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ESG investment may offer a viable solution to the problem staring Gen-Z in the face

  • Between March and September 2020, official statistics indicated an increase in the national poverty rate from 9.78% to 10.19% - effectively turning back three years of progress in poverty reduction.
  • Increasingly foreign buyers, especially from China, have spotted investment opportunities in the Indonesian real estate market.
  • The implementation of relaxed foreign ownership regulations will most likely gain the Indonesian market - something the Indonesian government has promised throughout last year.

Indonesia has made massive gains in poverty reduction prior to the COVID-19 crisis and was able to maintain consistent economic growth. The country qualified to reach upper middle income status, but for the 2022 fiscal year Indonesia has been classified as a lower-middle income economy with an estimated per capita income of $1,046 to $4,095 using the World Bank Atlas method.

Decent housing is one of the focal points of the UN’s Sustainable Development Goals. Functioning economies need functioning cities, yet in many major metropolitan centers property remains out of reach for most. One can expect to pay an average of $3,741 per square meter for title apartments in Jakarta CBD while in south Jakarta the price per square meter averages at $2,808. The average annual income in Indonesia hovers around the $17,519 mark and despite significant economic growth, World Bank data indicates that more than 28 million Indonesians are living below the poverty line.

In an effort to help mitigate the impact of COVID-19 on the existing housing crisis the Indonesian government, in April 2020, announced a housing stimulus for individuals earning less than $552 per month (Rp 8 million), who do not have a house and never received a subsidy. The greater majority of Indonesians end up being excluded from this much-needed grant as they earn an average monthly income of $1459.

A significant and growing shortfall of housing thus exists in bigger cities and the existing supply for the mid-class housing market tends to be poor in quality as demand is rising for new units. However an ESG-driven approach to investing in residential property might help address the affordability crisis, along with the benefits it brings to the neighborhoods it serves and the broader fight against climate change.

Why is ESG important to the housing sector?

ESG is an acronym that has popped up a lot in the social housing sector and refers to a way of measuring the performance of an organisation in terms of its environmental and social impacts and risks as well as the quality of governance. The corporate world has been developing ESG strategies and reports for many years and investors have become increasingly adept at using these reports to determine suitable investment opportunities.

The issue with housing affordability is one of cognitive dissonance. Conflicting attitudes, beliefs and behaviors make it hard for investors to equate the abstract idea of property investment with the very real and tangible notion of real estate as a home that people live in. Many high-end property buyers are investors who buy for the purpose of capital gain, which pushes property prices up further out of the reach of the middle class.

Casting wider investment nets

The narrative in Indonesia is an interesting one. Offering some of the cheapest real estate in Asia, with the price per square meter in Jakarta’s business district up to 55% less than that of Bangkok, an increased inflow of foreign property inventors are snapping up properly.

According to Colliers International the Chinese invested around $169 million in the Indonesian property market during 2017. The Indonesian Investment Authority made headlines recently by omitting China from their sovereign wealth fund, economist Esther Sri Astuti with the Jakarta-based Institute for Development of Economics and Finance, shared the reasoning behind this move: "Indonesia is also looking to diversify its portfolio to reduce the risk and collect more investments by approaching other countries," she said. "Anti-China sentiment in Indonesia remains huge, too, so that makes the government look at countries other than China."

Helping Gen-Z on their feet

Steve Suryadinata, Co-owner of BSA Land and Co-founder of Mata Investments, holds a fresh view, stating that, “Typically, property developers want to be associated with luxury and prestige since this is the best way to build your brand. We look at it from a different angle and believe that there is a bigger impact that we can contribute to, by providing high-quality homes at affordable prices to millennials, young families, and newly-weds instead because these are the demographic that are looking to settle down or get a place of their own.”

By transforming their target market and strategy, the Indonesian-based property developer was able to successfully navigate it’s way through the pandemic while targeting the massive housing backlog in the country, successfully building more than 20,000 residential and commercial units which are highly affordable. These efforts have positively contributed towards the daily lives of nearly half a million people that live, trade and work in BSA Land developments and serve as a shining example of how property developers and investors can overcome the issue of cognitive dissonance without impacting the bottom line negatively.

ESG real estate investing has been one of Mata Investment’s top performers in their portfolio, seeing ample gains after starting with an initial seven-digit investment in BSA Land back in 2015. Their successes has allowed them to continue on with various projects across Indonesia as co-investors and has also given them hard-earned recognition.

"We are thrilled to learn that we have won multiple awards from Real Estate Asia. We are especially honoured that our work to reduce the housing backlog in Indonesia has not gone unnoticed by the international panel of judges," said Steve Suryadinata.

Summary

With low property prices, an increasing middle class, political stability and the upcoming completion of mega infrastructure projects, Indonesia has the potential of becoming a hub for foreign investors, however development needs to be weighed against the housing and affordability needs of the people.