Forecast Rents - (USD per m2/month)
2013 (Jan-Jun) 2013

Min Max Trend (% change)
Jakarta 12.50 72.50 Same 0%
Bandung 12.00 27.50 Same 0%
Bali 8.50 30.50 Same 0%
Source: BMI
Table: Forecast Net Yield, 2010-2017 (%)
2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Jakarta 10% 10-11% 8-20% 9-20% 9-20% 9-20% 9-20% 9-20%
Bandung 5% 8-10% 8-20% 8-20% 8-20% 8-20% 8-20% 8-20%
Bali 10% 5% 5% 5% 5% 5% 5% 5%
Source: BMI

Retail
BRIC-Like Potential To Attract The Sights Of Regional Consumer-Facing Players:Longer term, it

cannot be denied that there are dynamic opportunities on offer in the Indonesian consumer market. Strong
macroeconomic fundamentals, favourable demographics and the spread of organised grocery retail mean
that the Indonesian consumer sector certainly has the potential to be regarded in the same light as the BRIC
economies of Brazil, Russia, India and China.
Youthful Demographics: A massive youth population (aged between 15 and 24) of around 40.9bn in
Indonesia underlines the potentially dynamic opportunities available in the mass-market. As this youthful
population matures, accompanied with rising purchasing power, demand for mass-market products should
also grow accordingly over the coming years. The growing receptiveness of this demographic group to
Westernised trends and product innovation, which are key drivers behind soft drinks and confectionery
sales, further endorses our bullish long-term consumer picture.
Spread Of Organised Grocery Retail: The proportion of organised grocery retail in Indonesia, which is
estimated at 23% of overall grocery retail sales, is considerably lower than levels witnessed in other
developing Asian markets such as Thailand and China. As foreign retailers continue to plough in
investments in the Indonesian mass grocery retail (MGR) sector, organised grocery retail will inevitably
play a more prominent role in the domestic retail landscape, in turn improving the visibility of products and
easing product distribution to local consumers.
Growing Consumer Affluence: Dynamic economic growth should, in theory, translate into increasing
wealth of Indonesians (GDP per capita in US dollar terms is forecast to more than triple to reach US$10,633
in 2020). This growing spending power will fuel a greater discretionary appetite, implying exciting long-
term growth potential for consumer product sales.
Sector Investments More Forthcoming: These dynamics mean that Indonesia will continue to feature
strongly on the radars of foreign consumer-facing players. US fast food chain Yum! Brands, Japanese food
and beverage producer Suntory and South Korean MGR player Lotte Group have all recently committed
investments in Indonesia. With sector investments likely to be more forthcoming in the coming years,
dynamism in the consumer-facing sectors will consequently remain buoyed to support demand growth.

In spite of the upside to the longterm potential for the retail real estate market stemming from the potential
of the domestic consumer, in the short term, global macroeconomic factors continue to weigh on growth,
and we anticipate that the market will remain flat over 2013.
2013 (Jan-Jun) 2013

Jakarta 41.50 232.50 Same 0%
Bali 20.00 51.50 Same 0%
Source: BMI
2010 2011 2012 2013 2014 2015 2016 2017

Jakarta 10% 10-11% 8-15% 9-15% 9-15% 9-15% 9-15% 9-15%
Bandung 5-10% 8-10% 8-22% 8-25% 8-25% 8-25% 8-25% 8-25%
Bali 10% 10-15% 7-10% 7-10% 7-10% 7-10% 7-10% 7-10%
Source: BMI
Industrial
Industrial Drive To Intensify Our forecast factors in a steady increase in investment in industrial estates.
A rise in real wages in China, and 2011's rating upgrade to investment grade, is encouraging manufacturers
to relocate production to South East Asia. Notable investors include Taiwanese producer Foxconn, which
began production in Bantem in October 2012. We believe that firms will increasingly look to invest in
industrial estates - in September, developer PT Intiland Development announced that it would acquire up
to 650 hectares of land to expand its industrial estate portfolio in East Java.
The government has made a strategic commitment to industrial construction and will forge ahead with plans
to invest US$22bn in Indonesia's industrial base, moving the country away from a reliance on natural
resource wealth. Important in this respect is the ongoing development of the Special Economic Zones
(SEZs) of Batam, Bintan and Karimun.

The development of the SEZs suggests improved trade links for Asian investors looking to take advantage
of Indonesia's growth story. Over H112, South Korean investment in Indonesia tripled year-on-year,
according to the Investment Coordinating Board, making the country the third largest foreign investor after
Singapore and Japan.
Saying this, we remain reluctant to factor in too great an increase until the Indonesian government
successfully begins reforming the country's private sector. Furthermore, growth in these areas will remain
muted until the country achieves higher and more consistent foreign direct investment (FDI) inflows. FDI
looks set to underperform in 2012, with inflows for construction at just US$69mn in H112 compared to US
$300mn over the same period in 2011.
Internal Risks And External Cooling Curb Forecast The poor performance of both imports and exports
supports our view that poor external economic conditions are finally beginning to hit Indonesia's buoyant
domestic economy - with the current account's rapid decline exacerbated by falling prices across the major
commodity groups that Indonesia exports, most notably palm oil and coal. Despite the rising fiscal deficit,
President Yudhoyono has announced that capital spending will increase 15% in 2013 (by US$20bn). That
said, fiscal constraints weigh on our forecast as a whole.
The country's private sector remains relatively underdeveloped. Investors will remain wary until issues
pertaining to contractual process such as feasibility studies, documentation, contractual arbitration and
public consultation are institutionalised.
We believe that greater utilisation by the government of FDI - and, in particular, of the PPP model - would
facilitate large builds requiring greater scalability (including affordable housing builds), endow local firms
with improved technical knowledge and weigh less heavily upon government coffers.
However, as it stands, we believe that the government lacks the will to implement greater liberalisation,
with trends of national industrial favouritism and resource nationalism deepening, and subsidies and export
taxes remaining common practice. Recently, The Indonesian Chamber of Commerce and Industry began
lobbying the government to give precedence to small, domestic firms for projects valued at less than US
$2.1bn.We highlight the strong risk that the winner of the 2014 election may further stymie many of the
current pro-business reforms.
With these risks in mind, although we forecast robust industrial construction growth, we advance the view
that Indonesia's industrial real estate sector will remain flat over the 2013 period as there will be no
immediate change to the sectors supply and demand dynamic.

2013 (Jan-Jun) 2013

Jakarta 4.75 13.50 Same 0%
Bali 3.25 8.00 Same 0%
Source: BMI
2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Jakarta 10% 5% 5% 5% 5% 5% 5% 5%
Bandung 3-5% 3-5% 3-5% 3-5% 3-5% 3-5% 3-5% 3-5%
Bali 8-9% 5% 5% 5% 5% 5% 5% 5%
Source: BMI
Construction And Infrastructure Forecast Scenario
Industry Forecast Scenario
Table: Indonesia Construction And Infrastructure Industry Data, 2011 - 2016
2011 2012e 2013f 2014f 2015f 2016f

Construction industry value,
IDRbn 756,538.0 895,712.5 1,063,157.7 1,264,680.0 1,505,222.5 1,797,071.5
US$bn 86.2 95.5 109.6 131.1 159.3 192.2
Construction industry, real
growth, % y-o-y 6.7 7.6 7.2 7.4 7.5 7.9
Construction industry, % of
GDP 10.2 10.8 11.6 12.4 13.2 14.1
Total capital investment,

IDRbn 2,322,674.0 2,687,182.8 3,024,693.0 3,445,881.5 3,922,102.3 4,460,018.7
Total capital investment, US
$bn 264.7 286.5 311.8 357.1 415.0 477.0

Indonesia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued
2011 2012e 2013f 2014f 2015f 2016f

Total capital investment, %
of GDP 31.3 32.5 33.0 33.7 34.3 34.9
Capital investment per
capita, US$ 1,092.2 1,170.4 1,261.5 1,430.8 1,647.8 1,877.0
Real capital investment
growth, % y-o-y 8.9 10.5 7.2 8.5 8.4 8.3
Construction industry
employment, '000 6,603.3 7,068.2 7,542.4 8,069.1 8,640.0 9,283.8
employment, % y-o-y 6.2 7.0 6.7 7.0 7.1 7.5
Total workforce, '000 163,990.6 166,170.9 168,286.3 170,418.6 172,597.1 174,633.0
employees as % of total
labour force 4.0 4.3 4.5 4.7 5.0 5.3
Infrastructure Industry
Value As % of Total
Construction 45.0 45.0 45.0 45.1 45.2 45.0
Value, IDRbn 340,442.1 403,374.8 478,636.4 570,621.5 679,843.3 808,959.6
Value, US$bn 38.8 43.0 49.3 59.1 71.9 86.5
Infrastructure Industry Value
Real Growth (%) 12.5 7.7 7.1 7.7 7.6 7.5
as % of GDP 4.6 4.9 5.2 5.6 5.9 6.3
Residential and Non-

residential Building
Industry Value As % of
Total Construction 55.0 55.0 55.0 54.9 54.8 55.0
residential Building Industry
Value, IDRbn 416,095.9 492,337.7 584,521.3 694,058.5 825,379.2 988,112.0
Value, US$bn 47.4 52.5 60.3 71.9 87.3 105.7
Value Real Growth (%) 3.2 7.5 7.2 7.2 7.4 8.2
Value as % of GDP 5.6 6.0 6.4 6.8 7.2 7.7

Indonesia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued
2011 2012e 2013f 2014f 2015f 2016f

Cement production
(including imported
clinker), tonnes 51,099,501.6 54,730,644.8 58,730,731.5 62,826,603.2 66,747,273.7 70,933,638.9
Cement production
(including imported clinker),
tonnes, % y-o-y 4.0 7.1 7.3 7.0 6.2 6.3
Cement consumption,
tonnes 52,514,747.0 56,224,912.1 59,847,254.4 63,403,519.2 66,770,451.2 70,452,659.6
Cement consumption,
tonnes, % y-o-y 2.9 7.1 6.4 5.9 5.3 5.5
Cement net exports, tonnes -1,415,245.4 -1,494,267.4 -1,116,522.9 -576,916.0 -23,177.5 480,979.3
Cement net exports, tonnes,
% y-o-y -26.0 5.6 -25.3 -48.3 -96.0 -2,175.2
e/f = BMI estimate/forecast. Sources: Statistics Indonesia, UN, BMI
Table: Indonesia Construction And Infrastructure Long Term Forecast, 2017 - 2022
2017f 2018f 2019f 2020f 2021f 2022f

IDRbn 2,153,556.9 2,582,669.2 3,096,122.4 3,694,883.1 4,379,630.5 5,179,201.5
US$bn 232.8 280.7 336.5 401.6 476.0 563.0
Construction industry, real
growth, % y-o-y 8.3 8.4 8.4 7.8 7.6 7.9
Construction industry, % of
GDP 15.1 16.2 17.3 18.5 19.7 21.0
Total capital investment,

IDRbn 5,048,295.1 5,719,466.0 6,449,841.8 7,239,624.9 8,068,851.5 8,971,594.6
Total capital investment, US
$bn 545.8 621.7 701.1 786.9 877.0 975.2
Total capital investment, %
of GDP 35.4 35.8 36.1 36.2 36.3 36.3
Capital investment per
capita, US$ 2,129.1 2,405.3 2,690.8 2,997.0 3,315.4 3,659.8
Real capital investment
growth, % y-o-y 7.8 7.9 7.4 6.9 6.4 6.4
employment, '000 10,017.9 10,821.5 11,688.0 12,566.1 13,485.1 14,512.8

Indonesia Construction And Infrastructure Long Term Forecast, 2017 - 2022 - Continued
2017f 2018f 2019f 2020f 2021f 2022f

employment, % y-o-y 7.9 8.0 8.0 7.5 7.3 7.6
Total workforce, '000 176,712.0 178,787.6 180,771.4 182,612.3 184,258.5 185,771.3
employees as % of total
labour force 5.7 6.1 6.5 6.9 7.3 7.8
Value As % of Total
Construction 44.8 44.5 44.1 43.7 43.3 42.8
Value, IDRbn 964,073.0 1,149,856.0 1,365,209.6 1,613,607.9 1,894,333.8 2,218,993.0
Value, US$bn 104.2 125.0 148.4 175.4 205.9 241.2
Real Growth (%) 7.7 7.8 7.2 6.7 6.5 6.8
as % of GDP 6.8 7.2 7.6 8.1 8.5 9.0

residential Building
Industry Value As % of
Total Construction 55.2 55.5 55.9 56.3 56.7 57.2
Value, IDRbn 1,189,483.9 1,432,813.2 1,730,912.8 2,081,275.2 2,485,296.7 2,960,208.5
Value, US$bn 128.6 155.7 188.1 226.2 270.1 321.8
Value Real Growth (%) 8.9 8.9 9.3 8.7 8.5 8.7
Value as % of GDP 8.3 9.0 9.7 10.4 11.2 12.0
Cement production
(including imported
clinker), tonnes 75,239,107.7 79,870,761.6 84,553,548.6 89,269,541.5 89,269,541.5
Cement production
(including imported clinker),
tonnes, % y-o-y 6.1 6.2 5.9 5.6 0.0
Cement consumption,
tonnes 74,218,774.1 78,273,188.2 82,343,124.0 86,404,410.5 86,404,410.5
Cement consumption,
tonnes, % y-o-y 5.3 5.5 5.2 4.9 0.0
Cement net exports, tonnes 1,020,333.7 1,597,573.4 2,210,424.7 2,865,131.0 2,865,131.0

Indonesia Construction And Infrastructure Long Term Forecast, 2017 - 2022 - Continued
2017f 2018f 2019f 2020f 2021f 2022f

Cement net exports, tonnes,
% y-o-y 112.1 56.6 38.4 29.6 0.0
e/f = BMI estimate/forecast. Sources: Statistics Indonesia, UN, BMI

Construction And Infrastructure Forecast Scenario
Not Maximising Infrastructure Potential

Construction Industry Value And Infrastructure Share
e/f = BMI estimate/forecast. Source: BMI, Statistics Indonesia
Q312 saw Indonesia's construction industry surprise on the upside, with growth higher than that seen in
H112. Data from Statistics Indonesia show that real growth for the sector reached 8.00% year-on-year (y-o-
y) in Q312, compared to just 7.2% y-o-y over H112.

Trending Up At The Tail-End

Indonesia - Construction Real Industry Value Data (At 2000 Constant Prices), By Quarters
Source: Statistics Indonesia, BMI
This positive Q312 performance has prompted us to revise up our construction real growth estimates for
2012, from 6.9% to 7.6%. We believe that an improvement in global economic conditions, brought about by
the third round of quantitative easing by the US Federal Reserve and the increase in fixed investment by
China, has improved investor appetite for Indonesia's construction industry. Foreign direct investment (FDI)
is picking up, though still not at the levels seen in 2011 - FDI flows for construction reached US$81mn in
Q312, compared to US$50mn in Q212 and just US$33mn in Q112.

Still Not At 2011 High
Indonesia Foreign Direct Investment (FDI) Flows In Construction, US$mn
Source: BMI, Bank Sentral Republik Indonesia
2013: Positive Drivers
Beyond 2012, we are cautiously optimistic about the outlook for Indonesia's construction sector and have
maintained our real growth forecasts of 7.2% for the sector in 2013. Besides favourable macroeconomic
fundamentals - a youthful population, large consumer base, wealth of natural resources, high infrastructure
deficit - our outlook is driven by:
Monetary Conditions Remaining Conducive: Although we expect Indonesia to carry out a monetary
tightening policy a key downside risk to construction lending - inflation in Indonesia has remained benign
and declined in September 2012. This situation does not create significant pressure on the Indonesian
central bank to hike rates, making current monetary conditions conducive for infrastructure companies
operating in Indonesia to finance their 2013 capital expenditures via debt.

Still In A Sweet Spot
Indonesia - Policy Rate, % & Headline CPI, % y-o-y
Source: BMI, Statistics Indonesia
Key Reforms Move Forward: Indonesian President Susilo Bambang Yudhoyono finally signed the long-
awaited regulation on land acquisition in August 2012. Land acquisition issues have been one of the main
reasons for project delays, and the regulation could pave the way for greater speed and clarity in the land
acquisition process.
In addition, a plan by the Indonesian government to increase the country's power tariff in 2013 has secured
approval from an energy commission in September 2012. The plan, which is awaiting parliamentary
approval, aims to limit the power subsidy in 2013 to IDR78.6trn, thereby increasing power costs by 15%.
These higher rates would boost the investment capacity of state utility PLN in Indonesia's power plants,
allowing it to complete the country's 20,000-megawatt (MW) Electricity Fast Track Programme. The
programme was originally scheduled to be completed in 2014, but so far, PLN has only completed
4500MW of additional capacity.

Finally Approved
Factbox - Key Elements Of Indonesia's Land Acquisition Bill
Source: BMI, Bloomberg, Reuters, Jakarta Globe, Bisnis Indonesia
Increased Government Expenditure: Despite a rising fiscal deficit stoked by burdensome subsidies,
President Yudhoyono has announced that his government will boost capital spending by 15.0% to
IDR194trn (US$20.0bn) in 2013. While it remains to be seen if his aggressive budget proposal can be
carried out, it does signals the government's intention to focus on infrastructure development. The funds
would be used for the construction of 4,431km of roads, 15 airports and 380km of railways.
Islamic financing could be helpful in funding this public expenditure plan. There is a growing demand for
Indonesia's Islamic bonds (sukuk), with yields on its Islamic bonds falling to a record low of 1.86% in
September 2012, according to data from Bloomberg. We expect demand for these bonds to remain
relatively robust over the long term, given that 80% of Indonesia's population are Muslim, and the country
has been granted investment-grade status by rating agencies Fitch and Moody's.

Big Spender
Indonesia - Central Government Capital Expenditure, IDRtrn (LHS); Breakdown of Central

Government Expenditure, IDRtrn (RHS)
Source: Bank Indonesia, BMI
. Dampened By Pertinent Risks
However, our forecasted 2013 construction growth of 7.2% is still a slowdown from the estimated 7.6%
seen in 2012. This cautious outlook is driven by several downside factors:
Deepening Deficit: Although we highlight earlier that there is some momentum for a reduction in
electricity subsidies, reforms for fuel subsidies, which is expected to account for 61% of total subsidies in
2013, has seen little or no progress. We believe the government's fiscal deficit will have hit an estimated
3.0% of GDP in 2012 and is due to make up 2.7% in 2013 - up considerably from the 2.1% seen in 2011.
This fiscal profligacy affects the central government's ability to finance its infrastructure plans in two ways.
Firstly, the government would have to continue to channel funds into supporting subsidies at the expense of
infrastructure development - it remains to be seen if the government has sufficient funds to allocate US
$20bn to capital spending and IDR316trn (US$33bn) for subsidies. Secondly, demand for Indonesian bonds
could wane on the back of a weaker fiscal picture and higher inflationary costs, pushing up yields across the
board.

Deeper Deficit Developing

Indonesia - Fiscal Deficit, % GDP
f= BMI forecast. Source: BMI, Bank Indonesia
More Reforms Needed: Even though the land acquisition bill has been passed, we believe that several
other regulatory reforms are needed to accelerate infrastructure development in Indonesia. The country
needs to boost its institutional capacity to carry out the level of detail desired by the private sector during
the pre-construction stage (such as feasibility studies, documentation and public consultation). Indonesia
also needs to resolve several regulatory bottlenecks that continue to delay infrastructure projects in
Indonesia. They include:
A lack of coordination among government agencies, ministries and sub-sovereign governments;

Slow progress in determining spatial planning;
A lack of institutional capacity to resolve contract disputes;
A lack of legal rights to safeguard the interests of the private sector;
Licensing and permit issues at the central and sub-sovereign government level, such as overlapping
concession permits relating to the use of forest areas, and a failure by the Transportation Ministry to issue
licenses for transport networks.
These issues, particularly the lack of human resources to boost institutional capacity, could take many years
to be resolved.

Still In Need Of Other Reforms

Indonesia - Key Indicators For Construction Project Completion
*Higher rating denotes greater strength. Source: World Bank Doing Business Report 2012
Populist Presidential Elections: The presidential elections in 2014 represents a key risk to pro-business
reforms as President Yudhoyono is constitutionally prohibited from standing for a third term. As it is, we
have noticed a growing trend towards nationalism within the current government and the likely presidential
candidates, which is a threat to Indonesia's policy continuity and investment attractiveness.
The run-up to the elections has seen the current incumbent fail to garner sufficient parliamentary support to
reign-in fiscal spending for 2012 and enact nationalistic polices such as a new export tax on metal ores.
Current presidential contenders have stated a preference for nationalistic policies to shore up support among
the nation's electorate (see our online service, September 15 2012, 'Leading Presidential Candidates Signal
Rise Of Populism').

Near The Front Of The Pack, For Now...

Asia - BMI Short and Long-Term Political Risk Ratings (LHS) & Policy Continuity Component (RHS)
Source: BMI

Macroeconomic Forecasts
Economic Activity.
BMI View: We continue to hold a neutral bias on the rupiah over the short-term, as our expectations for
the currency to hit stability have played out well. Although Indonesia's external position has deteriorated
markedly over the course of 2012, it too appears to have found some stability, and we believe that pressures
from the country's weakening trade position have eased somewhat. As such, we expect the unit to end 2012
at our target of IDR9,600/US$.
Indonesia's current account deficit came in at US$5.3bn in Q312, a notable retreat from its Q212 record
high of US$7.7bn. Nevertheless, the performance was the second worst on record for the account, and
continues to paint a picture of Indonesia's distressed external position relative to 2011, when the country
was posting consistent surpluses. As we have written before, the rapid deterioration in Indonesia's current
account has largely been the result of its declining terms of trade in view of commodity prices. More
specifically, 2012 has witnessed a marked drop in the price of coal (-24.3%) and palm oil (25.8%),
Indonesia's two largest commodity exports, even as oil (Indonesia is a net oil importer) prices stayed
resilient. As a result, Indonesia's exports through Q312 had fallen by 6.6% from the same period in 2011 in
nominal terms despite the fact that they had grown by 2.0% in real terms.
Trade Deterioration Slowing
However, following what has been perhaps the worst trade performance in the region in 2012, we expect
Indonesia's external balance to stabilize somewhat in 2013 on the back of a moderate recovery in export
growth, as reflected by our forecast for the current account deficit to fall slightly from 2.1% of GDP in 2012
to 2.0% in 2013. As such, we expect depreciatory pressure on the rupiah arising from the country's negative
trade position to ease somewhat relative to H112, during which time the currency sold off by 4.8%.

Not So Cheap...
Indonesia - Real Effective Exchange Rate Index
Source: BMI, Barclays
But Risks Seen In Portfolio Account
Nevertheless, we do see some scope for further downside for the unit as we head into 2013. Despite the fact
that the rupiah has been the worst performing currency in the region in 2012, it is not yet cheap in real
effective terms, as indicated on the above chart. Moreover, we have seen the correlation between the rupiah
and Indonesia's credit default swap (CDS) break down, with the CDS flirting with 2007 lows even as the
rupiah has continued to sell-off. Rather than suggesting that the rupiah is cheap, we believe that this is
indicative of the fact that Indonesian credit protection is inexpensive in consideration of Indonesia's
continued exposure to the parlous state of the global economy, and that this dynamic indicates further
downside risk for the rupiah should the CDS spike higher.

CDS Relatively Attractive

Indonesia - Real Effective Exchange Rate Index & Indonesia 5-Year Credit Default Swap
Source: BMI, Barclays
Indeed, it is the perilous external climate that we believe will be the key driver for the rupiah over the next
year, and for this reason we also see risks for the currency with regards to the country's portfolio account. In
sharp contrast to its trade woes, foreign investment in Indonesian equity and debt markets has been
undeniably strong so far in 2012. Over the first three quarters of 2012, total foreign inflows into Indonesian
debt (both public and private) hit US$9.3bn, versus US$5.6bn over the same period in 2011. Indonesia's
equity market saw a similar improvement, raking in US$1.7bn worth of foreign investors' funds versus an
outflow of US$1.1bn in the first three quarters of 2011.

Fickle Inflows Pose Rising Risks
Indonesia - Stock Of Portfolio Investment Since 2004, US$mn
Source: BMI, BI
These inflows have contributed considerably to what we believe are rich valuations within Indonesia's
sovereign debt and equity markets, and a reversal in these flows is therefore increasingly likely. Given that
foreign ownership in these markets (approximately 60% of Indonesian equities and 30% of Indonesian
bonds are owned by foreigners) is among the highest in the region, this means increased risks for the rupiah
originating from the portfolio account (and the related hot money outflows). Taking these risks into account,
and in consideration of the fact that we believe they outweigh the potential upside from a trade rebound, we
have revised our average rupiah forecast for 2013 downwards from IDR9,400/US$ to IDR9,700/US$,
reflecting an end of period target of IDR9,800/US$.
Risks To Outlook
Risks of large-scale portfolio outflows will be especially high should the global economy underperform our
already bearish expectations in 2013, in which case Indonesian assets would be particularly vulnerable to a
rapid sell-off which could potentially mirror that seen in Q408.

Industry Risk Reward Ratings

Asia-Pacific Risk/Reward Ratings
The Real Estate Risk/Reward ratings provide a regional country-by-country comparison of the risks and
rewards for the Real Estate market. The ratings evaluate the industry's current size and growth potential, and
take into account various issues that could affect the industry's development, such as the size and forecasted
development of the construction sector, commercial bank lending, financial infrastructure, per capita GDP,
urbanisation, real estate prices, and lending rates. The score also covers country and industry specific
factors which may inhibit or encourage future development in the Real Estate sector, such as political and
economic stability.
Table: Asia Pacific Real Estate Risk/Reward Ratings
Real estate Country Market Country Real estate

market structure Returns risks risks Risks rating Rank
China 80.0 48.4 68.9 86.7 50.0 73.8 71.4
India 87.5 37.2 69.9 86.7 38.4 69.8 69.8 1
Australia 65.0 91.6 74.3 60.0 75.0 65.3 69.8 2
South Korea 55.0 71.3 60.7 83.3 69.6 78.5 69.6 3
Hong Kong 52.5 91.7 66.2 66.7 74.5 69.4 67.8 4
Malaysia 55.0 59.5 56.6 83.3 60.1 75.2 65.9 5
Taiwan 60.0 67.0 62.4 73.3 59.2 68.4 65.4 6
Singapore 52.5 97.6 68.3 50.0 81.9 61.2 64.7 7
Indonesia 82.5 35.3 66.0 76.7 37.9 63.1 64.6 8
Pakistan 67.5 29.3 54.1 86.7 42.6 71.2 62.7 9
Japan 57.5 77.9 64.6 53.3 73.3 60.3 62.5 10
Philippines 65.0 44.1 57.7 73.3 51.0 65.5 61.6 11
Thailand 45.0 36.7 42.1 86.7 39.4 70.1 56.1 12
Vietnam 65.0 16.7 48.1 73.3 29.6 58.0 53.0 14
Scores out of 100, with 100 the best. Source: BMI

Business Environment Outlook
Business Environment Outlook
Introduction Indonesia's business environment is still plagued by poor infrastructure and weak institutions.
Indeed, the infrastructural shortcomings are visible in Indonesia's potholed roads, dilapidated public
buildings and, most significantly, schools. Despite an ongoing anti-corruption drive, Indonesia is still
ranked only 100th out of 183 countries in Transparency International's 2011 Corruption Perceptions Index.
Aside from the problems of corruption and poor infrastructure, excessive bureaucracy and potential security
risks also undermine the country's business environment. Nevertheless, the current executive remains
committed to improving Indonesia's business environment, and the relatively recent transition to democracy
has significantly improved the long-term prospects for doing business in the country.
Table: BMI Business And Operation Risk Ratings
Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Afghanistan 21.75 20.07 17.94 19.92
Australia 80.25 85.75 68.14 78.05
Bangladesh 40.49 35.18 39.14 38.27
Bhutan 28.82 43.31 28.98 33.70
Cambodia 37.43 31.76 52.04 40.41
China 66.04 56.58 55.66 59.43
Hong Kong 71.13 84.23 80.65 78.67
India 47.44 41.76 48.78 45.99
Indonesia 49.05 38.66 64.70 50.80
Japan 76.38 77.14 49.77 67.76
Laos 39.15 28.71 35.32 34.39
Malaysia 60.13 74.91 70.88 68.64
Maldives 42.71 43.66 41.29 42.55
Nepal 29.39 29.88 30.76 30.01
New Zealand 69.27 92.65 65.27 75.73
Pakistan 33.42 36.96 41.09 37.16
Philippines 48.63 36.81 60.07 48.50
Singapore 71.91 87.06 81.17 80.04
South Korea 63.00 79.09 71.26 71.11
Sri Lanka 54.29 51.83 47.89 51.34
Taiwan 56.05 68.24 61.35 61.88

BMI Business And Operation Risk Ratings - Continued
Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Thailand 60.98 56.76 67.23 61.66
Vietnam 58.19 38.99 62.23 53.14
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
Institutions
Legal Framework Indonesia's legal system reflects the country's diverse history, with Islamic and Dutch
civil law influences prevalent. The judicial system comprises several types of courts overseen by the
Supreme Court. Most disputes are heard before the courts of general jurisdiction, with the State Court being
the court of first instance. Appeals from the State Court are heard before the High Court, while the Supreme
Court can hear a final appeal from lower courts.
In 1998, the Commercial Court was established to handle insolvency cases, but its jurisdiction is being
widened to cover other commercial matters. Constitutional changes in 2001 recommended the creation of a
Constitutional Court.
Only now is Indonesia attempting to forge a genuinely independent judiciary. Under the regime of former
President Suharto, it was firmly under the control of the executive and judges rarely defied those in power.
The post-Suharto reform process led to a transfer of authority to the Supreme Court, bolstering the
independence of the judiciary. But weak institutional capacity, corruption and continued political
interference will continue to undermine confidence in the judiciary's impartiality.
Indonesian officials acknowledge the deficiencies of the court system. A weak judiciary has hamstrung
efforts to address corruption and improve accountability, with questionable standards of professionalism
among the legal profession. Enforcement levels are poor and the dispute resolution mechanisms inadequate.
The commercial courts have yet to gain sufficient clout. With a plethora of conflicting regulations, there is
little clarity, and the court system fails to provide an effective avenue of recourse for resolving commercial
disputes.
Property Rights A violation of property or contractual rights is a concern as there is a moderate risk of
expropriation. According to the Heritage Foundation, a US think-tank, court rulings can be arbitrary and

inconsistent, and the judicial system suffers from corruption. A PriceWaterhouseCoopers audit of the
attorney-general's office in 2004 revealed endemic corruption within the institution that allows Indonesia's
wealthy elite to buy justice. 'The lack of confidence in the justice sector is pervasive', adds the World Bank.
According to the International Property Rights Index (IPRI) 2010, Indonesia ranked 97th out of 125
countries surveyed with regard to protection of overall property rights. With regard to physical property
rights, Indonesia ranked 78th.
Intellectual Property Rights Indonesia enjoys a fairly robust legislative framework for dealing with
intellectual property rights (IPR) issues, but the weakness of the court system means enforcement is often
lacking. A signatory to the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPs), the government is attempting to reform the IPR regime with new laws. This has led to an
improvement in patent protection, extending the term of protection from 14 years to 20 years, and the
introduction of the reversal of the burden of proof onto the defendant in intellectual infringement cases.
However, while the Indonesian government has steadily improved the regulatory and legal framework for
the protection of IPR, enforcement remains weak and the US government again placed Indonesia on its
Priority Watch List for inadequate protection of IPR from 2007. In 2009, Indonesia's positioned worsened
and it was moved to a Priority Black List. In the above-mentioned IPRI survey, Indonesia ranked 108th out
of 125 countries for IPR protection.
Corruption Corruption is pervasive, afflicting many private and public institutions. The World Bank
estimates that corruption can add up to 20% to the cost of doing business in Indonesia. The entire judicial
system is affected, with police and judges alleged to regularly supplement incomes with bribes and
commissions. The customs service is another area where corrupt practices are said to flourish. In an attempt
to clamp down on corruption in the customs system, the government has issued regulations requiring that
Indonesian importers pay import duties and taxes at one of 45 appointed banks, although this policy has
been met with only moderate success.
The lack of clarity in regulations provides ample room for rent seeking. Though the press regularly covers
high-level corruption cases, successful prosecutions are few and far between. Lack of transparency and a
surfeit of bureaucratic red tape are among investors' biggest complaints. Corruption is rampant in Indonesia,
which has been widely recognised as the primary obstacle to luring the US$145bn of investments the
government believes is necessary to improve the country's decrepit infrastructure. Indeed, despite the
president's pledge to eradicate graft, Transparency International's survey of perceived corruption in 183

nations ranked Indonesia at 100th in 2011. On a scale of 0-10, with 0 the most corrupt and 10 the least,
Indonesia's 2011 score stood at 3.0, a small improvement from 2010.
Table: BMI Legal Framework Rating
Investor Protection Score Rule of Law Score Contract Enforceability Score Corruption Score
Afghanistan 1.85 20.07 17.94 19.92
Australia 78.88 85.75 68.14 78.05
Bangladesh 59.10 35.18 39.14 38.27
Bhutan 14.83 43.31 28.98 33.70
Cambodia 31.53 31.76 52.04 40.41
China 64.43 56.58 55.66 59.43
Hong Kong 93.73 84.23 80.65 78.67
India 61.45 41.76 48.78 45.99
Indonesia 53.93 38.66 64.70 50.80
Japan 80.65 77.14 49.77 67.76
Laos 14.03 28.71 35.32 34.39
Malaysia 80.05 74.91 70.88 68.64
Maldives 24.30 43.66 41.29 42.55
Nepal 41.75 29.88 30.76 30.01
New Zealand 94.63 92.65 65.27 75.73
Pakistan 46.35 36.96 41.09 37.16
Philippines 36.35 36.81 60.07 48.50
Singapore 96.23 87.06 81.17 80.04
South Korea 68.45 79.09 71.26 71.11
Sri Lanka 63.20 51.83 47.89 51.34
Taiwan 67.23 68.24 61.35 61.88
Thailand 53.73 56.76 67.23 61.66
Vietnam 24.38 38.99 62.23 53.14
Infrastructure
Physical Infrastructure Official statistics state that Indonesia has 391,009km of roads, 6,458km of
railways and 21,579km of waterways. In addition, Indonesia has developed an extensive air transport

network that encompasses 652 airports, meaning that all of Indonesia's islands are accessible, by either sea
or air, although safety remains a key issue.
Indonesia's physical infrastructure - which encompasses its power and energy sectors, water and sanitation
facilities, roads, transportation and telecommunications - is sorely lacking. The British Chamber of
Commerce reports that, over the next five years, Indonesia will require infrastructure investment of US
$70bn. This will be necessary to bring about sustained growth levels above 7%, which is required to make
headway on fundamental issues such as employment and poverty. In the ensuing five years, this figure will
increase to US$100bn.
Unfortunately, there has been little progress in raising such investment. For instance, of the 90-odd projects
that were highlighted as priorities in the January 2005 Infrastructure Summit in Jakarta - a majority of
which related to toll road and infrastructure projects - none have yet gone forward. This is primarily
because, despite the fact that the president and senior cabinet members recognise that urgent action is
needed, the regulations in place have prevented a private sector response to the problem.
The infrastructural shortcomings are visible in Indonesia' potholed roads and dilapidated public buildings
and schools. Meanwhile, only 40% of Indonesians have access to landline telecommunications, and almost
half of their households have no electricity. Poor infrastructure also means that the cost of doing business
increases. Almost 80% of Indonesia-bound cargo dock in Singapore or Malaysia because of poor port
infrastructure, increasing the amount of time and money it takes for goods to be sent to Indonesia.
To rectify the situation, plans are afoot to issue major upgrades to Indonesia's physical infrastructure which,
it is hoped, will kick start the economy and help boost investment. Yet we remain sceptical as to how
successful the government will in fact be, given that in the wake of the January 2005 conference little
progress has been made. Unfortunately, billions of dollars in loans granted for infrastructure are often
unused and are in danger of being cancelled if the relevant ministries fail to make a start. This underscores
our view that, in order to see real improvement in this area, there is an urgent need for money to be
disbursed in a timely fashion. This, in turn, will require more in the way of bureaucratic reforms than the
government has yet been willing to make.
Labour Force The Indonesian labour force is around 113mn, with an overall participation rate of around
68%. The official unemployment rate slipped to 6.3% in February 2012.
A rapidly rising population is putting strain on the Indonesian employment market, with some 2mn new
entrants estimated to be seeking jobs each year. Agriculture and services are the two biggest sectors,

employing respectively 43% and 44% of the workforce. Women make up just over one-third of Indonesia's
labour force.
Though labour is relatively low-cost by global standards, Indonesia cannot compete with regional
neighbours on cost. A recent thrust has therefore been to boost vocational training and skills levels. Low
education levels among unskilled and semi-skilled workers are particularly evident. Labour market
inflexibilities continue to discourage job creation.
Outdated labour legislation is a drag on Indonesia's competitiveness, and efforts to make the labour market
more competitive are only proceeding at a slow pace. Labour contracts with employees are often subject to
renegotiation, and the courts are not reliable arbiters in disputes between employers and workers. High
severance payments make laying off employees a costly exercise and constrain companies' ability to adapt
to fluctuations in market demand.
The labour code of 1948 and further legislation set the ground rules for child labour, holidays and general
working conditions. Regional authorities set minimum wages, which vary by province. Minimum-wage
levels are based on proposals by tripartite provincial wage commissions. Firms with more than 10
employees are subject to a workers' insurance scheme.
The government has focused strongly on labour law reform in the past three years, though with varied
success. In 2003 the Manpower Law was issued, legislation attempting to create a consensus between
employers and unions on key workplace issues. In 2005, the Industrial Dispute Law set up an Industrial
Relations Court under the control of the Supreme Court to adjudicate industrial disputes.
But other legislation has come unstuck. A draft Labour Law modifying provisions relating to severance pay,
outsourcing, and minimum wage-setting was put on hold after widespread union protests that broke out in
2006. This legislation was also supposed to smooth the procedure for allowing foreigners to obtain work
permits and boost the role of employer-employee negotiations in setting wages.
Industrial relations remain tense, though strike levels are down from five years ago. The government has
promoted reforms that have allowed more than 70 new trade union federations and hundreds of new unions
to form, replacing the single union federation that existed under Suharto. Still, only a very small percentage
of Indonesian workers belong to trade unions.

Table: Labour Force Quality
Literacy Rate,% Labour Market Rigidity Score Female Labour Participation, %

Afghanistan 28.00 20.00 33.10
Australia 99.00 0.00 58.40
Bangladesh 52.50 28.00 58.70
Bhutan 54.30 7.00 53.40
Cambodia 75.60 36.00 73.60
China 93.00 31.00 67.40
Hong Kong 93.50 0.00 52.20
India 65.20 30.00 32.80
Indonesia 91.00 40.00 52.00
Japan 99.00 16.00 47.90
Laos 72.50 20.00 77.70
Malaysia 91.50 10.00 44.40
Maldives 97.00 18.00 57.10
Nepal 55.20 46.00 63.30
New Zealand 99.00 7.00 61.80
Pakistan 54.20 43.00 21.70
Philippines 93.30 29.00 49.20
Singapore 94.20 0.00 53.70
South Korea 99.00 38.00 50.10
Sri Lanka 90.80 20.00 34.20
Taiwan 96.10 46.00 n/a
Thailand 93.90 11.00 65.50
Vietnam 90.30 21.00 68.00
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 0 = highest score,
Market Orientation
Foreign Investment Policy Foreign direct investment (FDI), previously a key driver of Indonesia's export-
oriented economy, has fallen by almost half in the post-Asian crisis period. Gross FDI inflows have dropped
to around 2% of GDP from 5% prior to 1997. Foreign portfolio investment, rather than FDI, is the only
significant source of capital inflows into the country currently.

Though nominally open to foreign investment, the barriers to foreign investment are numerous. However,
the government's medium-term programme is geared towards transforming the investment climate by
simplifying the regulatory framework, addressing governance concerns, curbing corruption, bolstering the
legal system and encouraging investment in infrastructure. The government of President
Susilo Bambang Yudhoyono has claimed that its new approach has reaped near-term dividends in terms of
rising investment levels. FDI inflows have fluctuated in recent years. In 2005, FDI inflows of US$8.34bn
were recorded, an increase from just US$1.9bn the previous year. This slid to US$4.9bn in 2006 before
rising to US$6.9bn in 2007. In 2008, statistics reveal that foreign investment inflows amounted to US
$8.3bn, before declining to US$5.3bn in 2009 due to the global slowdown. FDI into Indonesia has since
picked up markedly, hitting US19.3bn in 2011.
The main legislation governing FDI in Indonesia is the Foreign Capital Investment Law, but a promised
new investment law remains stuck in the parliamentary process. In April 2004, a 'one-roof' investment
streamlining process was instituted via the Capital Investment Coordinating Board, however in practice it
appears to have had little impact, with ministries and local authorities remaining responsible for approving
investments. The government has prioritised investment in infrastructure sectors, inviting tenders to private
investors for several projects, some via public-private partnerships.
Indonesia retains a liberal system allowing full earnings repatriation. There are no controls on capital or
foreign exchange. Foreign investors have the right to repatriate capital and profits at the prevailing rate of
exchange. There are no minimum or maximum total investment requirements. However, investors in the
manufacturing sector typically are expected to have a debt to equity ratio of 3:1 or less, while those in the
agricultural or mining sectors may have ratios of 6:1 or greater.
Foreign investors say the national team for investment and export promotion set up in 2003 has had little
success in tackling the panoply of problems afflicting FDI in Indonesia. Particularly troubling is the extent
of judicial corruption and lack of equal treatment for foreign companies in the courts system. General
lawlessness and poor law enforcement are also disincentives. Investors in plantation and extractive
industries in Sumatra and Kalimantan islands have been plagued by looting and protection rackets.
Export-oriented foreign investors are encouraged to operate in export processing zones of which there are a
number throughout the country. Investors in these zones enjoy 100% ownership rights.
Key sectors are oil and gas, and telecommunications. The UK, Japan and Singapore are the key sources of
foreign investment, supported by Indonesians living abroad who fled during the 1997 financial crisis and
racial riots. Much of their capital has been channelled via tax havens such as the British Virgin Islands.

Table: Asia, Annual FDI Inflows
2008 2009 2010
US$bn Per Capita US$bn Per Capita US$bn Per Capita
Australia 46.84 2177.33 25.72 1174.13 32.47 1458.20

Bangladesh 1.09 7.47 0.70 4.76 0.91 6.14
Cambodia 0.82 58.97 0.54 38.57 0.78 55.35
China 108.31 82.98 95.00 72.42 105.74 80.21
Hong Kong 59.62 8607.76 52.39 7497.73 68.90 9769.18
India 42.55 35.73 35.65 29.52 24.64 20.12
Indonesia 9.32 39.66 4.88 20.54 13.30 55.46
Malaysia 7.17 260.78 1.43 51.16 9.10 320.52
Pakistan 5.44 32.48 2.34 13.71 2.02 11.61
Philippines 1.54 17.12 1.96 21.41 1.71 18.37
Singapore 8.59 1799.63 15.28 3089.31 38.64 7596.32
South Korea 8.41 176.16 7.50 156.39 6.87 142.64
Sri Lanka 0.75 36.74 0.40 19.55 0.48 22.90
Taiwan 5.43 236.13 2.81 121.52 2.49 107.69
Thailand 8.45 123.75 4.98 72.42 5.81 84.10
Vietnam 9.58 111.45 7.60 87.46 8.17 93.04
Source: UNCTAD, BMI.
Foreign Trade Regime The government maintains its commitment to a free trade policy, gradually
reducing the overall level of import tariffs. The authorities aim to bring all tariffs below 5% under its
commitment as part of the Association of South East Asian Nations (ASEAN) Free Trade Agreement
(AFTA). The focus on trade liberalisation is primarily designed to support Indonesia's medium-term growth
potential. However, the government has also made moves to promote domestic production through import
restrictions.
Indonesia is a member of the WTO and AFTA. Bilateral negotiations have begun with ASEAN and its
partner countries, including Australia, China and Japan, over free trade pacts. A free trade agreement
between ASEAN and China has come into effect since January 2010. The authorities are also making
efforts to strengthen multilateral and regional trade arrangements.

Although the authorities have gradually lowered the level of import tariffs (the IMF calculates the average
unweighted tariff rate at 7%), they also remain wedded to restrictive practices, extending existing import
bans on sugar and rice to boost domestic producers.
Under ASEAN commitments, Indonesia has reduced tariffs for all products included in its original
commitment - involving more than 7,000 tariff lines to 5% or less for products of at least 65% ASEAN
origin. A new tariff reduction package was implemented in January 2004, dividing tariffs into non-ASEAN
and ASEAN tariffs.
A three-tier structure - 0%, 5% or 10% - applies for most non-ASEAN tariffs. ASEAN tariffs also fall into
three tiers: 0%, 2.5% and 5%. In May 2006, Indonesia signed preferential trade agreements with Egypt,
Bangladesh, Iran, Malaysia, Nigeria, Pakistan and Turkey, aimed at reducing tariffs to predetermined rates.
The government will remain under pressure to remove import restrictions. The IMF has urged their
replacement with more transparent and less distortionary mechanisms for regulating imports and promoting
domestic production. The fund expressed encouragement in the recent review of existing restrictions on
trade and the decisions to ease export restrictions on selected commodities.
The authorities have reduced a number of formal non-tariff barriers since 1997. However, the Indonesian
Customs Service operates arbitrary 'check prices' rather than actual transaction prices on import documents
for assessing duties on food imports. The methods used to arrive at these prices are far from clear or
transparent. Consequently, despite the fact that most food product import tariffs remain at 5%, the effective
duty levels are often higher.
Table: Trade And Investment Ratings
Openness To Investment Score Openness To Trade Score

Afghanistan 11.20 25.10
Australia 71.10 39.05
Bangladesh 22.05 37.60
Bhutan 16.50 45.05
Cambodia 54.00 82.90
China 47.70 69.95
Hong Kong 49.50 98.90
India 53.80 42.00
Indonesia 56.75 58.25

Trade And Investment Ratings - Continued
Openness To Investment Score Openness To Trade Score

Japan 7.80 40.05
Laos 69.00 19.75
Malaysia 50.55 98.65
Maldives 87.10 28.00
Nepal 4.80 59.45
New Zealand 40.85 52.55
Pakistan 31.75 51.65
Philippines 46.40 69.55
Singapore 47.70 99.20
South Korea 51.35 83.70
Sri Lanka 50.30 57.30
Taiwan 11.70 91.35
Thailand 61.60 89.50
Vietnam 79.70 96.50
Table: Top Export Destinations, 2001-2008
2001 2002 2003 2004 2005 2006 2007 2008
EXPORTS TO 56,336.40 57,168.60 61,075.40 71,587.60 85,660.20 100,842.00 114,112.00 155,060.00

WORLD
EXPORTS TO 13,010.20 12,045.10 13,603.50 15,962.10 18,049.10 21,732.10 23,632.80 29,567.00
JAPAN
EXPORTS TO 5,363.83 5,349.08 5,399.66 6,001.18 7,836.59 8,929.85 10,501.60 15,993.20
SINGAPORE
EXPORTS TO
UNITED 7,761.33 7,570.49 7,386.38 8,787.08 9,889.20 11,259.10 11,644.20 15,193.40
STATES
EXPORTS TO
CHINA,PR: 2,200.67 2,902.95 3,802.53 4,604.73 6,662.35 8,343.57 9,675.51 13,818.00
MAINLAND
EXPORTS TO 3,772.46 4,107.22 4,323.76 4,830.18 7,085.64 7,693.54 7,582.73 9,967.13
KOREA
EXPORTS TO 1,778.63 2,029.95 2,363.85 3,016.05 3,431.30 4,110.76 5,096.06 6,813.15
MALAYSIA
Sum of top 32,108.49 31,974.84 34,515.83 40,185.27 49,522.88 57,958.16 63,036.84 84,538.73
five

Top Export Destinations, 2001-2008 - Continued
2001 2002 2003 2004 2005 2006 2007 2008
% of top five 56.99 55.93 56.51 56.13 57.81 57.47 55.24 54.52
Source: IMF
Tax Regime Parliament is considering a new tax law aimed at widening the tax base. Foreign investors
hope it will address key concerns such as transparency and improving efficiency. The overall tax system is
progressive.
Corporate Tax: The standard rate is at 28% in 2009, and will be lowered to 25% in 2010 and beyond. Non-
resident companies are taxed on Indonesian-source income only.
Individual Tax: Income tax progressively increases up to 30%. The 30% rate applies to income over
IDR500mn. Non-residents are taxed on Indonesian-source income only.
Indirect Tax: The standard rate of VAT is 10%, with two lower rates of 4% (applicable to building
services) and 1% (courier services and travel agents' services). VAT is applied to most transactions.
Businesses with annual turnover above IDR600mn must register. VAT exempted areas include basic
necessities, insurance and financial services, and healthcare. A luxury sales tax applies at 10% to soft
drinks, cosmetics, radios and luxury houses.
Capital Gains Tax: For individuals and companies this is taxed as ordinary income, and capital losses are
deductible. Withholding Taxes: Dividends, interest and royalties 20%.
Operational Risk Security Risk The UK Foreign and Commonwealth Office (FCO) considers that there is
a high risk from terrorism in Indonesia. The FCO cites the rise of indiscriminate attacks, including in cities
frequented by British expatriates and foreign travellers. Since 2002 there have been a number of high-
profile terrorist attacks in tourist-frequented areas including those undertaken by the extremist group
Jemaah Islamiyah, which has links to al-Qaeda. These include the 2002 and 2005 Bali bombings, the
Marriott Hotel bombing in Jakarta which killed 12 people in August 2003, and the Australian Embassy
bombing in September 2004, which killed 11 people. More recently, there were hotel bombings in Jakarta in
July 2009.

In addition, travel to Central Sulawesi Province and Maluku Province, especially Ambon - the scene of
considerable social unrest between 1999-2002 - is considered especially hazardous. Both provinces have
been subject to outbreaks of internal violence, and the security situation remains unsettled. Although Aceh
is emerging from a period of political unrest, the risk of politically motivated violence remains.
Apart from this risk of terrorism, there also exists a moderate security risk. Petty theft is common in
crowded areas such as markets, airports and bus and railway stations, while there have been reports of
extortionate fares or robberies by unlicensed airport taxi drivers. The Indonesian National Police also
reported an increase in drink-spiking incidents in 2008.
Indonesia is especially prone to the onslaught of natural disasters. Flash-floods are common during the
November-March period, and even the major cities are not invulnerable. Severe localised flooding,
especially in Jakarta, have caused major disruptions in the past and occasionally led to fatalities. Indonesia
sits along a volatile seismic strip called the 'Ring of Fire' in the Pacific. Volcanic eruptions, earthquakes and
tsunamis - such as that which killed over 200,000 people along the coasts bordering the Indian Ocean -
remain safety threats.

Market Overview
Indonesia has a buoyant economy, growing urbanisation, relative political stability, and strong savings and
income growth. The country's population has doubled in 30 years, increasing the demand for property and
providing a rapidly expanding labour force. With vast demand and a strong economy, the Indonesian
property sector has been predicted to be among the top 10 fastest growing sectors, according to Jones Lang
LaSalle (JLL) and Globe Asia. Regardless of the nature and extent of any future global economic
slowdown, demand for real estate development in Indonesia is likely to be strong over the medium-to-long
term.
Indonesia's recent economic scorecard has been nothing short of remarkable. In contrast to regional trends,
the country clocked four straight quarters of growth in 2011, propelling full-year economic expansion to its
fastest annual pace since the 1997-1998 Asian Financial Crisis. At the same time, consumer price inflation
has remained relatively benign. This favourable mix of robust growth and stable inflation, coupled with
political stability, reform momentum and recent investment grade promotion, has seen foreign investors
flood into the market.
That said, there is considerable optimism in the Indonesian commercial property market. The last few years
have seen impressive growth in the Indonesian real estate sector. Rents were hardly touched by the global
financial crisis and have, in fact, generally increased over the past few years. We expect rents in most cities
in the office, retail and industrial sub-sectors to rise, or at least remain stable, in each of the next two years.
Our latest data collection in July 2012 indicates that the sector is still performing well, although growth
rates are starting to ease.
Nevertheless, Indonesia's economic development continues to be impeded by the country's sizeable deficit
in transport infrastructure. Therefore, it is no surprise that the government has been keen to address this
deficit. Since the start of President Susilo Bambang Yudhoyono's second term in 2009, he has pledged to
make infrastructure development a priority during his tenure, and we have seen his administration launch
numerous infrastructure projects in recent years. The release of the 2011-2025 Master Plan for the
Acceleration and Expansion of Indonesian Economic Development (MP3EI) in May 2011 was another
attempt to highlight these infrastructure opportunities. A total of 367 infrastructure projects with an
investment value of IDR4,012trn (US$440bn) were showcased in the master plan, and the bulk of these
projects were transport infrastructure projects (ie, roads, toll roads, railways, ports and airports).

However, Indonesia's lack of institutional capacity or regulatory reform has hampered efforts to lure
investment in these infrastructure projects.
Land Bill Receives Presidential Approval: Mostly Good
Indonesian President Susilo Bambang Yudhoyono has finally signed the long-awaited regulation on land
acquisition, paving the way for greater speed and clarity in Indonesia's land acquisition process. We believe
that this presidential approval to the land acquisition bill presents an upside risk to our outlook for
Indonesia's construction sector, but we note that other business environment issues need to be resolved as
well, in order to maximise Indonesia's growth potential in infrastructure.
The regulation, known as the Law No. 2 of 2012 on Land Acquisition for Public Interest Development, was
signed by the president in early August 2012. Previously, land acquisition in the country was primarily
governed by the Basic Agrarian Law of 1960, and a presidential decree on land acquisition for public
infrastructure was passed in 2005, which gives the president the right to seize land should owners refuse to
sell.
Archaic land acquisition procedures in Indonesia have been a major bureaucratic burden to infrastructure
projects in the past, and the passing of the bill could provide a more specific regulatory regime in the
acquisition of land. Not only does the bill clearly layout the framework and timeframe for government
institutions (including state-owned enterprises) to acquire land for public infrastructure projects, but it also
effectively balances the need to safeguard the public interest. The new regulation requires both parties to
agree on the compensation, and if disputes arise, they will be settled in a court of law.
The land acquisition bill could therefore unlock Indonesia's growth potential in infrastructure. At present,
there are already significant delays in the government's infrastructure targets. For example, the Indonesian
state utility Perusahaan Listrik Negara(PLN) was expected to complete the first phase of the country's
20,000-megawatt (MW) Electricity Fast Track Programme by end-2011. The first phase involves the
construction of 10,000MW of additional capacity, but only 4,500MW were completed as of August 2012,
with the remaining 5,500MW to be completed between the end of 2012 and 2013. This delay means that the
completion date for the entire Electricity Fast Track Programme is pushed back to 2018, instead of 2014.
Great, But A Little Slow
On the whole, the presidential approval to the land acquisition bill is positive news, but we highlight the
time taken to reach this point. The bill was approved by the Indonesian parliament in December 2011,

making it more than six months before the president gave his approval of the bill. In our opinion, this could
indicate a lack of institutional capacity to carry out regulatory reforms or a growing lack of political will to
implement regulatory reform. At present, we are already seeing several attempts by the government to water
down reforms or carry out populist moves that are deterrent to private investment. Looking ahead, we
believe that the political will to carry out reforms could wane as we approach parliamentary and presidential
elections in 2014. This could threaten the growth potential in Indonesia's construction sector. At present, we
are forecasting real growth for the construction sector to average 7.7% per annum between 2012 and 2021.
Still Plenty Of Room For Improvement
Furthermore, we once again highlight that the land acquisition bill resolves just one of Indonesia's numerous
business environment issues, and we are still awaiting concrete action from the government to enact reforms
in these areas. The private sector remains wary of providing long-term financing for infrastructure projects,
as Indonesia continues to exhibit a lack of legal rights to safeguard its interest. This view is in accordance
with the World Bank's Doing Business Report for 2012, where Indonesia's strength in legal rights that
facilitate lending is rated twice as bad as its Asian peers. Indonesia also suffers from significant red tape and
a lack of institutional capacity to resolve contract disputes. According to estimates from the World Bank, it
takes an average of 570 days to receive payment from a contract dispute in Indonesia, significantly higher
than East Asia's average of 519 days.
These issues, along with other impediments (very high levels of corruption, a lack of transparency in the
tendering process, low absorption capacity and a heavy bureaucratic edifice), need to be resolved as well in
order to maximise Indonesia's growth potential in infrastructure and allow for the adoption of a public-
private partnership (PPP) model on the scale envisaged by the government.
Building Buoyant Despite Risky Environment
Indonesia's fundamentals - the fourth largest population in the world has a huge consumption base, a wealth
of natural resources, a high infrastructure deficit and a young population (50% of its 240mn people are
under 29, according to the OECD) - are factors that will uphold a robust construction growth rate for the
foreseeable future, with the residential sector continuing to contribute significantly to the industry.
However, the government risks failing to gain from this demographic windfall as institutions continue to
weigh on infrastructure development.
Monetary conditions are expected to remain conducive to lending in the short-to-medium term. Despite
anticipating tightening measures, inflation has remained consistently weak, thereby supporting growth in

the construction sector. However, a potential rise in interest rates continues to present a downside risk to our
forecast.
The passing of the land acquisition law will prove more useful in the short term for large-scale energy and
transport projects. However, improved clarity in the land acquisition process may prove a long-term boon
for the residential and non-residential sector, as growth in infrastructure improves linkages between urban
hubs. This may facilitate an increase in suburban house building, as commuting choices improve for
residents of cities such as Jakarta. The bill also paves the way for an uptick in hospital construction.
The country's booming hospitality business will drive the residential and non-residential sector over the
medium term. Aside from an uptick in demand for business hotels in major cities, Indonesia will continue to
draw dividends from the rise in Asian LCCs (low-cost carriers), especially from an anticipated rise from
East Asian destinations.
Accompanying an expanding and increasingly wealthy middle class is a concomitant demand for retail and
leisure facilities. We expect retail construction to be a significant constituent of total construction activity,
second only to the residential sector. 2011 witnessed huge growth in the 'mini-mart' sector, with chains such
as 7-Eleven, Indomart and Alfamart firmly establishing themselves across the country.
China Factor Opens New Avenues For Tourism Indonesia's transportation ministry is planning to build
and relocate 45 airports over the next decade to support the rapid development of the country's aviation
industry.
The boom is proving attractive to local firms and major international players alike. International hotel chain
operator Aston International will open over 40 budget hotels in 2013 across both Bali and business cities
such as Jakarta, Bandung and Balikpapan. New local players Dafam Hotel Management and Kagum plan
to open 80 hotels, villas and resorts between them by 2015, while established property firm Ciputra
Property has made its first tentative moves into tourism. Market giant Accor - which recently sold its US
budget hotels division to private equity firm Blackstone for US$1.9bn, to open the way for a drive into
Asia - is looking to open 20 new hotels in 2013.
Although tourist numbers fell 5.94% year-on-year in July (largely as a result of an increase in the sporadic
terrorist attacks to which Indonesia is susceptible), we expect a steady uptick in demand - especially from
Chinese and Russian tourists, who are being specifically targeted by the Indonesian Tourism Ministry - to
facilitate construction growth across the archipelago, including the development of many of the lesser-
known islands which are proving popular with Chinese and Singaporean customers. Emerging Indonesian

airlines have already begun improving links to more remote regions. For example, Indonesia Air
Transport has recently run a new service between Bandung and West Java.
On The Ground In Jakarta: Our Thoughts On Infrastructure Prospects BMI recently travelled to
Jakarta to attend the Indonesia International Infrastructure Conference and Exhibition 2012 (IIICE'12), an
annual summit aimed at highlighting the country's growth potential for infrastructure development, and the
ongoing regulatory changes within Indonesia's business environment. As at previous conferences, a host of
infrastructure projects was presented by various cabinet ministers and provincial governors, with many of
them listed in the government's updated guidebook for PPP projects.
Following a similar vein of previous infrastructure summits, Indonesian officials were rather vocal in
pointing out the government's inability to finance all of Indonesia's infrastructure needs and, hence, the need
for private sector participation in developing the country's infrastructure. For example, the government
announced during the conference that it plans to allocate IDR194trn (US$20bn) of its 2013 fiscal budget to
capital expenditure (mainly infrastructure), while the capex requirement for Indonesia's MP3EI is estimated
to be around US$240bn over the next five years.
That said, the lack of foreign participation in the conference was telling, with around two-thirds of the
participants from the local market and numerous empty seats in several sessions, particularly during the
presentations from the provincial governors. There were also few deals signed during the IIICE'12. The
most pertinent commitment made during the conference was an agreement between Indonesia's Panghegar
Group and China National Machinery to implement a pre-feasibility study for a mass rapid transit system
in the city of Bandung, West Java.
To a large extent, this relatively lacklustre turnout for Indonesia's flagship infrastructure conference is
symptomatic of the current investment climate, in which challenging economic conditions globally have
dampened investor appetite for emerging market investments.
Moving In The Right DirectionNevertheless, our overriding takeaway from the conference is that
Indonesia is gradually moving in the right direction to improve its infrastructure, particularly with regard to
the investment climate.
The various non-bank financial institutions established by the government to accelerate infrastructure
development are on a more solid footing this year. The state-owned Sarana Multi Infrastruktur, created in
February 2009 to ease the process of infrastructure development for the private sector, and the Indonesia
Infrastructure Finance, established in August 2010 to channel investment for infrastructure, managed to

secure financial commitments for around IDR1.2trn (US$126mn) of infrastructure projects at the start of
2012.
Meanwhile, the state-owned Penjaminan Infrastruktur Indonesia, an infrastructure guarantee fund

established in May 2010, has already issued its first guarantee agreement for the Jawa Tengah coal-fired
power plant and is in the process of issuing guarantees for another 11 infrastructure projects. This is a key
mechanism to attract private investors as it acts as an insurance company, providing compensation to
investors should they incur losses in the event that unfavourable policies are passed, or promised policies
that would benefit investors are discarded.
The establishment of the MP3EI in May 2011 has also provided clarity and structure regarding the
infrastructure opportunities in Indonesia. In the past, bureaucratic overlaps between ministries and between
central and provincial governments have often led to convoluted plans for infrastructure development, and
the MP3EI reduces the possibility for such a scenario.
Lastly, the ongoing commitment by the government to provide a more conducive business environment for
infrastructure development is another positive step. Indonesia's Coordinating Economic Minister Hatta
Rajasa announced during the IIICE'12 that the Indonesian government had revised more than 30 regulations
that are unfriendly to businesses, with the most significant regulatory reform being the release of a
presidential decree on land acquisition. Land acquisition issues have been one of the main reasons for
project delays and the new regulation could pave the way for greater speed and clarity in the land
acquisition process.
More To Be Done We do, however, believe that there is a long road ahead in terms of accelerating
infrastructure development in Indonesia - a view we believe resonated at the conference. Participants from
the private sector raised concerns about the 'bankability' of the proposed MP3EI projects due to their
perceived lack of preparation and planning. As the Asian Development Bank's country director for
Indonesia, Jon Lindborg, pointed out during his presentation, PPP should not just be about public-private
partnerships, but also about producing 'Properly Prepared Projects'. Indonesia therefore still needs to boost
its institutional capacity to carry out the level of detail desired by the private sector during the pre-
construction stage (feasibility studies, documentation and public consultation).

Office
Supply And DemandAccording to Jones Lang LaSalle (JLL), Jakarta's property market has bucked a
muted trend observed since 2008 and is now at risk of overheating. Occupancy rates in the city's 'golden
triangle' are up 91%, while top quality buildings now command 98% occupancy. This is causing firms to
consider relocation to areas outside the capital and developers to add to luxury condominium stock-
developer pipelines suggest that 27,000 new condominium units will soon enter Jakarta's housing supply.
It is our view that this demand will drive a notable amount of office construction over the coming quarters
and, as organisations relocate closer to their bases of production, we will witness a wider geographical
spread of development, notably in Indonesia's south.
Rents And Yields
Newly collected proprietary data covering market performance over the second half of 2012 gives us a full
picture of market conditions over 24-month time period from January 2011 to December 2012.
Over the two-year period, office rents in Jakarta have returned to strength after an extended period of
subdued activity since the global financial crisis. In H111, top-end rents were reported to be on average US
$47/sq m per month, and by H212, growth of around 50% saw rents reach US$72.50. While these rates
have not remained stable, the oscillations between US$65 and US$70 indicate that, although rates may not
settle at their peak as seen in H212, they are stable at this upper range and should not return to previous
lows without major provocation. An additional underlying indicator of strength is the stability noted at the
lower end of the market, where small increments have been noted across the stable period.
Bandung has also born witness to something of a renaissance in its office market, having also bucked the
trend for contraction, albeit on a smaller scale than the capital. Rental rates at the top end of the quality
spectrum commenced the period at US$15.50/m2 per month in H111 - by far the cheapest rate for grade A
office property by at least 50% across the cities that we survey. Nevertheless, by year-end 2012, rates have
reached US$27.50/sq m per month, a mere US$0.50 less than Bali. As with Jakarta, while rents have yet to
settle it is within a higher price bracket than seen 24 months ago, again supported by sustained growth in
minimum rents.
Nevertheless, the progress of the office market since January 2011 has not blanketed the entire market, with
Bali showing significant weakness over the period. It is perhaps not surprising for a city that is more famous
for its beaches than its business that the office market suffers either in favour of other industries such as

tourism, or competitive markets such as Bandung. While the bottom has not completely fallen out of the
market, a significant contraction over 2011 has proven sustainable in 2012, with top-end rates settling in the
US$25-28/sq m per month bracket.
Table: Historic Rents - 2011-2012 (USD per m2/month)
Rental Cost - 2011 Rental Cost - 2011 (Jul- Rental Cost - 2012 (Jan- Rental Cost - 2012 (Jul-
(Jan-Jun) Dec) Jun) Dec)
Min Max Min Max Min Max Min Max
Jakarta 10.00 47.00 10.00 70.00 11.00 65.00 12.50 72.50
Bandung 05.00 15.50 08.00 25.00 10.00 30.00 11.25 27.50
Bali 02.00 46.00 07.00 35.00 10.00 25.00 7.75 28.00
Source: BMI
Table: Net Yield, 2011-2012 (%)
2011 (Jan-Jun) 2011 (Jul-Dec) 2012 (Jan-Jun) 2012 (Jul-Dec)

Jakarta 20% 10-11% 8-20% 9-12%
Bandung 10-20% 8-10% 8-20% 8-12%
Bali 8-20% 5.00% 5% 5%
Source: BMI
Table: Terms of Rental Contract/ Leases - H212
Lease terms Rent free months

(in years) (if any)
Jakarta 3-5 None
Bandung 1-2 None
Bali 2-10 None
Source: BMI

Retail
Supply And Demand
From a consumer-related perspective, the real estate industry in Indonesia has many positive attributes,
especially as the consumer-led growth story sets Indonesia apart from many of its regional peers. The
potential for real estate sub-sectors driven by strong consumer performance is being reflected in market
activity, especially in the retail sector. It is estimated that by the end of 2012, Jakarta alone will have almost
120 shopping centres, and growth continues apace. For example, Pakuwon Jati announced towards the end
of June 2012 that it would be constructing a new shopping and hotel complex in Surabaya to meet the
growing demand of the country's second largest city. The new tower, Tanjungan Plaza 5, is scheduled for
completion by 2013 and the company has pre-allocated capital expenditure of IDR500bn (US$59mn) for
the project. With BMI forecasting that the country's retail sales will grow from IDR1,551trn (US$149.08bn)
in 2011 to IDR1,982trn (US$190.47bn) by 2016, the strong underlying fundamentals of economic growth,
the world's fourth largest population (which is growing), rising per capita incomes and the continued
development of organised retail infrastructure are key factors behind the substantial growth forecast in
Indonesian retail sales.
Demand in the retail sub-sector will therefore continue to grow - especially from foreign retailers expanding
into the market. Jones Lang LaSalle comments that while several shopping centres are due for completion
this year or next, there is still only limited supply in the pipeline. The annual growth of retail supply will be
less than 10% in 2012 and 2013, according to Cushman & Wakefield. Limited supply in the face of growing
demand will lead to higher rents.
The consumer story in Indonesia continues to be one of the brightest in the world, with a recent global
survey conducted by Nielsen confirming the country's relative outperformance. Indonesia ranked third
globally in the survey, which gauged consumer sentiment despite global economic threats and generally
rising costs. Since the poll was conducted, the government has announced that it will shelve plans to reduce
fuel subsidies for at least the remainder of 2012, alleviating concerns that higher fuel prices would hit
consumers' wallets.
Indonesia has an ace up its sleeve relative to Asia's more external demand-driven economies. Consumption
comprises approximately 63.6% of Indonesia's economy, endowing it with a considerable buffer against an
external slowdown. The Indonesian consumer remains in a strong shape, and this is borne out in a strong
showing in retail, although we acknowledge growing downside risks to our near-term domestic demand

outlook. Looking long term, robust macroeconomic fundamentals, an enticing demographic profile and the
spread of organised retail underpin a highly dynamic consumer growth story in Indonesia.
Wage Growth Supportive Of Domestic DemandWage growth in Indonesia has been strong as the
economy's growth has begun to translate into higher employment. Minimum wages have been raised by as
much as 20% in some cities, and double-digit wage growth generally expected, with a survey conducted by
Towers Watson indicating that employers plan to increase salaries by 9.5% this year.
Consumer strength has translated into increasing demand for goods previously inaccessible to the majority
of Indonesians, such as automobiles. Auto sales in the country are projected to top 1mn this year for the first
time on the back of continued double-digit growth, highlighting both consumer strength and the effects of
record low interest rates.
Strong Retail Spending Good News For Consumer Goods PlayersConsumer spending indicators
continue to exhibit strength, reinforcing our positive near-term consumer outlook. Retail sales, for instance,
is hovering around double-digit levels, illustrating the continued strength in consumer spending. The
continued strength in retail should provide a strong cause for optimism in the country's near-term demand
outlook.
Continued tourist arrival growth is supportive of domestic demand as well. Tourist arrivals have gathered
stronger momentum in recent months, and the continued positive momentum in tourist arrival growth
should filter through to higher domestic consumer spending.
Rents And Yields
Retail remains the most expensive of the three real estate sub-sectors that we survey. Each city has noted a
different performance trend over the 2011-2012 period, with the overall outlook remaining positive.
Jakarta, the country's capital, remains the most sought-after location with rental rates far higher than any
other city. High-end rents incrementally increased over 2011, from US$200/sq m per month, to US$300.
However, in 2012, this peak was proved unsustainable and rents regulated themselves to end the period at
US$232.50/sq m per month. Our in-country sources noted that for high-end retail space in desirable
developments such as the Chinatown complex, rates can reach a staggering US$500/sq m per month.
Increasing interest from international investors and retailers will place upwards pressure on rental rates in
the capital, and we anticipate that this will lead to long-term growth. Demand for high-end space in
particular is expected to outweigh the new supply which is due to come online. The rates as the lower end of

the market have not yet settled into a rate to find a supply and demand equilibrium, alternating in growth
and contraction patterns.
H211 and H112 data show Bandung and Bali on a fairly even pegging in terms of top line rental rates.
Nevertheless, the year-on-year figures indicate that while Bandung has remained predominantly stable, Bali
has been the stronger performer, having eradicated the significant price gap that existed up to 18 months
ago, and by H212 had overtaken in terms of top-end rents. Our in-country sources relate that as an area on
the outskirts of Indonesia, Bandung has not historically been considered to be among the top locations for
retail investment, hence its rather static growth rate. However, awareness is on the up and rents could
marginally increase by, in line with urban development. It is anticipated that by 2013-2014, there could be
the prospect of major retail malls in the city.
Rental Cost - 2011 Rental Cost - 2011 Rental Cost - 2012 Rental Cost - 2012
(Jan-Jun) (Jul-Dec) (Jan-Jun) (Jul-Dec)
Jakarta 10.00 200.00 30.00 300.00 15.00 200.00 35.50 232.50
Bandung 05.00 15.00 10.00 45.00 20.00 60.00 15.00 46.50
Bali 02.50 46.00 08.00 46.00 20.00 60.00 18.50 51.50
Source: BMI

Jakarta 20% 10-11% 8-15% 9-13%
Bandung 10-20% 8-10% 8-20% 8-13%
Bali 9-20% 10-15% 7-10% 7-10%
Source: BMI


(in years) (if any)
Jakarta 5-10 None
Bandung 2-10 None
Bali 2-10 None
Source: BMI
Retail Sales Indicators
Table: Indonesia Retail Sales Indicators, 2010-2017
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Retail sales (IDRbn) 1,239,349 1,397,143 1,565,875 1,751,148 1,971,094 2,220,637 2,504,200 2,835,372
Retail sales (US$bn, fixed
2008 FX rate) 119.1 134.27 150.48 168.29 189.43 213.41 240.66 272.48
Retail sales (US$bn,
forecast FX rates) 136.4 159.23 166.94 180.53 204.26 234.99 267.83 306.53
Retail sales as % GDP 19.3 18.8 19 19.1 19.3 19.4 19.6 19.9
Retail sales per capita (IDR) 516,673 576,556 639,736 708,427 789,817 881,624 985,383 1,106,147
Retail sales per capita (US$) 496.5 554.1 614.8 680.8 759 847.3 947 1,063.00
Total retail sales growth
(IDR) 14.3 12.7 12.1 11.8 12.6 12.7 12.8 13.2
Per capita retail sales
growth (IDR) 13.2 11.6 11 10.7 11.5 11.6 11.8 12.3
Private final consumption
(IDRbn) 3,641,997 4,053,363 4,473,040 4,955,010 5,520,129 6,161,292 6,889,865 7,740,763
(US$bn) 400.84 461.95 476.87 510.83 572.03 651.99 736.88 836.84
(IDR, real growth % y-o-y) 10.7 11.3 10.4 10.8 11.4 11.6 11.8 12.4
f = BMI forecast. Source: BMI

Industrial
Supply and Demand
Industrial Drive To Intensify We believe Indonesia will see a steady increase in investment in industrial
estates. A rise in real wages in China, and 2011's rating upgrade to investment grade, is encouraging
manufacturers to relocate production to South East Asia. Notable investors include Taiwanese producer
Foxconn, which began production in Bantem in October 2012. We believe that firms will increasingly look
to invest in industrial estates - in September, developer PT Intiland Development announced that it would
acquire up to 650 hectares of land to expand its industrial estate portfolio in East Java.
The government has made a strategic commitment to industrial construction and will forge ahead with plans
to invest US$22bn in Indonesia's industrial base, moving the country away from a reliance on natural
resource wealth. Important in this respect is the ongoing development of the Special Economic Zones
(SEZs) of Batam, Bintan and Karimun.
The development of the SEZs suggests improved trade links for Asian investors looking to take advantage
of Indonesia's growth story. Over H112, South Korean investment in Indonesia tripled year-on-year
according to the Investment Coordinating Board, making the country the third largest foreign investor after
Singapore and Japan.
Saying this, we remain reluctant to factor in too great an increase until the Indonesian government
successfully begins reforming the country's private sector. Furthermore, growth in these areas will remain
muted until the country achieves higher and more consistent foreign direct investment (FDI) inflows. FDI
looks set to underperform in 2012, with inflows for construction at just US$69mn in H112 compared with
US$300mn over the same period in 2011.
Rents And Yields
Industrial rents in Indonesia are on the whole, low, compared with the country's other sub-sectors. On a
regional basis, however, Indonesian rates remain favourable. Over the past 24 months (the period January
2011 - December 2012), the sector has experienced stable and sustainable growth, which is encouraging
given the extremely low minimum rates with which 2011 was started.
It is of no surprise that the country's capital Jakarta boasts the highest rates by year-end 2012 at both ends of
the quality spectrum. Maximum rates have seen impressive growth, commencing the period at US$4.00/m2

per month - which is now the sustained rate for low quality space. While the sectors peak of US$17.00 has
proven to be unsustainable, the H212 rate of US$13.00 remains encouraging.
Bandung and Bali have also seen restricted, yet sustainable, growth which indicates a stable market. While
rates in Bali have changed the least, Bandung - as in the office sector - is closing the price divergence
between the two cities. Nevertheless, in spite of the broadly stable market, without significant investment/
growth to catalyse the market, growth is scheduled to remain unremarkable, especially in the short term.
Rental Cost - 2011 Rental Cost - 2011 Rental Cost - 2012 Rental Cost - 2012
(Jan-Jun) (Jul-Dec) (Jan-Jun) (Jul-Dec)
Jakarta 00.40 04.00 02.00 05.50 5.00 17.00 4.00 13.00
Bandung 00.28 02.00 01.00 03.00 10.00 2.00 2.75 6.75
Bali 01.70 10.00 02.00 08.00 6.00 8.00 2.88 8.00
Source: BMI

Jakarta 20% 5% 5% 5%
Bandung 10-20% 3-5% 3-12% 3-7%
Bali 9-20% 0.05 4-5% 4-5%
Source: BMI

(in years) (if any)
Jakarta 5-10 None
Bandung 5-10 None
Bali 3-20 None
Source; BMI

Competitive Landscape
Competitive Landscape
The major players in the property market include the Agung Podomoro Group, Bakrieland Wijaya Karya,
Jaya Konstruksi, Adhi Karya and the Lippo Group. Lippo Karawaci (LK) is a 25%-owned subsidiary of
the Lippo Group; it is a major company with substantial interests in government projects, such as hospitals
and housing. Ciputra Group is one of the country's leading integrated property developers.
The office sub-sector is dominated by established developers in the field, such as Mulia. As demand
continues to grow, entrants such as Bakrieland and the Lippo Group are also competing in the market.
Globe Asia reports that in the retail sub-sector, Lippo Group is the market leader.
LK owns two real estate investment trusts (REITs) in the market. First REIT has a portfolio of hospitals (in
Indonesia and Singapore) and a hotel. Lippo-Mapletree Indonesia Retail Trust (LMIR) has a portfolio of
retail and retail-related Indonesian properties, including shopping centres. According to Appraisal
Indonesia in January 2012, the REITs are listed in Singapore and do not produce any capital-appreciation
value for Indonesian investors.
The Financial Institutions Supervisory Agency (Bapepam) recognises a real estate investment fund called
the Kontrak Investasi Kolektif - Dana Investasi Real Estat (KIK-DIRE), translated as the Collective
Investment Contract - Real Estate Investment Fund. It is a financial product similar to a REIT, but with
significant differences. In contrast to many other countries' REITs, which often confer tax advantages, the
KIK-DIRE has a high tax burden, with several onerous taxes applying. It is unlikely that REITs in Indonesia
will list domestically until they are more issuer-friendly and have a much-reduced tax obligation.
Investment Outlook The Master Plan for the Acceleration and Expansion of Indonesia's Economic
Development, or MP3EI, is set to accelerate in 2012 as the Yudhoyono government looks to ratchet up
badly needed infrastructure development. The government is likely to launch as many as 84 infrastructure
projects under the MP3EI programme in 2012, expected to total IDR536.3trn (US$ 58.4bn). Only
IDR66.2trn (US$7.2bn) of the projects will be funded directly by the government, with another IDR90.3trn
(US$9.8bn) worth of projects being backed by state-owned enterprises. The remaining IDR301.8trn (US
$32.9bn) is being funded by private firms under the public-private partnership (PPP) programme. MP3EI is
the cornerstone economic policy for the Yudhoyono administration, which hopes to reach its goal of
IDR1,400trn (US$152.6bn) of infrastructure development between 2010-2014, while limiting the

government's contribution to 30%. The implementation of the plan should continue to support fixed capital
investment in the archipelago, which we see growing at a rate of 8.5% in 2012 versus a slightly slower 8.1%
in 2011. Fixed-capital formation should add a solid 2.1 percentage points to overall growth in 2012, and we
expect it to play a progressively larger role in Indonesia's economic growth story over the coming decade as
both the state and private sector allocate more resources to infrastructure development.
Permeable Borders? The favourable mix of robust growth and stable inflation, coupled with political
stability, reform momentum and recent investment grade promotion, has seen foreign investors flood into
the market - with interest in industrial space coming particularly from Japan and Korea, according
to Cushman & Wakefield. There is still plenty of vacant commercial real estate in many areas of the
country, but demand is strong and new projects are being absorbed, with positive market sentiment
continuing from Moody's upgrade of Indonesia's sovereign credit rating to investment grade. But likewise,
driven by domestic success, Indonesian corporates are spreading their wings overseas, with perceived
investment opportunities in Myanmar.
Indonesia-based cement producer Semen Gresik is the latest corporate to announce its intention to expand
into Myanmar, reflecting the state-owned firm's desire to establish an advantageous position in the resource-
rich frontier market. Having established a dominant position in its booming (but increasingly competitive)
domestic market, the firm is now seeking to broaden its footprint. Given Myanmar's reliance on imported
cement and the potential for growth fired by demand for mining-related infrastructure projects, early market
entrants could gain key advantages.
The announcement appears to reflect the broader policy of the Indonesian government, which is
encouraging many of the country's 141 state-owned enterprises (SOEs) to capitalise on the perceived
investment opportunities in Myanmar. However, given the inefficiency of many of Indonesia's SOEs -
helped by uncompetitive investment laws and regulations - a lack of competitiveness has resulted in a
predominantly domestic market focus. Domestic sales account for close to 100% of Semen Gresik's
revenue. Nevertheless, the firm's decision to make what is reportedly its first overseas foray is potentially a
timely one.
Through targeting an undeveloped and unsaturated market such as Myanmar, Semen can benefit from being
among the early movers within the market, while the company's size - it is Indonesia's largest cement
producer - affords it advantages of scale. Consistently robust growth in domestic sales posted over the last
18 months has seen the company's revenues surge and provided a favourable base from which to fund future
capex.

The firm is currently in talks with Myanmar's foreign investment body over plans to build a large 1.5-2.5mn
tonnes/year cement plant in the country in 2012, at a cost of between US$300mn and US$500mn, according
to Investor Daily Indonesia. Given that Myanmar is reliant on cement imports to meet demand - cement
consumption was 6mn tonnes in 2011 compared with a production capacity of 3mn tonnes (according to
Semen Gresik's Director for Business Development and Strategy) - the plant would provide a significant
capacity boost to the sector.
BMI notes that with Myanmar appearing set to genuinely open its doors to foreign investment after decades
of self-imposed isolation, the resource-rich country holds numerous greenfield opportunities for investors
across the entire infrastructure spectrum. In light of this, there would be a significant need for investment in
the country's cement sector if projects were to be completed on time and on budget. While Chinese
companies have an established presence in the country, foreign and Western competition is so far limited
and thus holds potential rewards for those companies prepared to take the risks and move first.
Risks remain pertinent for companies seeking to operate within Myanmar. Not least of these risks is
political where, despite moving to a civilian government, the system of government remains highly
authoritative. Further, there remains little in the way of regulatory and legal protection for companies.
Meanwhile, for the cement sector in particular, the clear deficit in electricity generation provides another
cause for concern and uncertainty given the energy-intensive nature of the industry.

Company Profile
PT Adhi Karya
SWOT Analysis
Strengths
Entering the Public-Private Partnership (PPP)/concessions market through the new
investment division.

The new investment division allows the company to cover all aspects of construction
and infrastructure.

Established local player.

The Indonesian government owns a majority share in the company.

Broad geographic and experience base.
Weaknesses
It has been experiencing some difficulties in operations in Oman in the Middle East.

A reliance on government projects for revenue.

In spite of its significant experience in road construction, the company is very
inexperienced in toll road concessions and it will face strong competition from the
leading toll road operator PT Jasa Marga.

In spite of a robust boost in revenues, the company failed to make a profit in 2011.
Opportunities
The company has opened Engineering, Procurement and Construction (EPC) and
Investment business units as revenue streams and to increase diversification.

Has a large domestic market with plenty of opportunities to expand further.

Indonesia has one of the most robust construction markets globally; it showed
resilience during the global financial crisis.

Ambitious target of obtaining contracts worth RP13.5trn in 2013.

Threats
Although construction activity has recovered to some degree in Indonesia, the climate
remains fragile.

Fallout from Dubai could threaten the company's operations in the Middle East.
Company Overview PT Adhi Karya is a major player in the Indonesian construction industry and is one of the
three big construction companies owned by the government. The company has
benefited from the government's IDR71.3trn (US$7.1bn) stimulus plan. The company
undertakes projects related to general civil engineering: bridges, roads, ports and power
plants; construction of commercial, residential and industrial buildings; and mechanical
and electrical works for integrated building systems. The company is also extending its
business to EPC projects in Indonesia.
The company is majority owned by the government of Indonesia, with a 52.3% share as
of December 31 2009. It is the largest construction and infrastructure company in
Indonesia, with several large-scale contracts under its belt in transport and power
projects, as well as in the residential and commercial construction sector.
Adhi Karya is continuing its expansion in the Middle East, including Qatar, Oman and
Saudi Arabia. It is also working on infrastructure projects in India.
Strategy Short-Term Strategy
The company continues to be heavily reliant on the Indonesian government to drive its
growth. Government and government-related projects accounted for 56% of total
revenues in 2009 and this increased to 86% in 2010. Given that the Indonesia continues
to push forward with massive infrastructure projects to address its deficit in
infrastructure and Adhi's status as a well-established local player, we expect
government projects to remain as the main bulk of the company's project portfolio over
the short to medium term.
While the company is involved in all types of infrastructure projects, it believes that it
has a competitive advantage in the toll roads sector. It has developed a new system of
building roads called the Adhi Concrete Pavement System, which it believes could
reduce the construction period, lower maintenance costs and produce durable roads.
The company aims to use this system to win several toll road projects in Indonesia, but
we remain cautious about the system given the lack of precedent.
The company has also been diversifying into the EPC business since 2001, and it has
begun to receive recognition for its EPC expertise, gradually receiving more EPC
contracts, particularly from the power markets and concessions markets. EPC projects

- mainly government contracts - accounted for 21% of total revenues in 2010,

compared to 7% in 2009. Adhi has also taken the first steps in entering the PPP/
concessions market with the establishment of an investment division.
Long-Term Strategy
Geographical diversification appears to be on the cards for Adhi Karya in the long term.
The company entered Oman's commercial construction sector in 2007, securing a
foothold in the Gulf construction market. In the future, it can use its presence in Oman
as a platform for further growth in the Gulf and wider Middle East, not just in
construction, but also as a base to launch operations across the wider region.
Adhi Karya is continuing its expansion in the Middle East. As well as a contract signed
earlier to build a property project in Qatar, the company has been awarded a similar
project in Oman. Valued at US$104mn, the Oman project includes a shopping mall,
apartment towers and a hotel. However, given the current political troubles in the
Middle East, we believe that this strategy is a long-term one.
Financial Data The company saw losses in 2011 despite a robust boost in its revenues. Revenues grew
by 18.0% to reach IDR6.7bn, but net profits fell by 3.9% to reach IDR182mn.This
divergence between revenues and net profits is due to a fall in operating profits.
Operating profits fell by 4.2% in 2011 to reach IDR379bn. Operating margin also fall
from 7.0x in 2010 to 5.7x in 2011.
FY 2011
Net Profit (2011): IDR182bn, -3.9% y-o-y

Revenues: (2011): IDR6695bn, 18.0% y-o-y
Operational Data In January 2013, the company secured a US$26.3mn selection of contracts from PT
Aneka Tambang - the country's state-owned mining firm. The agreement is for the
building of mining infrastructure facilities at Antam's mine in East Halmahera, North
Maluku. The facility is planned to be up and running by the end of 2014.
In January 2013, Adhi Karya had withdrawn from the Jakarta Semanggi-Kuningan
monorail construction project. This withdrawal came about after Jakarta's new governor
Joko Widodo asked Adhi Karya to team up with Jakarta Monorail (JM) to develop the
project, a proposal rejected by Adhi Karya. Adhi Karya is now proposing to build a
90.65km monorail project that links East Bekasi in West Java to Cibubur and Cawang in
East Jakarta.
In December 2012, Adhi Karya announced that it plans to invest IDR450bn over the
following two years to build four hotels. These hotels would be located in Jakarta
(GranDhika Blok M), Bekasi (GranDhika Bekasi), Surabaya (GranDhika Ngagel) and
Bandung (GranDhika Dago).
In April 2012, Adhi Karya announced that it secured the contracts for the construction of
a IDR350bn Gempol-Pandaan Paket I toll road, the establishment of double-track

railroads between Central and East Java (IDR200bn) and a IDR120bn mall in Bandung
in the first quarter of 2012.
In March 2012, Adhi Karya received a IDR278bn (US$30.5mn) EPC contract to develop
a 14MW thermal power plant in Tarakan, East Kalimantan. Construction works for the
project is expected to take 21 months.
Company Details Adhi Karya
Address line 1
Tel: +62/(21) 797 5312
Fax: +62 (21) 797 5311
Website: www.adhi.co.id

Jakarta Propertindo
SWOT Analysis
Strengths
Fully supported by local administrations.

Company website claims the firm is well capitalised.
Weaknesses
Geographic limitations.

Lacking in easily accessible information for investors.

Project pipeline seems to be lacking in new commissions.
Opportunities
Infrastructure development in the Jakarta area.
Threats
Susceptible to the national economic situation.
Company Overview Jakarta Propertindo, a holding company of Jakarta's local government, undertakes
projects on behalf of the Jakarta government in property development and
management, infrastructure development, industrial and warehouse development,
beach reclamation and the provision of social facilities. It has five subsidiaries: PT
Jakarta Marga Jaya, PT Pulo Mas Jaya, PT Jakarta Manajemen Estatindo, PT Jakarta
Konsultindo and PT Jakarta Komunikasi.
PT Jakarta Marga Jaya's business activities include:
General building contractors

Installation of heavy building components / heavy lifting
Construction of buildings, bridges, roads, airports, docks
The development of telecommunications networks and infrastructure
Toll road projects
PT Pulo Mas Jaya's business activities include:
The development and expansion of housing, offices, retail space, leisure centres and
tourism facilities.
PT Jakarta Manajemen Estatindo's business activities include:
Service management and property trading

Land leasing
Property leasing

Environmental management services

Sports facilities management services
Public Chartering Services
PT Jakarta Komunikasi's business activities include:
Focuses on building activities in relation to the telecommunications field.

Development of network infrastructure
Multimedia and telecommunications equipment
According to the company's website, there are 11 ongoing projects as of February

2013.
Strategy The firm vision is for a property development and infrastructure company that produces
high quality products and services with both market- and environmental-oriented
policies.
The company's aims are:
To develop assets and purchase land/buildings with potential in line with

market trends.
Developing new areas of land according to the potential development of City areas.
Develop land and buildings by taking into account the environmental impact.
Developing property services and other support industries with business
oriented strategies.
Developing infrastructure projects in the areas of Jakarta and surrounding areas.
Financial Data The company has no financial data available on its website (February 2013).
Operational Data Key Statistics
No. of employees: 258

Year established: 1997
Company Details Jakarta Propertindo
Menteng Office Park 8th Floor

Jl. Probolinggo No 18
Jakarta
10350
Indonesia
Fax: +62 21 2301188
www.jakarta-propertindo.com
Company Data Key Personnel

President Commissioner: Ir. Palgunadi Setiawan

Lippo Karawaci
SWOT Analysis
Strengths
Largest listed property company by revenue and market capitalisation.

Strong financial position: high revenues and sound liquidity.

Market leader in hospitals, retail and residential property.

Its diversified range of products provides some protection to sector slowdowns.
It has a large land bank.
Weaknesses
Property development makes up about 50% of total revenue.
Opportunities
Middle-to-upper income housing market is set for further growth due to economic
improvement.

2010 transitional growth plan for the company.
Threats
Vulnerable to volatility of property development cycles.
Company Overview Lippo Karawaci is a leading property developer in Indonesia. The company was created
in 2004 through the merger of eight property-related companies and is presently the
largest listed property company in Indonesia by market capitalisation. Lippo has six
business units: Urban Development; Large Scale Integrated Development; Retail Malls;
Healthcare; Hotels, Leisure and Infrastructure; and Property and Portfolio Management.
The company has the largest developable land bank in Indonesia. It offers design,
construction, marketing and sale of homes within gated communities, as well as urban
development, land acquisition and clearing, land development and excavation, and
infrastructure development.
Lippo is the leading provider of private medical services in Indonesia. It develops and
manages shopping mall and hotels. It also operates chains of restaurants, a golf course
and a country club. It is active in water supply and treatment and waste management.
The company has two Singapore-listed real estate investment trusts (REITs). First REIT
is has a portfolio of hospitals (in Indonesia and Singapore) and a hotel. Lippo-Mapletree

Indonesia Retail Trust has a portfolio of retail and retail-related Indonesian properties,
including shopping centres.
In addition to its core Indonesian business, the company also has a regional presence in
China, Macau, Hong Kong, the Philippines, Korea and Singapore.
No. of employees: 5,683

Company Details Lippo Karawaci
Menara Matahari 22nd Floor

7 Boulevard Palem Raya
Lippo Karawaci Central
Banten
Tangerang 15811
Tel: +62/21 2566 9000
Fax: +62 21 2566 9099
Website: www.lippokarawaci.co.id
Company Data Key Personnel
President director: Ketut Budi Wijaya
Financial Highlights Revenues for H111 were IDR1.883trn, up 29% y-o-y. Net profit was IDR298bn, an
increase of 35% y-o-y. All business divisions reported growth.

Pakuwon Jati Tbk

SWOT Analysis
Strengths
The firm is a major property developer in Surabaya, Indonesia's second largest city.
Some diversity in its product line provides protection against individual sector
downturns.
Over 30 years of industry experience.
Weaknesses
The company is experiencing lower profitability, as it was hit hard by the recent global
financial crisis.

Geographic limitations.
Opportunities
Key developments in inner-city Surabaya offer opportunities for further growth.
Threats
Although construction activity has recovered to some degree in Indonesia, the climate
remains fragile.
Company Overview Pakuwon Jati is a leading property developer in Indonesia, involved in land acquisition,
design, property development and operational management. The company favours
ownership and management of mixed-use developments, as well as retail, office, hotel
and high-rise residential condominiums. The company was founded in 1982, and is
based in Surabaya, Indonesia.
Pakuwon Jati is listed on the Jakarta and Surabaya Stock exchanges.
It is currently (as of February 2013) building four large developments, including a seven-
hectare superblock located in the heart of the city centre in Surabaya.
Financial Data The latest financial results available for the company are the unaudited 9M12:
Total assets for 9M12 stand at INR7,091bn

Gross profit of INR9.3bn

Number of employees: 1,242 as of March 2011, according to Bloomberg.
Company Details Pakuwon Jati Tbk
Menara Mandiri Lt. 15

Jl. Basuki Rachmat 8-12
Surabaya
60261
Indonesia
+62/31 5311088
+62 31 5311099
www.pakuwon.com

Demographic Forecast
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is
the total population of a country a key variable in consumer demand, but an understanding of the
demographic profile is key to understanding issues ranging from future population trends to productivity
growth and government spending requirements.
The accompanying charts detail Indonesia's population pyramid for 2011, the change in the structure of the
population between 2011 and 2050 and the total population between 1990 and 2050, as well as life
expectancy. The tables show key data points from these charts, in addition to important metrics including
the dependency ratio and the urban/rural split.
Source: BMI, World Bank, UN

Table: Indonesia's Population By Age Group, 1990-2020 ('000)
1990 1995 2000 2005 2010 2012e 2015f 2020f
Total 184,346 199,400 213,395 227,303 239,871 244,769 251,880 262,569

0-4 years 22,625 22,182 21,526 22,272 21,579 21,017 20,740 19,722
5-9 years 22,818 22,273 21,904 21,296 22,077 22,095 21,416 20,596
10-14 years 21,767 22,678 22,151 21,790 21,197 21,464 21,987 21,333
15-19 years 20,294 21,517 22,483 21,948 21,599 21,320 21,061 21,856
20-24 years 18,354 19,902 21,166 22,079 21,552 21,453 21,331 20,808
25-29 years 15,902 17,975 19,494 20,686 21,589 21,529 21,171 20,979
30-34 years 13,384 15,563 17,603 19,067 20,255 20,748 21,194 20,820
35-39 years 10,341 13,063 15,228 17,233 18,699 19,217 19,916 20,887
40-44 years 8,046 10,037 12,730 14,864 16,860 17,517 18,365 19,606
45-49 years 7,450 7,739 9,690 12,317 14,422 15,260 16,451 17,976
50-54 years 6,711 7,067 7,363 9,242 11,789 12,679 13,916 15,947
55-59 years 5,498 6,229 6,584 6,878 8,667 9,648 11,182 13,290
60-64 years 4,225 4,938 5,624 5,971 6,266 6,800 8,010 10,442
65-69 years 2,911 3,607 4,249 4,871 5,206 5,257 5,571 7,225
70-74 years 1,958 2,288 2,866 3,409 3,944 4,112 4,339 4,742
75+ years 2,064 2,342 2,734 3,382 4,168 4,653 5,230 6,340
f = BMI forecast. Source: BMI, World Bank, UN

Table: Indonesia's Population By Age Group, 1990-2020 (% of total)
1990 1995 2000 2005 2010 2012e 2015f 2020f
0-4 years 12.27 11.12 10.09 9.80 9.00 8.59 8.23 7.51
5-9 years 12.38 11.17 10.26 9.37 9.20 9.03 8.50 7.84
10-14 years 11.81 11.37 10.38 9.59 8.84 8.77 8.73 8.12
15-19 years 11.01 10.79 10.54 9.66 9.00 8.71 8.36 8.32
20-24 years 9.96 9.98 9.92 9.71 8.98 8.76 8.47 7.92
25-29 years 8.63 9.01 9.14 9.10 9.00 8.80 8.40 7.99
30-34 years 7.26 7.80 8.25 8.39 8.44 8.48 8.41 7.93
35-39 years 5.61 6.55 7.14 7.58 7.80 7.85 7.91 7.95
40-44 years 4.36 5.03 5.97 6.54 7.03 7.16 7.29 7.47
45-49 years 4.04 3.88 4.54 5.42 6.01 6.23 6.53 6.85
50-54 years 3.64 3.54 3.45 4.07 4.91 5.18 5.52 6.07
55-59 years 2.98 3.12 3.09 3.03 3.61 3.94 4.44 5.06
60-64 years 2.29 2.48 2.64 2.63 2.61 2.78 3.18 3.98
65-69 years 1.58 1.81 1.99 2.14 2.17 2.15 2.21 2.75
70-74 years 1.06 1.15 1.34 1.50 1.64 1.68 1.72 1.81
75+ years 1.12 1.17 1.28 1.49 1.74 1.90 2.08 2.41
f = BMI forecast. Source: BMI, World Bank, UN

Table: Indonesia's Key Population Ratios, 1990-2020
1990 1995 2000 2005 2010 2012e 2015f 2020f
Dependent ratio, % of total

working age 1 67.3 60.8 54.7 51.2 48.3 47.3 45.9 43.8
Dependent population, total, '000
2 74,142 75,371 75,430 77,020 78,172 78,598 79,283 79,957
Active population, % of total 3 59.8 62.2 64.7 66.1 67.4 67.9 68.5 69.5
Active population, total, '000 4 110,204 124,029 137,966 150,283 161,699 166,171 172,597 182,612
Youth population, % of total
working age 5 61.0 54.1 47.5 43.5 40.1 38.9 37.2 33.8
Youth population, total, '000 6 67,210 67,133 65,581 65,358 64,853 64,576 64,143 61,651
Pensionable population, % of
total working age 7 6.3 6.6 7.1 7.8 8.2 8.4 8.8 10.0
Pensionable population, '000 8 6,932 8,238 9,849 11,662 13,318 14,022 15,141 18,306
f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of total
population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+.
Source: BMI, World Bank, UN
Table: Indonesia's Rural And Urban Population, 1990-2020
1990 1995 2000 2005 2010 2012e 2015f 2020f

Urban
population,
% of total 30.6 35.6 42 48.1 53.5 55.5 58.4 62.5
Rural
population,
% of total 69.4 64.4 58 51.9 46.5 44.5 41.6 37.5
Urban
population,
'000 54,279.90 68,174.50 86,217.70 105,440.20 128,450.90 135,773.40 146,972.20 164,105.90
Rural
population,
'000 123,105.30 123,326.90 119,062.60 113,770.10 111,420.10 108,995.70 104,908.20 98,463.50
f = BMI forecast. Sources: BMI, World Bank, UN

Methodology
How We Generate Our Industry Forecasts
New Approach
This round of real estate reports incorporates a new approach. In each of the countries surveyed, we have
made contact with local sources (typically major commercial real estate agents) and asked them 10
questions in relation to three sub-sectors - office, retail and industrial. We have combined the answers into
the data tables and text that form part of the Real Estate Market Overview and the Industry Forecast
Scenario.
In taking this 'grass-roots' approach, we believe we have ensured that we identify, in a timely fashion, key
issues that will likely drive rents and yields over the short, medium and long term. We have developed a
framework that facilitates comparisons between cities and sub-sectors in different countries. In developing
our long-term forecasts, we have focused on net yields. Our view is that, as yields are driven by both rentals
and capital values, the movements in yields provide a convenient short-hand for what is and is not expected
to be happening in markets.
Our forecasts are based largely on qualitative judgements. Given that, in most of the countries that BMI
surveys, the real estate protagonists are still dealing with the aftermath of the global financial crisis, it is
questionable how valuable a quantitative approach would be. In part due to BMI's own macroeconomic
research and partly because of the insights gleaned from our in-country sources, we are normally able to
comment in an informed way on the likely directions for rentals and capital values. Nevertheless, we
recognise that we can and should refine the methodology and incorporate greater quantitative aspects over
time as we accumulate more data on each of the various markets that we survey.
In mid-2012, our researchers conducted further interviews with the local sources in order to confirm details
pertaining to rental levels and rental yields. In many cases, the new data has caused us to revise our
forecasts for 2012-2017.
Overview
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being

examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and
encourage the use of objective views, uses a 'general-to-specific' method. BMI mainly uses a linear model,
but simple non-linear models, such as the log-linear model, are used when necessary. During periods of
'industry shock', for example a deep industry recession, dummy variables are used to determine the level of
impact.
Effective forecasting depends on appropriately-selected regression models. BMI selects the best model
according to various different criteria and tests, including, but not exclusive to:
R2 tests explanatory power; Adjusted R2 takes degree of freedom into account;
Testing the directional movement and magnitude of co-efficients;
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);
All results are assessed to alleviate issues related to auto-correlation and multi-co-linearity.
BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI's
forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot
structural breaks, anomalous data, turning points and seasonal features where a purely mechanical
forecasting process would not. Within the real estate industry, this intervention might include, but is not
exclusive to, new investments across sectors, or projects getting cancelled; general investment climate and
business environment changes; domestic or regional trends changing; macroeconomic indicators; and
regulatory changes.
Example Of Construction Value Model:
(Construction Value)t = 0 + 1*(GDP)t + 2*(Inflation)t + 3*(Lending Rate)t + 4* (Population)t +

5*(Government Expenditure)t + 6*(Construction Value)t-1 + t
Construction Industry
A number of principal criteria drive our forecasts for each construction and engineering variable:
Construction GDP And Infrastructure Spending Figures for construction GDP and infrastructure
spending are based, where possible, on national accounts as published by the relevant central banks, as well
as primary government/ministry sources and official data. Where these are unavailable, construction GDP
forecasts are based on a range of variables, including:

Stated infrastructure and development programmes;
Likely increases owing to related urban or industrial sector developments;
Political factors, such as an electorally motivated public works programmes.
Construction as a percentage of GDP is calculated using BMI's macroeconomic and demographic forecasts.
Employment Within The Construction IndustryThese figures are forecast based on:
The growth or otherwise of the construction industry;
Company results and expansion plans.
Bank Lending
We assume that the growth rate for each of the three variables (assets, loans and deposits) varies over time.
The growth rate in 2012 is deemed to be the actual growth rate achieved over the 12 months to the point in
time for which the latest data is available. In practice, this is usually a date in late 2012. The growth rate in
2013 is assumed to be a weighted average - 80% of the actual rate achieved in the previous year and 20% of
the long-term nominal rate of growth in GDP that BMI projects for the five years to the end of 2015. The
growth rate in 2014 is assumed to be a weighted average where the respective ratios are 60% and 40%. In
2015, the ratios are reversed. In 2016, the ratios are 20% and 80%. In 2017, the three variables are assumed
to increase at the annual rate of growth in nominal GDP over the five years. In effect, 2017 is the only year
of the five where the actual growth of the variables achieved in 2011 has no impact on the projected growth
rates.
Real Estate/Construction Business Environment Rating
BMI's Real Estate/Construction Business Environment Rating (RECBER) provides a globally comparative,
numerically based assessment of the risk/return trade-off for the industry in each state covered by BMI's
real estate reports. In order to provide clients with a detailed assessment of this trade-off, the overall rating
is made up of two distinct sub-ratings.
Limits Of Potential Returns
Evaluates the industry's current size and growth potential, and also assesses broader industry/state
characteristics that may enable or inhibit the industry's development.
Risks To Realisation Of Returns
Evaluates issues within (a) the real estate sector, and (b) broader country risk vulnerabilities that increase
uncertainty surrounding the stability of anticipated returns on investment into each state.

These ratings themselves comprise sub-ratings.
The 'limits' rating comprises:
Real estate market. This evaluates industry growth/size dynamics.
Country structure. This evaluates the broader economic/socio-demographic environment.
The 'risks' rating comprises:
Real estate risks. This covers real estate-specific factors, including finance.
Country risk. This evaluates the industry's broader country risk exposure.
Weighting
Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal
weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Weighting
Limits of potential returns 50%, of which
Real estate market 65%
Country structure 35%
Risks to realisation of returns 50%, of which
Real estate risk 65%
Country risk 35%
Source: BMI
In all cases, scores are out of 100, with a higher score indicating greater potential returns (returns), or lower
risks (risks).
Indicators
The following indicators have been used. Overall, the rating uses five subjectively measured indicators, and
over 20 separate indicators/datasets.

Limits Of Potential Returns - Real Estate-Specific Factors
The ratings score for limits of potential returns considers four real estate-related factors, each of which is
given equal weighting.
Construction output, US$bn (previous year). Absolute size of construction sector used as proxy for size
of real estate sector.
Construction sector real growth, compound annual growth rate (CAGR) (previous year to three years
hence). Indicates prospects for, and confidence in, the construction sector, and hence a proxy for
prospects/confidence for real estate sector.
Total commercial bank lending, US$bn (end previous year). Real estate projects are long term and capital
intensive, with most finance obtained from commercial banks. Indicates funding availability.
Commercial bank lending, CAGR (previous year to three years hence).This indicates prospects for the
stability of finance and, implicitly, its cost. In times of crisis, this is likely to be the most volatile
indicator.
Limits Of Potential Returns - Country Structure
The ratings score for limits of potential returns considers three other factors, each of which is given equal
weighting.
BMI's Business Environment Rating for financial infrastructure. This captures the efficiency of the
commercial banking sector - and other elements of the financial services industry - in making funding
available to the real estate sector.
Per capita GDP, US$. Higher per capita GDP correlates with the expansion of the middle classes, which
are the key market for residential real estate, and the users of commercial and retail real estate properties.
Urbanisation, % of total population living in urban areas. Urbanised states tend to be more conducive
markets for real estate development, as they have deeper, more mature markets. That said, our scoring
methodology views favourably less urban, or even predominantly rural, states that are characterised by
persistently strong construction sector growth.
Risks To Realisation Of Returns - Real Estate-Specific Factors
The ratings score considers three factors that are directly relevant to the real estate sector. These are each
given equal weighting. They are:
Lending risks, ratio of the growth in nominal lending (ie by commercial banks to non-bank customers) to
the nominal growth in GDP over a five-year period (last year to current year plus three). It is assumed
that lending volumes and nominal GDP should, generally, grow at the same rate. If lending growth
substantially exceeds nominal GDP expansion, this would suggest deterioration in risk standards by
lending institutions. Conversely, if nominal GDP rises substantially faster than bank lending, then the
cost of finance for real estate ventures is likely to rise (thereby affecting profitability).

Financial institution confidence, change in the loan to deposit ratio over a five-year period (last year to
current year plus three). This is used as a proxy for the stability of finance. Thus, a rapid decline in the
ratio (ie a lending squeeze) is penalised. Conversely, we are more tolerant of a rise in lending, as in itself,
this may be positive for the industry. High rates of lending growth are penalised as they could indicate an
investment bubble unless the state's Country Risk Short-Term Economic Rating - a proxy for
vulnerability to an economic shock - is very high.
Real estate prices, % change y-o-y. There are a number of methodological challenges in identifying
suitable proxies for real estate prices in each country. Nevertheless, where possible, we have identified a
national index (usually for house prices) and assess annual growth. The rating is symmetrical, in that high
growth (which indicates a bubble) is penalised, as is sharp price falls (which indicates that bubbles have
been burst). Where no real estate price index is available, this indicator does not affect the overall score
for this section.
Risks To Realisation Of Returns - Country Risk Factors
BMI's Long-Term Economic Rating. A measure of long-term economic stability.
BMI's Business Environment Legal Framework Rating. Denotes the strength of legal institutions in each
state - security of investment can be a key risk in some emerging markets.
BMI's Business Environment Bureaucracy Rating. Denotes the ease of conducting business in the state.
Sources
Sources used in real estate reports include UN statistics, national accounts, housing and economy ministries,
officially released company results and figures, trade bodies and associations and international and national
news agencies.

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Q2 2013

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2013

Business Monitor International 2013 Business Monitor International

BMI Industry View ............................................................................................................... 7

Industry Forecast .............................................................................................................. 15

Macroeconomic Forecasts ............................................................................................... 33

Industry Risk Reward Ratings .......................................................................................... 37

Market Overview ............................................................................................................... 51

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Table: Net Yield, 2011-2012 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Competitive Landscape .................................................................................................... 65

Company Profile ................................................................................................................ 68

Demographic Forecast ..................................................................................................... 79

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BMI Industry View

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SWOT Analysis - Continued

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SWOT Analysis - Continued

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SWOT Analysis - Continued

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Table: Forecast Rents - (USD per m2/month)

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

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BRIC-Like Potential To Attract The Sights Of Regional Consumer-Facing Players:Longer term, it

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Table: Forecast Rents - (USD per m2/month)

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

2010 2011 2012 2013 2014 2015 2016 2017

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Table: Forecast Rents - (USD per m2/month)

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Construction And Infrastructure Forecast Scenario

Industry Forecast Scenario

Table: Indonesia Construction And Infrastructure Industry Data, 2011 - 2016

2011 2012e 2013f 2014f 2015f 2016f

Total capital investment,

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Indonesia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

Residential and Non-

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Indonesia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

e/f = BMI estimate/forecast. Sources: Statistics Indonesia, UN, BMI

2017f 2018f 2019f 2020f 2021f 2022f

Total capital investment,

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2017f 2018f 2019f 2020f 2021f 2022f

Residential and Non-

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