01 February 2008

Affordable Apartments in Indonesia

The Government has taken the initiative and decided that one way to promote prosperity in Indonesia and to rid urban areas of their slums is to provide low-cost apartment housing for the masses. This is a two-pronged attack where the prongs represent housing for civil servants and then housing for everybody else.

It seems that the rationale is that happy workers are productive workers and happy workers need happy housing.

With space being a premium in Indonesia's bigger urban centers it is going to take some creative accounting, financing, and incentives to get developers into the game and people into the low cost apartments that the developers build. It reminds me of Kevin Costner in 'Field of Dreams' and the ever-present whisper of 'if you build it they will come'. Hopefully, real life follows the fantasy world of film because Kevin Costner did end up building that baseball field in the middle of his corn field and they, being long dead baseballers, did come!

There is plenty being written and there is plenty of active discussion on the low cost apartment topic. But what is truly amazing is the assumptions that commentators are making about the cost-effectiveness of developing and building low cost housing or apartments for the developers. There is little or no discussion on whether once a low or middle income earner purchases one of these cheap apartments whether or not they will be able to maintain the costs associated with keeping it.

For example, Kompas (p. 52 01/02/08) ordered up their financial wizards to crunch the numbers and not surprisingly found that developers could in fact make a profit on the development of low-cost apartments. The issue is probably not as simplistic as whether or not one would make a profit but rather whether company resources could be used elsewhere and generate even bigger profits. The sad but true answer to that question is yes. When it is all said and done the company's responsibilities are to their shareholders. Shareholders want to see increases in the value of the equity they invested. And this exponential equity value increase is going to be seen at the top end of town and not down the bottom.

Perhaps the Government could allow companies to satisfy their Corporate Social Responsibility obligations by participating in the development of a low-cost apartment scheme.

My other concern is that one of the rationale behind this policy initiative is to reduce the number of slums and other non-formal residential eyesores that dot Indonesia's urban landscapes. Yet, I have always wondered how this might happen as your run of the mill slum dweller is not living where they are because of choice but rather because of lack of choice. Simply, this is the best they can afford. Even if the Government was to subsidize this low-cost housing and apartment sector to keep it affordable the reality is the inhabitants of Indonesia's burgeoning slums are not going to be able to afford to purchase even a low-cost apartment.

The truth is that Indonesia needs to create jobs and with income people will be able to get into the market because they will be able to borrow to finance their apartment purchase. Oops, I made an assumption, I assumed that banks would lend money to a low or medium income earner -- not the case. A bank has no moral problem with throwing credit cards at low income earners and getting them into the perpetual debt cycle of paying off minimum balances...but lend money to a low-income earner and allow them to develop equity, not in this lifetime.

There is no doubt that the Government must take the lead and initiative in this sector but it must do so by putting into place a regulatory framework that not only supports developers but also those people who are the targets of the initiative; those that are going to buy into this segment of the apartment market. Without incentives or facilities this is just another round on the lip service merry-go-round that the Government wheels out when it needs to be seen to be trying to do something...

But this must be read in conjunction with the fact that the Parliament has recently authorized an additional payment of IDR 13 million a month to all of its members to cover accommodation costs while their official residences are renovated -- two points here; this is objectionable when one considers the salaries and allowances already paid, and second on a more personal note, this is more than I earn in a month...Is the Government serious, you decide!

The dream of owning your own home or apartment in Indonesia remains just that for the majority; a dream!

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