Understanding Land Value Capture
| Indonesia Research Institute Japan
“This post is written by Moh Mahrus Ali, Market Research & Business Development at PT Indonesia Research Institute Japan Jakarta, a global management consulting firm on business strategy”
Director General of Infrastructure Financing of the Ministry of Public Works and Housing (MPWH), Eko D. Haripoerwanto provides his full support so that this Land Value Capture scheme can be applied to the construction of road and bridge sector infrastructure as a first step. This support was said in his remarks at the Focus Group Discussion with the theme Opportunities for the Implementation of Infrastructure Financing Through the Land Value Capture (LVC) Scheme in Indonesia which was held in November 2020. Then what exactly is this Land Value Capture? In this article, we will discuss the basics of Land Value Capture.
Land Value Capture
Land Value Capture is a policy of utilizing an increase in land value resulting from investments, activities and government policies in the region. The Land Value Capture Scheme is one of the infrastructure financing schemes that has also been widely implemented in various countries, where the Government uses 2 (two) instruments, namely tax-based (tax-based) and development-based (development-based) to capture the benefits and abundance of benefits from infrastructure development. against the increase in land value.
Table 1. Description of Land Value Capture Mechanism
Source : Suzuki, Murakami, Hong, & Tamayose, 2015
The benefits of the LVC scheme in infrastructure financing include obtaining alternative sources of financing that can be used for other public sector investments and increased regional revenue from increased taxes and levies. As we all know, the infrastructure development that has been carried out by the Government has had an impact on increasing the quality and quantity of infrastructure in Indonesia and has had a multiplier effect on many sectors and people’s lives. The government will continue to increase this impact by implementing several LVC instruments.
LVC Funding Practices in Various Countries
- Hong Kong
Hong Kong is one of the largest and most populous megapolitan cities in the world with 6,300 inhabitants per square meter (United Nations, 2019). In addition, Hong Kong has the world’s busiest mass transportation system with 10 rail-based mass transportation lines along 128 km serving 4 million passenger trips per day. Rail-based mass transportation is managed by the MTR Corporation, a Special Purpose Vehicle (SPV) in the form of a builder, operator and management business entity which is 75% owned by the Hong Kong government.
In the Hong Kong LVC funding scheme, the government gives privileges to property developers to build property on government-owned land at a price before transportation infrastructure is built. The developer then builds and sells the property on the government land at a price after the transportation infrastructure is built, which of course will be more expensive than the price before it was built. The profits derived from the increase in land value are then distributed in a profit sharing agreement through the MTR Corporation. The profits generated are used to finance the transportation infrastructure on the land owned by the government by returning the initial construction cost, maintenance and operational costs.
- Tokyo, Japan
Tokyo, with its 37 million inhabitants, has a 3,500 km long rail-based mass transportation network with 2,000 stations operated by 48 companies. Tokyo implements capitalizing on land value increases with land readjustment programs and inclusive land development schemes.
The land conditions in Tokyo are already very limited for building rail-based mass transportation facilities, therefore the Japanese government invites already developed land voters to donate part of their land for transportation infrastructure and convert their land from single-use to mixed land ( mixed use) in exchange for incentives. In addition, land owners around the transportation route are consolidated so that the value of the Building Area Coefficient (KLB) can be increased and receive subsidies.
- Linha Verde Metro, Portugal
Linha Verde Metro is a 9 km long transportation line and consists of 13 stations. To finance the construction and operation of this mass transport route, the Portuguese government provided air-right-sales to landowners around Linha Verde. The government sells the Building Area Coefficient (KLB) development to landowners so that they can increase the density of commercial buildings by elevating them. The revenue from the sale of the Building Area Coefficient (KLB) development is used to fund Linha Verde.
The Indonesian Government’s great support for the application of Land Value Capture in Indonesia makes LVC an extraordinarily profitable business prospect. Of course, to succeed in this program, the Indonesian government requires a lot of investment from both domestic and foreign investors. This opportunity is an opportunity that cannot be missed because this program is a new program and has long-term prospects.
We, Indonesia Research Institute will help investors to conduct further research on this business opportunity. Indonesia Research Institute Japan offers all services from desk research, in-depth interviews, to market surveys for a better understanding of the topic that wants to be understood on how this business works.
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References
Cervero, R., & Murakami, J. (2009). Rail and Property Development in Hong Kong: Experiences and Extensions. Urban Studies, 46(10), 2019-2043.
Cervero, R., & Susantono, B. (1999). Rent Capitalization and Transportation Infrastructure Development in Jakarta. RURDS, 11-23.
Froes, M., & Rebelo, J. M. (2006). Transport, Energy, and CO2 in Asia: Where Are We Going and How Do We Change It? The Better Air Quality 2008 Workshop. Bangkok, Thailand.
Hui, E. C.-M., & Ho, V. S.-M. (2004). Land value capture mechanisms in Hong Kong and Singapore: A comparative analysis. Journal of Property Investment & Finance, 22(1), 76-100.
Murakami, J. (2012). Transit Value Capture: New Town Codevelopment Models and Land Market Updates in Tokyo and Hong Kong. Value Capture and Land Policies, 285-320.
Suzuki, H., Murakami, J., Hong, Y.-H., & Tamayose, B. (2015). Financing Transit Oriented Development with Land Values: Adapting Land Value Capture in Developing Countries. Washington: World Bank Group.
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Authored by : Fitri Aulia | 22 December 2020
Recent Property Development
The Covid-19 pandemic has dealt a quite severe blow to the property business sector in 2020. During the PSBB period, business activities were very sluggish and it can be said that some business actors suffered severe losses.
However, entering the new normal period, the economic activity in several sectors including property has begun to revive from the previous period. The role of the government triggers the revival of Indonesia’s property business activities.
Government Stimulus
The assistance provided by the government is in the form of subsidies or incentives for interest subsidies to debtors of public housing credit (KPR), which is contained in the Minister of Finance Regulation (PMK) Number 138 / PMK.05 / 2020 and amendments to PMK 85 / PMK.05 / 2020 regarding the guidelines for providing interest subsidies in the effort to implement the National Economic Recovery program.
In early March 2020, the Government decided to increase the allocation of housing financing assistance by IDR 1.5 trillion for Low-Income Communities (MBR). This was stated by the Director General of Infrastructure Financing of the Ministry of Public Works and Public Housing (PUPR) Eko Djoeli Heripoerwanto in a webinar, Wednesday (29/7/2020).
In addition, the Government also has Bank BTN as their partner-collaboration to implement their OMH Program aimed at Low-Income Communities (MBR) with low interest rates and low installments for the purchase of a prosperous tread house and a welfare apartment.
Bank BTN noted, in 2015 they have provided housing financing assistance totaling 474,099 units. Then in 2016 as many as 595,540 units, in 2017 to 666,806 units, in 2018 to 755,093 units, and in 2019 to 735,749 units.
As of September 2020, BTN has provided home ownership credit support (KPR) of 93,448 units which cost as much as Rp. 15.6 trillion. These support provided by BTN is significant for the survival of the business property sector.
BTN commitment on supporting business property has not slackened. In fact, during the pandemic, BTN continuously provides support for the government program.The distribution of subsidized KPR is still a mainstay of BTN for the One Million Houses program.
Source : Bank BTN (visit : https://www.btn.co.id/id/Conventional/Product-Links/Produk-BTN/Kredit-Konsumer/Pinjaman-Bangunan/KPR-BTN-Subsidi)
Positive Trend in Q3 2020
There is a positive trend during Q3 2020 after it drastically dropped earlier in the year, indicates there is potential for the revival of Commercial Property Demand in Q4 2020 and the next Q1 2021.
Source : Bank Indonesia
Hotels and convention halls are two sectors whose demand has risen quite drastically in the Q3 after falling badly in the previous quarter. This demonstrates positive potential for its development in the future. Meanwhile, the demand of apartment remains low and still struggles to revive until now.
Growth of Commercial Property Demand in Jabodetabek
Overall in Jabodetabek, the commercial property sector also experienced a positive increase during Q3 2020.
In Jakarta, all commercial property demands show positivism with hotels being the most prominent in their development at Q3 2020. After previously shows a negative number, the total index in Q3 has at least increased to be positive.
Source : Bank Indonesia
Meanwhile, the growth in the total commercial property index jumped drastically in Bogor, Depok and Bekasi. Same case with Jakarta, its hotel sector are also the most prominent in reviving, at least in the Q3 2020.
Source : Bank Indonesia
As we can see on charts above, the hotel segment shows a great improvement in demand. This was driven by various kinds of promotions offered by hotels to adapt in this situation such as providing huge discount, staycation packages, working from hotels offer, and wedding reception packages.
Why Hotels?
As Indonesia gradually eases lockdown restrictions, the hotel occupancy rates across the country including Jakarta, have slowly started to pick up. However this is not without several efforts and sacrifices driven by people in the hotels sector to improve and revive the hospitality business sector in Indonesia.
To get through this hard times, efficiency and innovation are the main keys. Therefore, there are several trends created specifically to adapt to this era. Hotels competing with each other to offer a flood of discounts. To further intensify its sales strategy, there are several e-commerce platforms that is becoming a great place to advertise rooms and staycation packages, such as Traveloka. The Buy Now Stay Later also sticks to this trend.
Hotels discounts on Traveloka (Source : Traveloka)
Another new trend is the Work From Hotel (WFH). As you might know, the abbreviation of WFH was initially stands for Work From Home. To connect the dots, Working From Hotel then exist and created because there are more and more office workers are getting bored with the atmosphere of their house and desperate to look for a new atmosphere. It’s a trend where hotels prepare rooms, complete with equipment and facilities to work (e.g : Wi-Fi , stationer, and free printing facilities,etc).
Source : Instagram @harrisfxsudirman and @arunasenggigi
During the transitional PSBB period, indoor wedding receptions are allowed to be held again after previously was banned temporarily due to the massive increase of the Covid-19 spread. This becomes the opportunity that triggers the revival for the hotel business.
However, this permission is also accompanied by the requirement to fulfill and comply with the health protocols made by the government. These includes the limitation of attendees to a maximum of 25 percent of normal capacity. Then, the seating distance for visitors is set at least 1.5 meters. Visitors are also prohibited from passing by or changing seats. The eating and drinking utensils must be sterilized, while the serving of food is prohibited from using a buffet. Last but not least, the wedding staffs are required to wear a mask, face shield and gloves.
One of the breakthrough in this trend was the make of “Virtual Wedding” ever since June 2020. As this was the case held by The Sunan Hotel Solo, which offer a virtual wedding service package for 44.5 million. The event is only attended by the couple and their family members, meanwhile guests are able to attend the wedding virtually through various platforms such as Zoom, YouTube, Facebook and Instagram, while enjoying food sent by the hotel to their residences.
Source: The Sunan Hotels Solo
Finally, we might conclude that the property business in Indonesia has the potential to develop more despite the massive impact it has taken from pandemic outburst. Combining the stakeholders effort and the government’s support to stimulate this sector are expected to help revive the business sector in the future.
References
Bank Indonesia. (2020). Perkembangan Properti Komersial (PPKOM).
Kementerian Pekerjaan Umum dan Perumahan Rakyat. (2020, November 3). Tingkatkan Kepemilikan Hunian Layak, Realisasi Program Sejuta Rumah Hingga Akhir Oktober 2020 Capai 601.637 Unit. Retrieved from https://www.pu.go.id/berita/view/18970/tingkatkan-kepemilikan-hunian-layak-realisasi-program-sejuta-rumah-hingga-akhir-oktober-2020-capai-601-637-unit
Kementerian Pekerjaan Umum dan Perumahan Rakyat . (2020, January 3). Capaian Pembangunan Rumah Tembus 1,25 Juta Unit. Retrieved from https://perumahan.pu.go.id/berita/view/227/capaian-pembangunan-rumah-tembus-1-25-juta-unit
Kompas. (2020, July 29). Alokasi Tambahan Rp 1,5 Triliun untuk Perumahan Terkait 3 Program. Retrieved from https://properti.kompas.com/read/2020/07/29/191334021/alokasi-tambahan-rp-15-triliun-untuk-perumahan-terkait-3-program?page=all
BUMN inc. (2020). Target Penyaluran KPR Bank BTN Naik Menjadi 300.000 Unit Per Tahun. Retrieved from http://bumninc.com/target-penyaluran-kpr-bank-btn-naik-menjadi-300-000-unit-per-tahun/?more=2