CLSA INDO: SE Asia property - a period of strong growth

Did you know that Jakarta properties give you yields of 11.27%, the second highest in Asia after Ulan Bator?

A great piece today from Nick Cashmore on SE Asia’s property sector. There is good value in SE Asian residential property. We believe Asean property markets are set for a period of strong growth.

Something is going to give for sure. Its either that rental rates will crash or capital value will explode. My bet is on the latter. I am convinced that we are in the beginning of a big property boom in Indonesia. Reading our new 150 pager Retrovision Report (on HK property) over the weekend, the first striking similarity between Hong Kong in the 1970s and today's Indonesia property market is the strong underlying housing demand, which is underpinned by a low homeownership ratio, low leverage and income growth as the middle class population builds up. Interesting to note that home ownership in HK was less than 20% in the early 70s and that local bank (Hang Seng) offered what was considered a groundbreaking mortgage product. It was a 7 years mortgage rather than the average of 3 years! In comparison mortgage leader BCA now offering 2 - max 5 years mortgage product.

I am not saying Indonesia will reach HK prices. All I saying is prices can easily double from here but still it would be cheaper compare to Thailand, Cambodia, India. Top end luxury apartments here go for US$2,500psm compare to the jaw dropping prices of $100,000psm recently fetched in HK. Its not a typo, it is a staggering 40x more.

A combination of record low interest rates and low leverage, rapid urbanization, and young population will no doubt propel Indonesia property prices. Indonesia property companies will be the big winners. We learned from our Retrov report that the single most important factor to success of the biggest developers in HK today was their vision to acquire vast landbanks in the 1970s (mostly for close to nothing through letter Bs, rights to convert agricultural land) Major players in Indonesia such as Summarecon, Ciputra Dev, Bumi Serpong owns land banks (also bought for close to nothing as they were barren land) that could last them for a decade. Note that NAV calculation of Indo property companies is valued conservatively at replacement cost of landbank Vs DCF of future development used in developed markets. Cash flow leverage on higher prices could have a massive impact to the valuation.