Indonesia Real Estate (NEUTRAL) Sector Update: One Step Forward - Daily Pack 30 April 2014

Good morning,

Indonesia’s housing ministry just announced a new regulation on liquidity facility of housing finance (FLPP). The highlighted changes: i) subsidised houses are now priced by provinces, whereby average prices have increased by 34% to IDR113m-185m per unit for landed houses and IDR284m-562m per unit for flats, ii) an increase in borrowers’ maximum income to IDR4m from IDR3.5m for landed houses and to IDR7m from IDR5.5m for flats.

What’s new:

       Necessary changes. Under the new rule, subsidised houses are now priced by provinces as opposed to by regions previously (ie 1,2,3, and special region). Prices have also increased by 34% on average to IDR113m-185m per unit for landed houses, from the previous IDR88m-145m per unit. Prices of flats (apartments) have also adjusted to IDR284m-562m per unit from IDR216m. The flats’ price range per sq m has also widened to IDR6.9m-15.7m from IDR6m.

       The maximum income of the borrowers has also increased to IDR4m  from IDR3.5m for landed houses and to IDR7m from IDR5.5m for flats.

       However, what is missing from this new regulation is the free-input value-added tax (VAT), although the public housing minister is currently seeking tax incentive approval from the finance minister.

Our view:

       We are positive about this new rule as this is one step forward by the Government to spur the realisation of FLPP or the mortgage subsidy program. Note that from 2010-2013, the realisation of housing purchase facility through FLPP was at IDR11.8trn, with only 285,050 housing units built out of The National Medium Term Development Plan (RJPMN)’s target of 1.35m subsidised housing units. This low realisation is mainly due to a lack of supply for low-cost housing, with the development of new low-cost housing being hindered by rising land prices. Based on our calculation, gross margins from subsidised houses can only reach up to 20% due to a cap in housing prices. Through increasing the prices by an average of 34%, low-cost housing developers can now profit from a reasonable margin of 30%. Yet, we believe this new rule is still subject to future revision as prices of housing remain capped, with unit price being based on construction cost while a major cost component like land acquisition is susceptible to significant price increase.

       We believe that Ciputra Development (CTRA IJ, BUY, TP: IDR1,370) is a company under our coverage that will benefit from this regulation. Ciputra formed joint operation projects with Hanson International (MYRX IJ, NR) to build 20,000 low- cost housing on 500ha of land in Maja Raya, Banten, where the company is expected to generate a conservative sales value of IDR99bn.  (Lydia Suwandi)

ON THE PLATTER:

Bank Negara Indonesia (BBRI IJ, BUY, TP IDR5,600) Results Review: So Far So Good

Bank Tabungan Negara (BBTN IJ, SELL, TP IDR1,100) Results Review: That Familiar Feeling

Ramayana Lestari (RALS IJ, NEUTRAL, TP IDR1,350) Results Review: No Excitement

FROM TRADING DESK: JCI today is expected to be traded at 4,831.6 and 4,877.06.

MEDIA HIGHLIGHTS:

Indofood Sukses’ 1Q14 earnings achieved IDR1,373bn (+90.3% y-o-y), above expectation

Indofood CBP’s 1Q14 earnings reached IDR689bn (+7% y-o-y), in line

Express Transindo booked IDR182bn revenue and IDR28.7bn core profit in 1Q14

Deflation in April and Minimum Risk from El-Nino going Forward

Global FDI Recovers in 2013

Best regards,

RHB OSK Indonesia Research Institute

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