Understand the real estate market in Indonesia and learn how you can mitigate risk while investing. Umar Munshi explains what are the important aspect.
I shuttle monthly between Kuala Lumpur – Jakarta – Singapore, to lead and align our different teams. Ethis (short for Ethical & Islamic) is a real estate technology company focused on crowd-investment in Social Housing Real Estate Development Projects in Indonesia. We also have a licensed Real Estate Development company in Indonesia, owned by our partners in Singapore alongside our local partners. Together, we’ve built a project-financing ecosystem that empowers ordinary people to invest alongside institutions and larger investors in Social Housing Development Projects in Indonesia. I’ll share more on this later.
I am not (yet) a Real Estate Expert, having been actively involved in the industry only for the past 3 years. But I am incredibly fortunate to be surrounded by partners, collaborators and investors who are domain experts in Real Estate investment, and doing business in Indonesia. And I continue to learn from them as much as I can. I gain invaluable insights directly from on-the-ground business owners and developers, as well as from Real Estate Investment and Project Management professionals at the top of their game. This helps me to develop a wider perspective and understanding of investing in Indonesian Real Estate.
Prior to setting up Ethis in Singapore, I had lived in Jakarta for 7 years at my earlier health-tech startup. At a young age, I delved into the Indonesian business world, observing the country develop rapidly, bringing incredible opportunities rarely found in today’s slow global markets. A decade later, I am more excited and amazed about Indonesia than ever. In fact, the investment climate has been further enhanced by a prolonged period of socioeconomic stability and strong growth.
However, there are real challenges and potential pitfalls that the unaccustomed investor, especially foreign investors, need to be aware of. There is also a need to understand and adapt to local methods and customs, as well as manoeuvre legal and tax matters.
In this article, I will highlight 2 points to consider, with more points in Part two of this article.
- Carefully select your preferred Real Estate investment activity.
Investors should only invest in activities that match their expected returns, risk appetite, time horizon and ethical considerations. Real Estate Investment is wide, with many very different activities, depending at which stage your investment comes in.
Investors with longer time-horizon may be suited to the early stages of real estate pre-development, in activities such as land banking. The most common investment is to purchase properties for future sale or rental. The key to success here is to get a good price and payment terms. This however typically requires a sizeable investment upfront, and is a huge long-term commitment that most individuals may not be able to take up. Some try to buy and sell quickly, or ‘flip’ properties. This can be highly risky is highly dependent on timing the market, which can be unpredictable.
Real Estate Development is a highly lucrative business. In any country, the biggest companies will include real estate developers. Ethis is focused on helping both small and large investors to invest in the development and construction real estate. Real Estate development can be simplified as such: acquire land, add value by obtaining permits and building physical structures, and finally sell this asset. Essentially, developers add and create value, then sell it at a profit. This is a model that makes a healthy, sustainable and stable quality investment. It is important to also note that the selling price is set by the market. If the market is poor, then holding power is required to wait for recovery and better prices. Thus, time is the main factor for investors to consider. Real estate development can be highly profitable, structured fairly to mitigate risk, and have the element of being asset-backed.
The obvious barrier to most investors is, of course, the high capital required. The smallest development project of a single landed house in Singapore will cost half a million dollars. Crowdfunding allows for this capital barrier to be broken down and shared by many. Ethis focuses on bringing our global investment community to invest together in affordable housing estate developments in Indonesia. A project with 500 houses will have a total value of around US$5million. Since we work only with reputable developers with access to their own funds and facilities from Islamic Banks, our proven model will need the crowd to provide only short-term finance of a total of around US$500,000 for these developers. Imagine that, with just US$500,000, shared by a group of crowd-investors, we can co-invest with established developers, high network individuals and Islamic Banks to develop 500 houses for the needy!
On the ground, of course, there is a lot of expertise and experience required to run a successful development project, especially in a unique country like Indonesia. This links to my second point:
- Good Project Partners are Key
Experience and Track Record is incredibly important, and everything aspect needs to be directly and properly verified. Project owners and partners must have proven themselves not only in Real Estate in general, but more specifically in the same segment as the project, and in the region or area of that project. There are many variances and differences in different projects based on geography and type of real estate, that one project owner may be familiar with yet another may have no clue about!
Also incredibly important is to have trust and leverage with the project partner. Trust is something that takes time to build, and experiences to strengthen. Trust can also be established through connections, a circle of trust, or ‘second-hand’ trust. This, of course, has inherently higher risk though.
Leverage is also important, to be able to negotiate on equal footing, or to ensure that investor’s rights are taken care of. Typically, leverage for investors is closely linked to the size of the investment. A small investor will have lower leverage than a large investor. In reality, small investors may not even be allowed on the negotiation table. This is a core matter that crowdfunding solves for small and medium-sized investors. When a group of investors come together, we have a larger amount of capital, and at the same time, we also have the potential to bring in much more money. This is powerful leverage.
[to be continued in Part 2]