If you rented a high-end apartment or leased premium office space in Jakarta today, the chances are that the figure on your contract would be in US dollars (USD). While the Indonesian economy is not fully dollarised, all manner of corporate business transactions are conducted in USD – but this is set to change on July 1st. Bank Indonesia has outlawed domestic foreign currency transactions from 2H15 onwards and we understand that the regulations will be implemented in the property market as follows:

• Existing USD contracts signed before July 1st will remain valid.
• Renewals signed in USD should be re-agreed in rupiah (IDR) terms; probably using the market exchange rate at the beginning of the renewal term.
• From July 1st onwards (likely before), landlords will quote in IDR.

With regard to point three, however, in researching second quarter data, it is interesting to note that many landlords have yet to make the switch despite the looming cut-off date. The possible impact of the new regulations on the property market could include:

• Increased volatility as the stabilising effect of the USD is removed.
• Rising rents as landlords attempt to offset currency risk while the rupiah continues to depreciate.
• Expanding yields on the back of an increase in perceived risk.

Regulatory changes are also afoot in the residential market. In an attempt to boost tax revenue, the super luxury tax price threshold in the primary market has been reduced from IDR 10 billion to IDR 5 billion. However, fears that this would be the first part of a one-two punch combination of regulatory changes have been allayed by the announcement that there will be no changes to luxury (as opposed to super luxury) tax measures; at least for now. This announcement is likely to restore some confidence in the luxury residential market which had come to something of a standstill on the back of uncertainty surrounding regulations.

But is there a way of boosting tax revenues without impacting primary sales volumes? Taxation in the secondary market is commonly based on Nilai Jual Objek Pajak or NJOP. This is a government-estimated value which is usually much lower, sometimes by as much as 50%, than the transaction value. If secondary market taxes were based on actual transaction amounts, tax collections would be much higher.  JLL believes that this could be a more effective tax policy. Implementation would be more challenging, but tax collections would probably be more significant.

We cover the Jakarta high-end residential market for REIS, our subscription data and forecasting service and second quarter data is likely to give some clues as to where the market is heading in light of regulatory changes.

Check out my next blog which covers the 'doom and gloom' forecast in Indonesia.