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Indonesia Logistics – Fast Track or Derail?June 2016

“The Arnott’s business in Indonesia has grown rapidly over the past five years to the extent that modern logistics warehousing and supply chain management are now a critical part of our business”.

Larry Crowley, Supply Chain Director Campbell Arnott’s Indonesia

Introduction

The world’s fourth most populous nation and largest archipelago is also South-East Asia’s largest economy. In the burgeoning logistics sector, opportunities are plentiful but many of these opportunities are intrinsically linked to the unique challenges that Indonesia poses.

While a number of high profile infrastructure projects are already underway, Indonesia’s sheer scale and archipelagic nature is such that delivering goods to far flung corners of the country remains time-consuming and costly. Logistics players looking to enter Indonesia also need to navigate issues pertaining to regulations, land ownership and restrictions on foreign investment. The nascent nature of the logistics market is such that modern warehouse facilities are very limited meaning build-to-suit is often the only viable option for market entrants. The e-commerce sector, flourishing in many global markets, remains relatively underdeveloped in Indonesia, hampered by regulatory challenges, infrastructure and payment issues.

There is a clear and compelling case for logistics real estate in Indonesia despite a myriad of challenges. In this paper, we examine the current state of the Indonesian logistics market including its challenges and opportunities; identify the easiest route for investors; and recommend the next steps to transform Indonesia into a world class global logistics hub.

Indonesia is by far the largest economy in Southeast Asia.

USD 1.02 trillion

USD 2.62 trillion

USD 0.75 trillion

USD 0.68 trillion

USD 0.51 trillion

USD 0.44 trillion

2.8%GDP growth

2.0%GDP growth

5.8%GDP growth

5.0%GDP growth

Indonesia

Thailand

Malaysia

Phillipines

Vietnam

Singapore

6.7%GDP growth

Real GDP

4.8%GDP growth

Indonesia

Philippines

Vietnam

Thailand

Malaysia

Singapore

= 10 million people

= 258 million

= 101 million

= 93 million

= 68 million

= 30 million

= 6 million

Source: Oxford Economics, “Global Economic Databank”, April 2016Note: GDP growth rate refers to real GDP/LCU annual growth in 2015. GDP relates to real GDP/PPP/USD.

Southeast Asia - Economic Scale and Growth

Population - World Top Four

Southeast Asia Population Ranking

The Potential Opportunity

Economic Growth and ScaleRecent disruptions in the commodities markets hit the Indonesian economy hard, but as government spending began to pick up in 2015, economic growth started to improve and Indonesia remains the largest economy in Southeast Asia or 16th globally.

Annual GDP growth has averaged 5.8% over the past 10 years and historically, domestic consumption has driven the national economy. Whilst the Asia Financial Crisis in 1997 sent shockwaves throughout the region and it took some time for the economies to recover, Indonesia weathered the global economic turmoil in 2008 better than most neighboring countries due to domestic demand. The current administration is now spearheading a shift to further stimulate growth through investment.

Source: Oxford Economics, “Global Economic Databank”, April 2016 & World Bank, “Population Ranking”, 2014Note: Population refers to millions of people.

A Large, Young and Growing PopulationIndonesia is the world’s fourth most populous nation and is growing at a faster rate than China. Average annual population growth over the past ten years came in at 1.3%; slightly lower than that in India (1.4%) but more than China (0.5%) and has outpaced neighboring Thailand (0.3%) and Vietnam (1.0%). It also boasts the largest population in South East Asia.

In terms of the working age population, a similar trend prevails. The 15 to 64 age group in Indonesia has grown by approximately 25 million people over the past ten years, with growth of a further 20 million people expected over the coming decade. By 2025, Indonesia’s working age population is expected to total more than 190 million. This large growing population provides the backdrop for organic growth in demand for a wide range of retail products and in turn strong demand for warehouse space and logistics services.

Indonesia is the 4th most populous country in the world, and the largest in SEA with 258 million people.

INDIA = 1,313 million USA

= 319 million

CHINA = 1,377 million

INDONESIA = 258 million

Indonesia Logistics – Fast Track or Derail? 3

Percentage of Population Living in Urban Areas

Middle Class and Above as a Percentage of the Population

Source: Oxford Economics, “Global Economic Databank”, April 2016

Source: The Boston Consulting Group, “Asia’s Next Big Opportunity: Indonesia’s Rising Middle Class and Affluent Consumers”, March 2013

UrbanisationIt is well documented that urbanisation has been one of the key contributors to economic growth in China. Over the last ten years Indonesia has been urbanising at a similar rate to China, up 37% over that period. Whilst the growth in China’s urban population is expected slow to 21% over the next decade, Indonesia shows no signs of slowing down. Average annual urban population growth of 3.2% over the next ten years is expected to mean an additional 53 million people will be living in cities by 2025.

The higher wages achievable in cities supports demand for consumer goods and, thus, the need for more modern logistics space.

Indonesia has a larger urban population than many of its regional peers.

55%Indonesia 48%

Thailand 45%Philippines

33%Vietnam

Growing WealthAs the economy continues to expand, people are becoming wealthier. Indonesia’s middle class is growing fast.

An expanding middle class and an increasingly wealthy population should further boost consumption.

The Indonesian population is becoming wealthier and consumption is expected to increase. By 2020,

more than half of the population is expected to be middle class or above.

30%Middle and above

70%Below middle

53%Middle and above

47%Below middle

2012 2020

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Demand for logistics space driven by…Healthy Growth in FMCGs and RetailUrbanisation and growing wealth is already translating into growth in the FMCG sector and retail sales.

This will increase the appeal of the logistics real estate market to a broader spectrum of modern international logistics players.

Indonesia has a robust manufacturing sectorIndonesia has a large manufacturing base driven by a large domestic consumer market and low labour costs. The robust manufacturing sector is another major driver of demand for logistics services and associated real estate. In 2015, manufacturing accounted for 22% of GDP.

Source: Manufacturing Industry Indonesia Contributes 18.1% to GDP. (2016, February 23). Retrieved April 27, 2016, from http://www.indonesia-investments.com/news/todays-headlines/manufacturing-industry-indonesia-contributes-18.1-to-gdp/item6527

Food & Beverage represents 30% of Indonesia’s total

manufacturing output.

30%

Shoppers are spending 41% more per trip today than they did in 2013.

Source: Kantar Worldpanel, “FMCG Monitor”, Full Year 2015

Increase in Food and Beverage Spending (2014 and 2015).

14%Food

spending increase

12%Beverage

spending increase

15%Dairy

spending increase


E-commerce The Indonesian population has a large online presence. Internet and mobile internet traffic has increased significantly.

While the e-commerce phenomenon has taken hold in many other markets in the region, the sector is still in its infancy in Indonesia and the potential future growth also presents an opportunity.

67%45%

67%45%

As a result MAP – a large retail group with more than 150 brands under its umbrella in traditional brick-and-mortar retail - is currently making an online push as is local department store operator Matahari which forms part of the Lippo Group. Despite this, several major international e-commerce firms including Amazon are not yet in the market. As these international groups enter the market, we are likely to see further growth in the e-commerce sector.

Successful e-commerce businesses require scale – which Indonesia is able to offer, so we expect this sector to develop considerably over the short to medium term.

In April 2016, Alibaba announced it would pay approximately USD 1 billion for a controlling stake in Singapore e-commerce start-up Lazada – Indonesia’s number one online retail platform – citing growth prospects in Southeast Asia.

In April 2016, Alibaba announced it would pay approximately USD 1 billion for a controlling stake in Singapore e-commerce start-up Lazada – Indonesia’s number one online retail platform – citing growth prospects in Southeast Asia.

Source: Bank of America Merrill Lynch, “Consumer Products – Indonesia, Bricks and Clicks: e-com an opportunity for offline retailers and telcos”, November 2015

Indonesia = 47%

India = 34%

China = 21%

USA = 14%

E-commerce growth to outpace other major countries.

Online retail sales as a proportion of overall retail sales are growing, as are the number of online digital buyers.

Infrastructure improvements, economic development, market entrants and the expanding middle class drive this growth.

experienced

Internet Usage: 2010 to 2015 Mobile Phone Ownership: 2010 to 2015


Compounded Annual Growth Rate of E-commerce (Total Market Size): 2015-2018

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The logistics sector is evolving…Modern logistics remains largely underdevelopedIndonesia lags behind other markets in the region in terms of infrastructure, legislation and open market practices that are required to be a world class logistics hub. A market where real estate operators can quickly support and adapt to the demands of the modern world of e-commerce and FMCGs.

The logistics sector in Indonesia remains nascent in comparison to other markets in the region, particularly compared to more mature markets such as Singapore and Australia. Notwithstanding this, the growth potential is huge and there are signs of a fundamental imbalance between available supply and demand for modern logistics warehousing space. We expect to see the Indonesian logistics market evolve into a modern logistics hub in the same way the sector has evolved in other markets regionally and globally.

Basic local warehouse

market

Modern logistics

hub

Growth in FMCG

Industry

Demand for modern logistics grows

VIETNAM INDIA

Sustained infrastructure development

• Ports• Roads

• Rail

Credit card market

becomes well established

Bureaucratic port clearance times reduced

Legislation supportive of level

playing field between local and

international logistics operators

Online retail becomes established

Local operators adopt best practice

and grow further

Logistics costs fall to a competitive

international standard

AUSTRALIA

INDONESIA CHINA JAPAN SINGAPORE


The logistics sector has seen gradual development in recent times. However, at present most supply chain operations remain largely inefficient, meaning inventories are being held for extended periods of time. Only in recent years has the market begun to evolve from the traditional ‘gudang’ style of warehouse to modern logistics warehouse building specifications which allow for far greater efficiency.

Progress is being made, led primarily by international FMCG and 3PL groups. Approximately 20 years ago, the supply chain in Indonesia was fairly basic. Up until the 1990’s one of the major international FMCG groups manually handled all goods being distributed in Indonesia. This same group has since outsourced to an international 3PL and the logistics operation has evolved to include one of the largest modern logistics distribution centers in the ASEAN region, with over 90,000 sqm of fully racked GFA and located in Cibitung, Greater Jakarta.

Warehouses are evolving to keep up with this demand.

Structure

Clear height

Loading docks

Floor loading

Modern FacilitiesSteel Structures are preferred with low costs and fast construction periods

At least 9–12 metres or higher as a single-storey building

Multiple loading docks available with hydraulic devices

At least 3 tonnes per square metre

Legacy Facilities

Masonry-concrete, masonry-timber and reinforced concrete structures are often used

Approximately 5 metres to 6 metres

No or limited docks available

Landlords do not calculate floor-loading data. This can result in floor depression if goods are stored beyond the loading limit

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Options for investors to increase as the market maturesAlthough the market remains immature, there are multiple avenues for investors and developers looking to gain exposure to the logistics sector in Indonesia. Investment groups currently showing interest in this asset class include private equity groups, sovereign wealth funds (SWFs) and a range of Indonesian and international property development groups.

These investments are typically made via sale-and-leaseback or build to suit deals with respective occupiers. Such occupiers may include third-party logistics service providers (3PLs), fast-moving consumer goods groups (FMCGs) or e-commerce companies. The Indonesian market is yet to see large scale speculative development of modern logistics warehouse space for lease.

Indonesia’s financial regulator is trying to increase the number of REITs in Indonesia and has proposed policy which includes tax incentives for REITs. However, this new policy has not yet been formalised. If this does eventuate it will increase liquidity in the logistics property market and provide an alternative exit or entry for investors.

Investors Developers,

Private Equity,SWFs, REITs

ExitIPO, REIT, Portfolio/

Asset Sale

OccupiersFMCGs, 3PLs,

E-commerce Cos

Increased Liquidity


Project Profiles

ILC Logistics

Land purchased by 3rd Party Logistics Provider, ILC (part of Itochu Corporation of Japan) and ILC purpose built the facility for logistics use. ILC are currently planning further development of modern logistics warehouse space in the Karawang area.

Location of The Property

Suryacipta Industrial Estate, Karawang Regency, West Java

Building Area 8,767 sqmCompletion Date December 2014Construction Contractor

Indonakano

Tenancy ILC is providing third party logistics services to automotive parts and construction companies.

Marunda Distribution Centre

Modern logistics facility with high building specification and equipped with comprehensive fire protection and IT systems. This investment marks Guidance Investments’ first logistics real estate investment in Indonesia.


Marunda Center International Warehouse and Industrial Estate, Bekasi, West Java

Building Area 11,300 sqm of NLA, land size 15,000 sqm

Completion Date 2010Tenancy International logistics

company

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KLOG Park is a fully integrated logistics park, located in Cibitung, Bekasi Regency, West Java Province, Indonesia. KLOG Park represents one of the first examples of a local Indonesian 3PL developing high specification warehousing. The warehouse was designed by UK design firm, Ashton Smith to international standards.


Cibitung, Bekasi Regency, West Java Province, Indonesia

Building Area 32,040 sqmCompletion Date December 2014Construction Contractor

PT. Sarana Steel Engineering and CoGri

Tenancy Daikin, Campbell Arnott’s, Frisian Flag, Mars, Sari Husada

KLOG Park – Integrated Logistics Park

Unilever Mega Distribution Centre

Delivered on a build-to-suit basis by PT. Mega Manunggal Property, a major Indonesian developer (listed on the Indonesia Stock Exchange) for consumer goods group, Unilever Indonesia.


MM2100 Industrial Estate, Cibitung, Bekasi Regency, West Java Province, Indonesia

Building Area +/- 90,000 sqmCompletion Date 2011Construction Contractor

Multikon

Tenancy PT Unilever Indonesia

On 15th April 2016, Singapore sovereign wealth fund GIC announced that they would enter into a partnership with Mega Manunggal Property Tbk (MMP) with a view to developing up to 500,000 sqm of quality logistics warehouses in the next three years.


But there are major challenges to consider…

Infrastructure is Challenging at BestSame day delivery is already a reality in major urban centres and courier firms offer overnight services between major cities. As such, delivering goods in quick time to the main local markets, while challenging, is already possible. However, the scale and quality of infrastructure in the form of roads, ports and rail networks is undoubtedly a major challenge in Indonesia.

Source: World Bank Group, Trading across borders, 2015

SINGAPORE1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24

29 30 31

25 26 27 28

PHILIPPINES1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24

29 30 31

25 26 27 28

VIETNAM1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24

29 30 31

25 26 27 28

INDONESIA1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24

29 30 31

25 26 27 28

Logistics Costs are HighIn Indonesia, logistics costs constituted 27% of GDP in 2013; significantly higher than the 8% which would be typical in developed nations. Transportation costs for both land and sea are high, creating price disparity around the country and inter and intra-island shipping remains underdeveloped.

8%

Singapore

13%Malaysia

20%Thailand

25%Vietnam

27%Indonesia

The Ports Network is Highly CentralisedDecentralisation is key if efficiency is to improve. Currently, North Jakarta’s Tanjung Priok operates at over capacity and much of Indonesia’s containerized trade is processed in either Jakarta or Surabaya with the former servicing West Java and the western islands and the latter East Java and the eastern islands.

Customs Clearance Times are LongCustoms procedures in Indonesia are plagued by lengthy administrative procedures and bureaucracy. Geographically, the archipelagic nature of the country poses obvious challenges. Trans-shipment currently takes three days compared with just two hours in other more advanced countries in the region.

Logistics Costs as a Percentage of GDP

Source: Center of Logistics and Supply Chain Studies, Institut Teknologi Bandung (ITB), Asosiasi Logistik Indonesia, Panteia/NEA, STC-Group, World Bank, “State of Logistics Indonesia”, 2013

Length of Time to Import: Documentary and Border Compliance (Days)

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The Regulatory Environment is ComplexForeign entrants to the logistics market need to navigate a complex and sometimes prohibitive regulatory environment. Prior to 2007, the storage and transportation sector was fully open to foreign investment. However, the government subsequently revised their negative investment list to prohibit foreign investment in the e-commerce sector and reduced ownership capabilities in the warehousing and distribution sector from 100% to 33%.

In January 2016, as part of a push to boost economic growth, the government announced that restrictions on foreign participation were to be loosened again with plans to increase foreign ownership in the transport and supporting services sector and warehouse distribution to 67% and cold storage and e-commerce to 100%.

However, freight forwarding regulations introduced in April 2015 increased the minimum paid-up investment for foreign freight forward entities to approximately USD 2.5 million. The regulations also limit operations of foreign freight forwarders to five major airports and four major seaports.

Commodities Prices Likely to Hit ExportsDespite cautious optimism on the economy for 2016, some challenges remain. A potential knock-on effect from weaker growth in China remains a risk as does sustained low commodity prices which are likely to hurt export revenues. Fuel subsidies were removed towards the end of 2014 causing inflation to spike over the subsequent year. However, with the impact of the fuel subsidy removed from y-o-y comparisons, inflation dropped sharply from over 7% in mid-2015 to 3.35% by year-end, leaving room for a cut in interest rates in January 2016. Despite this and the raise in US interest rates in December, the rupiah performed better than expected – at least in the short-term.

Increases in Land Prices to Build Logistics Space are Disconnected with Rental GrowthModern logistics warehouses within industrial estates in Greater Jakarta can currently expect to achieve rents in the USD 6-7 per sqm per month range reflecting moderate, single digit annual growth over the past five years. However, in the same period, land prices have grown by approximately 300% in many industrial areas resulting in something of a disconnect between expected and achievable yields.

Large chunks of land owned by industrial estate developers have been drip-fed to the market, effectively limiting land availability and driving price growth. We have already started to see a slight correction in land prices and this could help spur speculative real estate investment activity to take-off.

Industrial Estate Land Sales Avg. Land Price

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015-1H

2015-2H

0

100

200

300

400

500

600

700

800

900

Hec

tare

s

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

IDR

per

sqm

Land Sales and Asking Prices in Greater Jakarta Industrial Estates

Source: JLL Research


Doing Business Remains ChallengingAccording to the World Bank’s “Doing Business 2015” ranking, Indonesia is one the hardest countries in which to do business globally.

Development of Banking and Limited Credit Card Use is Limiting E-commerce GrowthPayment methods pose challenges as access to the formal banking system is limited. Around 36% of the population have bank accounts compared to 79% in China and 53% in India and just 17 million credit cards are in circulation domestically. In order to achieve scale, Indonesia’s e-commerce players need to look beyond traditional payment methods.

While Indonesia’s growing middle class is very much in evidence in the core areas of major urban centres, around 11% of the population remain below the poverty line and 40% live around the poverty line. As such, e-commerce remains a luxury beyond the means of many.

Singapore #1

Malaysia #18

Japan #29

China #90

Indonesia #114

World Bank's "Doing Business 2015" Ranking

Geotechnical and environmental issues Soil and seismic investigation is critical in Indonesia. Certain areas are particularly prone to seismic activity and others have deep layers of soil, meaning the depth of the pilings / substructure required for the building may be prohibitively deep and the foundation costs high.

Locations near river banks or former rice fields may also be prone to geotechnical issues. Also, certain areas are prone to flooding. Therefore, purchasers need to ensure that civil engineers check 100 year flood levels as part of their due diligence.

36%Indonesia

53%India

78%Thailand

79%China

96%Singapore

E-commerce firms may need to look beyond traditional payment methods to facilitate growth.

Source: World Bank Group, “Doing Business 2015, Going Beyond Efficiency”, 2015

Bank Account Penetration

Source: World Bank Group, “The Global Findex Database 2014, Measuring Financial Inclusion around the World”, 2014

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Proposed Government Planning will Assist Future Growth

Spending in 2015 increased by more than 150% on

2011 levels

$

Infrastructure DevelopmentThe government has already started to increase infrastructure spending.

Infrastructure development was touted as a priority at the beginning of 2015, but despite a huge available budget, spending failed to take off in the first half of the year. A cabinet reshuffle in August 2015 boosted accountability and cut red tape, creating a more business-friendly environment. As a result, spending began to gain traction in the latter half of the year. Pro-market policies and rate cuts are likely to boost investment activity. Planned road, rail and port upgrades should improve connectivity and lower costs in the logistics sector.

Infrastructure investment is a priority for the current administration.

ElectricitySupply (GW)

Construction ofnew roads (km)

Toll Road(km)

Railways(km)

Planned road, rail and port upgrades set to improve connectivity and lower logistics costs.220%

71%124%

60%

New airports

Scheduled for completion by 2019.

15

New seaports

24

Source: Ministry of Finance, Indonesia, Directorate General of Budget, Retrieved May 19, 2016, from http://www.anggaran.depkeu.go.id/dja/edef-seputar-list.asp?apbn=infra

Source: Bank Indonesia, “Progress of Infrastructure Initiatives under the RPJMN 2015-2019”, Retrieved April 28, 2016, from http://www.bi.go.id/en/iru/policy-document/economic-program/Documents/Progress%20of%20Infrastructure%20Initiatives%20under%20the%20RPJMN%202015-2019.pdf

Increases in Infrastructure by 2019


Major New Rail and Road ProjectsWell publicized, high-profile capital city centric projects such as the Jakarta MRT and LRT and the Jakarta to Bandung high-speed railway are being supplemented with improvements to roads, ports, bridges and energy producing facilities throughout the archipelago. The 2,500 km Trans Sumatera toll road will connect all of the major urban centres on Indonesia’s largest self-owned island.

Major New Ports ProjectsThe Tanjung Priok Port project will provide Indonesia with its first international standard port facilities. Work on New Priok, to the east of the existing port, began in 2013. New Priok will share operations with the existing port and reports suggest that the current capacity will be tripled by 2023. As part of the Sea Toll maritime program, 24 port projects are to be redeveloped to either facilitate passenger traffic or improve freighting.

Smaller logistics hubs in Medan (North Sumatra), Balikpapan (East Kalimantan) and Makassar (South Sulawesi) are likely to grow in importance as the logistics sector matures and the government’s Sea Toll initiative is likely to improve connectivity in the outer islands.

Source: JIIPE, “Java Integrated Industrial and Ports Estate”

23

24

5

10

Sumatera

Kep. Nusa Tenggara

Kalimantan

Sulawesi

Maluku & PapuaJawa

Allocated Budget to Build 24 Ports in Indonesia (USD Millions)

Banda Aceh Tanjung Priok

Cilacap

Tanjung Perak

Belawan

Dumai

Kuala Tanjung

Batam

Padang

Pangkai Pinang

Panjang

74.1 111.1

111.1

111.1

222.3

111.1

222.3

222.3

111.1

111.1

111.1

Lombok

Kupang

111.1

111.1

Makassar

Bitung

111.1

222.3

Pontianak

Palangkaraya

Banjarmasin

111.1

74.1

111.1

Maloy 74.1

Halmahera

Ambon

Sorong

111.1

74.1

111.1

Jayapura

Merauke

74.1

111.1

1 9

10

11

12

13

18

19

14

15

16

17

20

21

22

23

24

2

3

4

5

6

7

8

1

23

4

7

98

14

1516

18

1719

20

22

21

1112

13

6

US$ 2.93 billion allocated for port infrastructure

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What will the logistics sector in Indonesia look like in 10 years?

The logistics sector in Indonesia faces significant challenges, particularly with relation to prohibitive regulations and ailing infrastructure. Notwithstanding these challenges, the investment case for logistics real estate in Indonesia is clear and compelling. We expect to see the sector continue to grow and evolve rapidly as it has in many other markets in the region and globally. This growth will be driven by the emerging e-commerce sector, strong macro-economic fundamentals, favorable demographics and a growing number of consumers.

Success - A Score Card of What is Needed in the Next Ten Years

2025

Infrastructure• Government must continue to focus on infrastructure projects. • Spending will spur further economic growth and improve the supply chain thus lowering logistics costs.

Regulatory Environment

• Unclear whether we will see the major regulatory reform which is required to open up the sector to international players.

• International best practice would in turn help drive down logistics costs and assist in the growth of the sector.

• Zoning of government land parcels along well connected new toll roads would support the growth of the sector as it has in China.

E-commerce • Expect to see continued investment into the e-commerce sector from international global investors and e-commerce players.• As the e-commerce sector grows so too will demand for logistics facilities.

Demographics• Indonesia’s large population offers the scale required for the sector to grow.• Large urban population bases will provide demand for consumer products as well as the workforce required for an expanding logistics sector.

GDP Growth• Infrastructure spending picked up in 2015 and there are signs that economic growth is improving.• Investment led growth is likely to remain a theme going forward and many forecasts point to growth of over 5% per annum over the next five years.

Emerging Middle Class

• Indonesia’s middle class will continue to expand; disposable incomes are expected to rise and demand for consumer products should grow.

• Credit card and bank account penetration should also improve as a result and demand for online shopping platforms is likely to grow.


Where are the Opportunities for Local and International Investors?

While there are obvious challenges facing logistics and e-commerce, the business thesis behind these industries is scale – which Indonesia is able to offer.

There is a high degree of certainty that investment in logistics/e-commerce will continue for the foreseeable future. Large local conglomerates, existing players as well as those willing to enter in the early stages will be best able to gain a strong foothold in the market.

Increased Efficiencies Should Further Spur DemandWe expect to see more rapid change over the next ten years as businesses recognise the improved efficiency and cost savings which can be realised with modern world class supply chain solutions, including modern logistics warehousing. Efficiencies are improving which will ultimately have a positive impact on the bottom line and allow for lower prices and more consumption.

In a sign of things to come Indonesian groups are beginning to invest in state-of-the-art logistics warehousing, such as Kamadjaja Logistics’ KLOG Park in Cibitung, Greater Jakarta.

As the Indonesian economy continues to grow and larger volumes of goods get distributed, we anticipate that both international and local Indonesian companies will embrace the improved efficiencies and cost savings that modern supply chain solutions can bring.

Which Locations Should be Considered?At present the majority of modern logistics warehouses are located within the Greater Jakarta area, and to a lesser extent Surabaya, serving as centralized distribution or mega distribution centers catering to the entire archipelago. Going forward, we expect to see development of modern logistics warehousing in logistics hubs throughout Indonesia as distributors recognise the benefit of having decentralised stock.

We are also seeing GDP growth rates in many secondary cities and outer islands exceeding the national average, further driving consumption and demand for logistics and the associated real estate in these areas.

Given that supply is tightly controlled in existing industrial estates, some logistics firms may consider developing assets in less established areas with good connectivity to ports and toll roads.

Medan

6.1%

National average

5%

Surabaya

6.7%

Makassar

7.4%

Jayapura

10.3%

‘Kamadjaja Logistics (“KLOG”) is seeing increasing demand from our MNC clients for higher quality logistics warehousing. KLOG has met this demand by developing a high specification warehousing facility in Cibitung, West Java (designed by UK firm, Ashton Smith). As the first integrated logistics park in Indonesia, KLOG Park has been designed with a focus on optimization, productivity, and reduction of transportation lead time, which directly lower logistics costs for our clients. KLOG continues to upgrade and modernize our facilities across the archipelago in order to best serve our clients.’

- Ivan Kamadjaja, CEO Kamadjaja Logistics

Source: Statistics Indonesia (BPS), “Gross Regional Domestic Product of Regencies/Municipalities in Indonesia 2010 – 2014”, 2015Note: GRDP in 2014 at 2010 Constant Prices

Regional and National Economic Growth in Indonesia

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Entering the Market Foreign companies are permitted to set up a company and purchase property in Indonesia under a 100% foreign-owned PMA company.

The Indonesian government is taking positive steps towards opening up Indonesia to foreign investment. This has been reflected in recent proposed changes to the Indonesian Foreign Investment Review Board’s (BKPM) negative investment list.

Which Type of Investors are already Looking?There are a number of local Indonesian and international groups that are showing high levels of interest in acquiring logistics assets. These investment groups include private equity firms, sovereign wealth funds and developers.

But it’s Important to Factor in the High Cost of DebtThe cost of debt is typically higher than most other South East Asian markets and this must be factored into any planned investment strategy.

There is already an Opportunity to Build SpeculativelyA small number of groups are beginning to recognise that there is a fundamental imbalance between demand and the available supply of modern logistics warehousing and are looking to undertake speculative logistics developments.

This trend is expected to continue as major occupiers (primarily FMCG, processed food and 3PL groups) recognise the improved efficiencies and cost savings which modern logistics warehousing brings.

Indonesia

8.0%

Thailand

2.0%

Singapore

1.0%

Philippines

4.0%

Malaysia

3.0%

Japan

0.0%

India

7.3%

China

2.0%

Vietnam

7.0%

Project financing and cost-effectiveness is a challenge.

Indonesia

8.0%

Thailand

2.0%

Singapore

1.0%

Philippines

4.0%

Malaysia

3.0%

Japan

0.0%

India

7.3%

China

2.0%

Vietnam

7.0%

Project financing and cost-effectiveness is a challenge.


Southeast Asia Central Bank Policy Rates


Land Title and Development ConsiderationsAbsolute ownership of land - the right to freehold ownership, known in Indonesia as “Hak Milik”, is not available to companies regardless of whether the purchaser is a local Indonesian company or foreign owned. The right is hereditary and held only by Indonesian citizens.

Companies are permitted to purchase property in Indonesia under a form of title known as “Hak Guna Bangunan” or “HGB”. In terms of company ownership (as opposed to individual private ownership) of real estate, the HGB title is considered to be a sufficiently strong form of title and applies regardless of whether the purchaser is foreign owned or a local Indonesian group.

• Right to Build (Hak Guna Bangunan)

• Right to develop and own buildings on land owned by others

• Right to build is granted over state-owned land, Right of Ownership and Right to Operate/Manage (Hak Pengelolaan) land

• Granted for a maximum initial period of 30 years and extendable for another 20-year period, with a possibility for renewal

• Can be held directly by Indonesian entities or foreign joint venture companies

• This land right can be sold, exchanged

Benefits of Finding the Right JV Partner There is potential to align with a local partner with the ability to source cheaper land or with an existing land bank.

• Local partners will assist with ensuring land has a clean and clear title and are well versed in dealing with bureaucracy and the time consuming tasks of ensuring land has the appropriate zoning, permits, licenses and titles.

• A good partner is able to source off-market opportunities.

• While access to capital is important, investors need to demonstrate how they can add value other than just providing capital. For example, the ability to assist with an exit strategy, track record / existing relationships with major occupiers and expertise in developing these types of logistics assets.

Given the sector is in its infancy, a long term view will be needed by market entrants in order to seek benefit from their initial investment.

It is Important to Align with Local Real Estate ExpertsInvestors and developers looking to enter the market need to be aware that Indonesia lacks transparency and poses unique challenges. The challenges highlighted in this paper are complex in nature and ever changing. Groups looking to enter should consider aligning themselves with reputable advisors. Specifically, advisors with a deep understanding of the market and the opportunities which are available, as well as a track record of transactions and having assisted clients with similar requirements.

Note: Additional information can be found in JLL's Asia Pacific Property Investment Guide which is available upon request.

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Oxford Economics, “Global Economic Databank”, April 2016

World Bank, “Gross Domestic Product Ranking Table”, 2014

World Bank, “Population Ranking”, 2014

The Boston Consulting Group, “Asia’s Next Big Opportunity: Indonesia’s Rising Middle Class and Affluent Consumers”, March 2013

Kantar Worldpanel, “FMCG Monitor”, Full Year 2015

Statistics Indonesia (BPS), “Dynamic Table”, April 2016

Manufacturing Industry Indonesia Contributes 18.1% to GDP. (2016, February 23). Retrieved April 27, 2016, from http://www.indonesia-investments.com/news/todays-headlines/manufacturing-industry-indonesia-contributes-18.1-to-gdp/item6527

W&S market research, “Popular Brand Index”, 2015

Bank of America Merrill Lynch, “Consumer Products – Indonesia, Bricks and Clicks: e-com an opportunity for offline retailers and telcos”, November 2015

Center of Logistics and Supply Chain Studies, Institut Teknologi Bandung (ITB), Asosiasi Logistik Indonesia, Panteia/NEA, STC-Group, World Bank, “State of Logistics Indonesia”, 2013

World Bank Group, “Doing Business 2015, Going Beyond Efficiency”, 2015

World Bank Group, “The Global Findex Database 2014, Measuring Financial Inclusion around the World”, 2014

Credit Card Growth, Retrieved April 27, 2016, from http://www.akki.or.id/index.php/cr

Indonesia Overview, Retrieved April 27, 2016, from http://www.worldbank.org/en/country/indonesia/overview

DBS Group Research, “Indonesia Industry Focus, Indonesia Construction”, February 2016

Bank Indonesia, “Progress of Infrastructure Initiatives under the RPJMN 2015-2019”, Retrieved April 28, 2016, from http://www.bi.go.id/en/iru/policy-document/economic-program/Documents/Progress%20of%20Infrastructure%20Initiatives%20under%20the%20RPJMN%202015-2019.pdf

Presidential Regulation No. 03/2016; Committee of Infrastructure Priorities Development Acceleration (KPPIP) and JLL Research

Ministry of Finance, Indonesia, Directorate General of Budget, Retrieved May 19, 2016, from http://www.anggaran.depkeu.go.id/dja/edef-seputar-list.asp?apbn=infra

Statistics Indonesia (BPS), “Gross Regional Domestic Product of Regencies/Municipalities in Indonesia 2010 – 2014”, 2015

JIIPE, “Java Integrated Industrial and Ports Estate”

Bibliography

With contributions from: This paper would not have been possible without contributions from Todd Lauchlan, Vivin Harsanto, Dr Jane Murray, Dr Chua Yang Liang, Roddy Allan, Kara Keough, Lucia Serban, Pelham Higgins, Hasman Rusli, Farazia Basarah, Ivana Susilo, Kevin Chandra, Yunus Karim, Arta Putra, Vebri Marco, Kayla Susanto

As well as contributions from our valued clients and associates, including: Paul Noonan & Stewart Lyons – WT Partnership David Aboud & Willy Koes – Guidance Investments Asa Larsson and Aqwattha Junus – DHL Ivan Kamadjaja - Kamadjaja Logistics John Talbot – Logistics Consulting Larry Crowley – Campbell Arnott’s Itochu Logistics Linfox Mega Manunggal Property

Sincere gratitude to all the clients who prefer to stay anonymous.


About the Authors

James Taylor Head of Research, Indonesia [email protected] +62 21 2922 3888

Nick Maclean Head of Industrial, Indonesia [email protected] +62 21 2922 3888

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Jones Lang LaSalle© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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