Budiarsa Sastrawinata, Managing Director of Ciputra Group, an Indonesian Real Estate Company, explained the main criteria for investors to enter foreign markets, the formation of demand and consumer interests, and the peculiarities of working with long-term investment projects abroad.
LDaily: Your Company is represented in foreign markets. Please tell us more about the countries you are represented in and the kind of assets you manage.
B. Sastrawinata: First of all, let me tell you about our company. Ciputra Group was a family business established by Mr. Ciputra back in 1981, together with myself as one of the family members during the establishment. Mr. Ciputra started his own business in 1961 with the Jaya Group, a company he created jointly with the Jakarta City Municipality which decided to support Mr. Ciputra’s endeavor. Then, in 1971, together with six of his business partners, he started a new group of companies called the Metropolitan Group. Mr. Ciputra was involved in the creation and development of all three groups of companies.
In Indonesia we have around 100 projects, ranging from large township developments of 500-3,000 hectares to smaller residential projects, as well as commercial superblocks made up of hotels, shopping centers, offices and apartments. Our core business is selling residential products, although we also have a healthy recurring revenue stream. In Vietnam, Cambodia and China we have what we call a new town development, which includes residential products, commercial products and public facilities.
The reason we are involved in international business is that we seek to diversify our portfolio and risks and, of course, to become a multinational enterprise. It also gives us the opportunity to gain a lot of international experience. When it comes to Ukraine, I am extremely grateful for the opportunity to come here, and even more so, to invest in this country. I am aware that the Ukrainian government is doing a lot to create an attractive and conducive environment for foreign investors. To let significant investments come into the country, we need long-lasting and comprehensive government support. We do business only in countries where we feel the strong support from the local authorities. The officials may change, but if the government’s course remains unchanged, we can reap the benefits.
For example, in Hanoi (Vietnam), we have seen three prime ministers and five governors during the development of our project. However, due to the high level of trust and strong relationship we have with the government at all levels, our business has not been adversely affected. I believe this is one of the most important conditions for attracting and executing investment projects from abroad.
In addition to the strong government support, we need to be sensitive to market trends and changes, especially now that we live in the fast-changing world. Nothing is certain, change is inevitable. Millenials are now starting to make up the majority of today’s workforce and they have traits that set them apart from those before them.
LDaily: You spoke about the Millennials. How different are they from the previous Indonesian generations? You have given the examples of projects you are working on – they are long-term, and will be completed in 5-7 years. So, it’s interesting what you think about the people who will live and work in these newly created places. Do you know who these people are? And when it comes to investment opportunities in Ukraine, we can say this country is young, and we have a special generation born after independence declared. These are new people, fresh minds that perceive market trends in a quite different way, and keep track of them. There are new consumers in real estate. What kind of projects can you suggest to young Ukrainians? What is better to invest in, and what should we pay attention to?
B. Sastrawinata: First of all, we have to determine what the Ukrainian market is about. Is it a domestic-oriented market or an international one? If it is a domestic-oriented market, you should find local partners and work closely with them. And then you need to conduct an extensive market research to learn what kind of real estate is lacking. Is there a housing backlog? Is there a market for high-end apartments, for example? What about the tourism sector? And, of course, what are the regulations surrounding the real estate sector?
With regards to the millennials and the younger Generation Z, I think every country has seen this shift in demographics and the changes that come about as a result. These people are ambitious, connected, tech-savvy and achievement-oriented. They seek instant gratification and work-life balance. They prioritize experiences over material assets. As a result, we need to cater our properties to suit their lifestyles. For example, we have incorporated coworking spaces in our development. Also, as telecommuting becomes more popular, some companies find it unnecessary to allocate large areas for meeting rooms and reception areas. In one of our office buildings in Jakarta, we have allocated several floors as a shared space for multiple companies to hold business meetings or conferences. We provide internet connection along with some necessary office equipment, so our tenants may use the space as they see fit.
Another example would be our shopping malls. We have had to reduce the percentage of apparel stores in all our shopping malls, and reorganize our tenancy mix following the consumers spending behavior to have a higher ratio of F&B tenants or entertainment spaces. E-commerce has changed the way many people shop. Fewer people are buying products in conventional stores. I, myself, have started ordering things online because it saves me time from having to go to the stores myself. Malls have become a destination for socializing and entertainment. In Indonesia we now have churches in malls!
The same holds for residential products. Millennials no longer seek permanent landed houses. As a result, we have come up with different product ranges as well as flexible rental conditions. The number of car parks can be reduced because the younger generation no longer sees the car as a necessary mode of transportation.
These are examples of how we must reinvent ourselves to match the current market conditions in Indonesia. We need to do a similar thing before entering a new country such as Ukraine. We need to study the lifestyles of the local people and their culture, as well as market trends. We need to explore the local market itself to make sure it can accept us. Of course, we can borrow ideas from abroad, but we must adapt and adjust to the conditions of the markets we enter. I suppose that’s the main challenge of doing business abroad.
LDaily: The new generation is represented by young people who have enough money to buy a house in the current market. However, we are talking about a new demand which can be developed in the next 5-7 years. What kind of supply will we have?
B. Sastrawinata: I believe we are now facing new challenges because of the rapid market changes brought about by demographic changes. For example, we are currently exploring a flexible apartment-office design because we see some demand in this type of hybrid products. However, we must not be overly confident and think that this type of product will always be in demand. Sometimes I think even the market itself is experimenting. Let’s take a look at coworking spaces. In the beginning we saw many people jump at the opportunity very quickly and set up co-working services everywhere. It was indeed successful for a couple of years, but then the market declined. Now there’s an oversupply. The situation is very liquid at the moment. So, I do not think we should completely give in to new ideas but simply stay flexible. That is why government support is crucial as we have to obtain government approval every time we change our project’s objectives. I would like to emphasize once again that the market is not static, so steps forward should be taken, however, these steps cannot be taken in rush. It is not as easy and simple as it sounds. You know, they say now is an era of breakthroughs and changes. Today’s success does not guarantee tomorrow’s and we must always be alert and adaptable.
LDaily: I strongly agree with you that all the conditions you have mentioned must be taken into account, especially when it comes to demand, which will change every two years, if not every year. We have to take this into account, and perhaps these flexible spaces are exactly what consumers will need in the future.
B. Sastrawinata: Let me share with you my own experience with these flexible spaces. About three years ago we started construction on an office building. When we started promoting it to the market, it was a success. My son told me that some of his friends were looking to acquire some space in the office building, but the area was too large for them. One was just starting his own business and didn’t need that much space. Moreover, he couldn’t afford to rent the entire area. So, we decided to redesign a couple of floors and divided them up into smaller spaces so that small companies or startups could afford them. We sold these small office spaces in two short months. We decided to do the same in another two floors but the market changed and we saw demand decline. Fortunately, we had only redesigned 4 out of the 28 floors and not the entire building because just within one year, the market demand for office space returned to the conventional model again. So, adaptability is important, but it must be done with caution.
LDaily: My next question is about cooperation. If Indonesians and Ukrainians worked together, what type of business could they suggest each other? Do Ukrainians and Indonesians have anything special to offer?
B. Sastrawinata: Looking back at our previous experience in Vietnam, Cambodia and China, we have always sought government support while exploring large-scale development projects. Success will be very difficult to achieve without this. This is already present in Ukraine because we have heard that your government will support us and guarantee political stability. Ukraine has a large population base of more than 32 million people, with about 8 million residing in Kyiv and the surrounding regions. In addition, a rate of return of about 12% is a very attractive number to consider. Ambassador Yuddy Chrisnandi had personally given his blessings to Indonesian companies which wish to invest in Ukraine and he also encouraged us to come and develop our business in Ukraine.
LDaily: I would like to clarify the figures interesting from Ukraine’s side. You’ve mentioned that you are comfortable with 12%, and your mortgage rate is 9.2%. In Ukraine, the best mortgage rate is announced to be 17% while the average is 21-22%. So, let me ask you a question developers do not like – given country’s risks twice as high as in Indonesia, which rate can force Indonesian investors to ignore the situation in Ukraine and work in it?
B. Sastrawinata: In Ukraine, the interest rates on mortgages are around 17-22%, so we need to look for higher profitability. We are not too concerned about this number because we have already experienced this before. We had similar rates of about 18% in Indonesia in the 1980’s but you could still earn a margin of 20-25%. Also, in Vietnam we have seen rates at 7% before the government gradually increased it to 17% to combat depreciation. However, we have to admit that it was not an easy time for us because a slowdown in sales resulted in us reaching only 20% of our plan.
Long-term projects are often accompanied by high risks. We have seen many ups and downs in our own economy and our projects have weathered them all. A long-term project is like a marathon, as opposed to a sprint. We are bound to undergo periods of extremes, like the significant upswing in the Indonesian market in 2010 or the recession in Vietnam from 2011-2014. Every country has its own cycle, and diversifying into different countries allows us to keep a healthy global portfolio.
LDaily: Could you please tell us how you solve the issue of finding and collecting information when you enter a country? Do you have your own information department or perhaps a long-lasting relationship with international agencies? Does each country address this issue as the occasion requires?
B. Sastrawinata: Yes, our company has a dedicated Business Development Department. They conduct extensive market research and competitor study to understand the industry better. When necessary, we will also engage a market research consultant. However, because real estate is closely tied to the local cultures, it is important to have a local partner. We must get acquainted with local contractors, developers and designers, as these companies may become our partners later.
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