Fitch Ratings-Jakarta/Sydney-20 November 2013: Fitch Ratings expects Indonesian residential property developers to book lower presales in 2014 due to stricter mortgage regulations for second homes, higher average selling prices (ASP) and limited new project launches. The decline in presales will be more evident in the medium- to high-end property segments, where the buyers are typically upgraders for whom home purchases can be postponed.

Fitch views residential property developers with large, low cost and high quality land banks as better positioned to conserve cash amid lower presales. Developers with sufficient mature land will be able to continue generating presales cash flows, and scale back land acquisitions to conserve cash

as additional liquidity buffers.

Recurring revenue is also an important liquidity source when development sales are slow. In Fitch's view, PT Lippo Karawaci Tbk (Lippo, BB-/Stable), PT Kawasan Industri Jababeka (KIJA, B+/ Stable) and PT Alam Sutera Realty Tbk (ASRI, B+/Stable) have financial flexibility from steady

sources of recurring income. Lippo operates various shopping malls and hospitals, KIJA operates a

power plant with a long-term off-take agreement with PT Perusahaan Listrik Negara (PLN, BBB-/ Stable), while ASRI operates shopping malls and a cultural park.

Prices for Indonesian residential property rose sharply at about 30% annually over the past three years. While such a steep increase within a short period would be worrying elsewhere, that is not the case in Indonesia, where property prices are coming off a lower base compared to peers.

After prices more than doubled, home prices in Indonesia are now more comparable with those in its peers. This is based on Fitch's observation of the affordability ratio (price/ income; expressed in years of income) in 2012 - Jakarta was at 12.64, compared with Manila at 14.69, Mumbai at 13.61 and

Hanoi at 29.46. That said, Fitch expects ASP growth to slow to a more sustainable 7%-10% annually.

Tighter government control over the mortgage market is expected to further moderate ASP growth. However, Indonesians, like counterparts in many other emerging markets, have limited investment options and most still make home purchases using cash. Mortgages made up only about 11% of total loans extended by Indonesian banks in as of September 2013. This limits the impact of the mortgage restrictions on demand, and we expect prices to remain supported in the medium-term.

Indonesia's young population also provides an important support for housing demand, especially for first-time home owners. More than 50% of Indonesia's 250 million people are aged 30 years or below and a large number of these youths will be buying their first homes in the near future.