Developer Lippo Karawaci turns its sights to Indonesia's smaller cities
WATARU SUZUKI, Nikkei staff writer
JAKARTA -- Through years of economic growth, Indonesia's capital has become increasingly crowded with high-rise apartments, office buildings and shopping malls. Little, however, has been done to improve Jakarta's poor roads and lack of efficient public transportation. Lippo Karawaci, Indonesia's biggest listed property developer by assets, plans to pursue business opportunities outside the congested capital by expanding its township projects into suburbs and second-tier cities.
"Our strategy is very consistent: create leisure and entertainment, all in one location," said Lippo Karawaci President Ketut Budi Wijaya in a recent interview with The Nikkei. Township development, the company's main business, combines apartments with malls, business districts, hotels and hospitals in one area, minimizing the need to travel to the city's center. The business contributes roughly half of Lippo's revenue, which stood at 6.66 trillion rupiah ($570 million) in 2013.
Lippo's flagship project, Lippo Village, was launched more than 20 years ago in Tangerang, about 30km from central Jakarta. It now offers a golf course and a college. The company recently kicked off another project on the premises: Millennium Village. It aims to become the Indonesian version of Orchard Road, a famous shopping street in Singapore. Millennium Village will boast rooftop gardens, 300-meter-tall office buildings and five-star hotels connected via a 1.5km pedestrian pathway. The first phase is expected to be completed as early as 2022.
Wijaya said Kemang Village, a smaller township covering 15 hectares in south Jakarta, will soon enter its second phase of construction, which includes a hospital and office buildings. Lippo plans to invest a minimum of $500 million each year for the next four to five years, and more than half of this will be spent toward developing existing projects.
Smaller cities, big plans
Lippo's ambitions are spreading well beyond the capital. "We are now looking at secondary cities, where we can develop smaller versions of our projects in Jakarta," Wijaya said. For example, in January the company launched a high-rise apartment development covering 2.7 hectares of land in Makassar, the biggest city on the island of Sulawesi. Three-quarters of the rooms were purchased in presales.
Wijaya added that the company plans to expand into Manado, another city in Sulawesi, Medan, a city in Northeast Sumatra, as well as major secondary cities in Java such as Semarang and Surabaya. Cities like these are "in their infancy," Wijaya said, but are expected to become important economic hubs, as Jakarta has.
"If we can find the land at the right price, we may even build several small townships in one city," he said. Though the company has no plans for land acquisition at the moment, Wijaya said he aims to bring Lippo's annual marketing sales -- the total value of property sold -- to $1 billion by 2019, more than double this year's target of 4.6 trillion rupiah.
Jakarta is one of the biggest cities in Asia, with a population of around 10 million, and its lack of infrastructure is increasingly making life difficult. The World Bank ranks Indonesia 53rd in logistic efficiency, well below Malaysia's 25th and Singapore's fifth. For many Indonesian businesspeople, the daily commute to the capital by bus, train or ojek motorcycle taxi means hours on the road. The demand for residence in a township with more efficient transportation is growing, Wijaya said.
The shift to the suburbs also comes as the company faces headwinds in the capital. After becoming Jakarta governor in 2012, the now president-elect Joko Widodo limited developments of new malls to improve traffic conditions. He has pledged to accelerate infrastructure projects by attracting foreign investment once he takes over from outgoing President Susilo Bambang Yudhoyono in October.
Wijaya said his company has pushed back project launches to later in the year and next year due to difficulties obtaining permits. "A lot of the critics (of property development) say we need to overcome issues like bad traffic and flooding first, which we understand. Jakarta's population is similar to Tokyo, but the infrastructure is far less developed," he added.
Further obstacles remain. Jakarta's property prices have been rising at one of the world's fastest levels, which led the country's central bank to tighten regulations on housing mortgages last year. Wijaya said this, along with high interest rates, has slowed buyers' appetites. During the first half of the year, a number of local property developers, including Lippo, reported lower-than-projected marketing sales. Wijaya expects interest rates to remain high for the next two years, as the government will have to tackle issues such as inflation.
Healthy growth potential
Yet Wijaya said Lippo will remain resilient in the face of market swings due to its diverse portfolio. The company has a new darling: its hospital operating unit, which has been Lippo's fastest-growing business in recent years. The unit was started in the early 1990s in a partnership with Singapore-based hospital operator Parkway Holdings, but Lippo has only recently begun to accelerate its expansion. The number of hospitals under operation jumped from four in 2010 to 16 in 2013, making the unit the country's biggest private hospital operator.
In 2012, there were nine hospital beds per 10,000 people in Indonesia, according to data from the World Health Organization. This is less than half of Malaysia's 19 and Singapore's 20. "With our hospital business, we are entering a truly undeveloped market," Wijaya said. He expects the increase in the number of facilities will push the hospital unit's revenue to around 3.5 trillion rupiah this year, 40% higher than 2013 and similar to last year's growth rate. It is expected to contribute about 40% to the company's consolidated revenue.
Wijaya said the hospital unit is still less profitable than the main property business due to a low occupancy rate of around 30% for its new facilities. Competition is expected to increase, with rivals such as Ciputra Development launching hospitals and clinics in recent years. To differentiate its offering, Wijaya said that in addition to Siloam Hospitals Group, which targets middle- to high-income citizens, Lippo will add hospitals with cheaper rates and more beds per room.
The company plans to spend between $150 million and $175 million each year on building hospitals. It plans to open hospitals in Kupang, a city in the province of East Nusa Tenggara, and Medan by the end of this year. Lippo aims to raise earnings before interest, tax, depreciation and amortization, a measure of profit, of its hospital operations and other nonresidential business units from its current 37% of the total to more than 50% by 2019.
About Lippo Group
Indonesian conglomerate Lippo Group was founded by Mochtar Riady, an ethnic Chinese businessman who started his career as a banker. He quickly rose to stardom after partnering with billionaire Sudono Salim, who was known for his strong ties to former President Suharto, to manage Bank Central Asia, now Indonesia's biggest private lender. Riady expanded his financial business by buying Bank Perniagaan Indonesia (Bank Lippo, which later merged with Bank Niaga to form Bank CIMB Niaga).
But after the bank nearly collapsed during the Asian financial crisis in 1997, the group began shifting its business into the property and retail sectors. The move has been successful. Lippo Karawaci, which went public in 1996, is now the country's largest mall and private hospital operator. It has also built up business abroad, such as Singapore-listed property developer OUE, which made an unsuccessful bid to take over food and beverage giant Fraser and Neave in 2012. Lippo Group is currently estimated to own around 150 companies. Mochtar's sons James and Stephen manage some of the group's key operations.
Lippo has recently been delving into Indonesia's consumer-oriented businesses. Amid a surge in smartphone sales, its joint venture with Japan's Mitsui & Co. rolled out Indonesia's first fourth-generation services late last year. Lippo is also setting up a cinema chain across the archipelago.