Lured by Indonesia’s robust and resilient economy and positive business outlook, many foreign and international companies have flocked to the country to join the band of existing companies, which have enjoyed tremendous growth over the past several years.
This trend has been clearly evidenced by the country’s growing level of Foreign Direct Investment (FDI) during the past three years. According to the Indonesian Investment Coordinating Board (BKPM), FDI steadily grew between 2010 and 2012 by an average of 32% per annum. Last year, Indonesia’s total FDI increased by 36% to approximately USD 24.6 billion (this figure from BKPM does not include investment in the oil & gas, banking, insurance and household industries).
Aside from mining, which has been the most attractive sector (accounting for approximately 17.3% of the total FDI in 2012), most of these new investors have been attracted to sectors that are directly connected to the country’s huge and growing middle class, such as the transportation, telecommunication, logistics, pharmaceuticals and automotive sectors.
With the growth of FDI, the demand for industrial land has also increased significantly during the past three years. Between 2010 and 2012, the net absorption of industrial land in the area of Greater Jakarta averaged around 600 hectares per annum, which is about six times higher than the annual absorption seen during the period between 2000 and 2009.
Consequently, prices of industrial land have also increased. The average industrial land price in the area of Greater Jakarta rose by a CAGR of 50.5% between 2010 and 2012, which is 14 times the CAGR of 3.6% recorded between 2000 and 2009. Currently, the price for industrial land in the area of Greater Jakarta averages at around USD 124 per sqm. Popular estates with good access and infrastructure can fetch as high as USD 150 per sqm to USD 200 per sqm.
While Indonesia has continued to attract foreign companies to relocate or establish their production facilities within the country, there is growing concern over the increasing cost of land that could potentially hamper future market growth. Reportedly, some investors have expressed concerns about the industrial land prices, which are expensive compared to some other countries in the region. Based on anecdotal evidence, the price of acquiring a site for a factory in the area of Greater Jakarta is estimated to be around 10-15% of the total initial investment, while in some other Asian countries, the costs of acquiring land are only about 5% of the initial outlay. As such setting-up a factory in Indonesia may not be as appealing.
With the country’s robust economic growth and strong domestic demand, we believe that investors will continue to be strongly interested in building manufacturing facilities and the demand for industrial land will likely continue to grow in Indonesia.
About the author
Anton Sitorus is the Head of Research for Jones Lang LaSalle in Indonesia.