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3 AUG 2018

Cracker Jakarta

Office supply in the Indonesian capital is threatening to outstrip demand, but as one dominant sector declines, another emerges.

Emerging relatively unscathed from the global financial crisis, a subsequent construction boom in Indonesia has resulted in unprecedented volumes of supply in Jakarta’s office market. Office volumes reached a record level in 2016, and JLL reports that completions of around 785,000 m2 (8.45m ft2) by the end of 2017 will fulfil roughly half of the 1.6m m2 (17.2m ft2) expected to be delivered up to 2021.

Once dominant in the office market, over the past two years, oil, gas and mining firms have been rapidly downsizing their office operations, due to a commodities downturn. Increasingly, demand is now coming from firms in Indonesia’s booming tech sector.

"Jakarta is an attractive place to do business," says Elliot Hawkins MRICS, Associate Director of Markets at JLL Indonesia. "The country has more than 5% GDP growth per year, there is a young population with a median age under 30, and Indonesia’s e-commerce market is on track to being one of the largest in Asia."

According to JLL, e-commerce firms are among the most active industries in Jakarta’s central business district (CBD), with growing numbers of online travel booking firms, “fintech” payment companies and gaming start-ups requiring space. In August 2017, Facebook also opened a large, permanent office in the city.

"The tech sector is still in its infancy here, so the potential is huge," says James Taylor, Head of Research at JLL Indonesia. But, with occupancy falling, does this mean tech firms will pick up the slack in the office market? "Only to an extent. We don’t expect these firms to take up all of the 1.6m m2 that’s in the CBD pipeline. But if Jakarta catches up with other markets in Asia-Pacific, technology occupiers could lease an additional 750,000 m2 [8m ft2] of space by 2021, which is not unthinkable given that demand from tech firms represented around 15% of total market demand over the past year," explains Taylor. As well as a huge shift in demand from oil, gas and mining sector operators to e-commerce and tech sectors, many occupiers are taking advantage of excess supply of new office space to upgrade from older properties. "This is a challenge for existing landlords," says Hawkins, "but it’s an opportunity for occupiers as rents continue to decline."

Willson Kalip MRICS, Country Head at Knight Frank Indonesia, explains that for an increasing number of e-commerce technology companies entering Jakarta, efficiency — in terms of occupancy costs, strategic location, excellent supporting facilities and proximity to public transportation — is paramount. "Many are also looking outside the CBD at present, particularly new and young start-up companies," he says.

The rise of co-working

Young companies want informal and flexible office concepts too, such as co-working spaces equipped with a super-high-speed internet access, where young tech professionals can exchange ideas, collaborate and grow. Co-working is a relatively new idea in the country, and although it is more associated with "shop house" type buildings or grade B and C offices, JLL says this is beginning to change as international co-working firms increasingly explore options in the new-build market.

Among the more recent examples of high-quality co-working developments is the Salim Group’s partnership with Singapore’s National University on Block71, an incubator and co-working space in Kuningan, South Jakarta. Meanwhile, in Bumi Serpong Damai in the Greater Jakarta region, developer Sinarmas Land is constructing a $525m digital hub, which "aims to connect start-ups, technology leaders and digital communities" on completion of its first phase in 2019. The scheme has already attracted tech firms such as Apple, Huawei and IT services firm Dimension Data to consider taking space.

However, Indonesia is the world’s fourth most populous country, and Jakarta is notorious for its traffic-clogged streets. Therefore, improving public transport will be key for attracting workers. "The city desperately needs to improve its infrastructure to get people moving, because with the current growth in vehicles in the city, we will not have any movement on the road in 2019," says Natalia Pujiyanti MRICS, Director at Arcadis Jakarta.

Jakarta on the move

The completion of phase one of Jakarta’s Mass Rapid Transit (MRT) programme in March 2019 should begin to alleviate some of the city’s traffic gridlock. According to CBRE, the real estate sector is also expected to be a significant beneficiary, with land prices along the new MRT lines and in close proximity to stations already rising significantly. So, change is happening quickly. Furthermore, over the next few years, Jakarta’s office market will have to prepare for another major upheaval – losing its capital city status.

In July 2017, the government announced a plan to relocate Indonesia’s capital away from Jakarta, with preparations beginning this year. Although the idea has been in gestation for several decades, if implemented, it will have a seismic impact on the real estate sector, both in Jakarta and in the location of the new capital.

Nevertheless, it will still take at least three to four years to construct the basic infrastructure and government buildings at the new capital, which has yet to be officially announced. "Investors, developers and occupiers should stay attuned to developments relating to the relocation," advises Jonathan Hills, Director of Asia-Pacific Research at CBRE, "particularly as land prices are likely to surge dramatically within a short period of time."

This is an extract from Modus Asia edition, Q2 2018