Review of Urban and Regional Development Studies 5 (1993)

LAND MARKETS AND THE EFFECT OF REGULATION

ON FORMAL-SECTOR DEVELOPMENT IN URBAN INDONESIA
Bruce W. Ferguson and Michael L. Hoffman
The Urban Institute, 2100 M . St., N.W., Washington, D.C., 20037, USA

Received September 1992

Until recently, urban land and housing markets in Indonesia seemed to function well. Informal-
sector development provided low-income housing affordably . Through government programs, formal-
sector developers could build housing for all but the poor. Since 1989, however, daily conversation
pictures land speculation as rampant and formal-sector housing as rising beyond the means of the
middle class. Newspapers carry stones of conflicts between small landowners and large developers
with government officials in between. This article investigates this situation by addressing two
related questions: are urban land prices rising “too fast?”; how do land regulations and development
practices affect costs, and who pays these costs? The article includes quantitative estimates of
urban land prices, changes in urban land supply, movement of land through the permitting process,
and the effect of development regulations on costs. Data come from a literature survey and inter-
views of some of the largest formal-sector developers in Indonesia. A principal finding concerns a
development regulation called a “location permit’’ and the “social function” of land in Indonesian
law. Although helpful as a means of assembling land in Indonesia’s highly fragmented land
markets, location permits allow formal-sector developers to hold land off the market and pay low
prices to small landowners. Ultimately, the “social function” of land under Indonesian law holds
down the price formal-sector developers pay for land, but not at the price at which they sell their
product. The article concludes by proposing reforms to the regulatory process.

1. Introduction
Up until recently, land and housing markets appeared to be functioning reasonably
well in urban Indonesia. Informal-sector development provided an affordable, adapted
solution to the needs of the poor (Struyk, Hoffman, and Katsura, 1990). With the help of
government,’ formal-sector developers in Jakarta could build housing for a substantial
share of the remaining urban population-down to the 50th income percentile.
Since 1989, however, press reports and daily conversation in Indonesia picture land
speculation as rampant and land prices as rising explosively. Daily experience appears to
confirm the negative effects of high land prices on development. Many low and middle-
income people are finding purchasing a home more difficult. Businessmen say that they
are paying much higher rents for office and commercial space. Land disputes between
small owners and developers with government officials often in the middle have prolifer-
ated. Delays in land titling, unclear legal rights, and other constraints appear to hinder

‘Below-market financing of the government housing bank, Bank Tabungan Negara (BTN). has
largely stimulated the formal-sector housing development industry and helped this industry to reach
down the income ladder.
52 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia

development and contribute to many complaints about the process.

This article investigates this apparent change by examining two questions: have land
prices risen “too fast”?; and what is the effect of regulation and other government action
on development? The data for this investigation cover the period 1985 to 1991.

2. Land Prices
Are land prices in Indonesian cities increasing too fast? After all, rapid urban land
price appreciation occurs in many countries experiencing strong economic growth and
rapid urbanization such as Indonesia. GDP has grown at an annual average of 5.4 percent
from 1980-89 while urban population has increased at 4.9 percent compared to 1.9 percent
for total popuiation. To gain perspective on this question, we compare evidence on land
and property price increases with the increase in other key economic indicators. These
include the consumer price index and other common investments, and the experience of
land price and property appreciation in other Asian countries during periods of fast growth.
No organization systematically collects and publishes data on land and property prices
in Indonesia. So, the data available to investigate this question are few, erratic, and, often,
out-of-date. First, we examine three sources of information for the period of 1985-89: a
representative survey of urban households in Indonesia conducted by the Urban Institute in
1988 (Struyk, Hoffman, and Katsura, 1990); rough estimates of land prices for the Jakarta
area in 1985-88 taken from Wurta Ekonomi (1990) in 1990, an Indonesia economic jour-
nal; and a study by Dowall and Leaf in 1990 of the prices of individual residential lots in
Jakarta (table 1).
These rates of housing and land price appreciation are above the rates of return avail-
able on gold, the US dollar, one-year time deposits, and inflation. The price increase of all
land in Jakarta, which averaged 36 percent per year for 1985-88, far exceeds that of other
common investments and inflation. The only possible exception to this pattern is the rate
of increase of “formal sector” residential lots, as measured by Dowall and Leaf. These lots
appreciated at a rate (20.77 percent) closer to the returns available on one-year time
deposits for 1987-89 (17.6-20.26 percent). Although Dowall and Leaf (1990) have performed
the most thorough study of urban land values in Jakarta, their analysis may understate the
appreciation of land in Jakarta.2 In contrast, per-capita gross income remained constant in
real terms during this period.3
Interviews with some of the largest developers in Indonesia as well as some of medium-
size provided more recent inf~rmation.~ As the bulk of formal-sector developers in Indo-

*Dowall and Leaf examine land prices only within the boundaries of DKI Jakarta. However, the
bulk of middle and upper-income residential development occurs on fringe land outside these
boundaries. Developers report that land suitable to upper-income residential and commerciaVoffice
development has been appreciating fastest in recent years. Thus, the Dowall and Leaf‘s overall
appreciation rates could be expected to understate land increases in the metropolitan area as a
whole.
3At $560 U.S. dollars during the period 1985-89. See World Bank, 1989, p. 308.
4Eleven representatives of the development industry were interviewed in total, The sample
consisted of seven developers (including five of the largest in Indonesia), two property large prop-
erty consultants and managers, a lawyer specialized in real estate development, and a director of a
development industry association.
 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia 53

Table 1
Housing and Land Price Increases

Average Annual Increase

or Rate (in percent)
1985-88 1987-89
Housing Prices (1):
Large Cities 23.31 N.A.
Small/Medium Cities 33.26 N.A.
All Jakarta Land (2) 36.00 N.A.
Lots in Jakarta (3):
Formal Sector N.A. 20.77
Low Infrastructure N.A. 29.17
Inflation Rate 6.87 6.78
Gold 22.91 5.00
One-Year Time Deposits:
State Banks 16.78 17.60
Nat’l Private Banks 19.94 20.26
Foreign Banks 17.42 18.40
U.S.Dollar 10.35 2.95
Sources: 1. Struyk, Hoffman, & Katsura, 1990;
2. Warta Ekonomi, Sept. 1990.;
3. Dowall and Leaf, 1990;
Financial Data: Bank Indonesia, Weekly Reports.

Table 2
Land Price Increases in the Jakarta Area, Mid-1989 to Mid 1990

Land Price Increase

Type of Land 1989-90, (in percent)

Formal Sector Residential:

High-Income 108
Middle-Income 75
Low-Income Residential 27
Central CommerciaVOffice 230
Source: Interviews with Developers

nesia, these developers perform both residential and commercial/office development, al-
though in differing proportions. Table 2 presents land price data from these interviews.
From mid-1989 to mid-1990, much Jakarta area land rose very rapidly in value. How-
ever, land suitable to different types of development appreciated at suikingly different
rates. Formal-sector residential land and centrally located commercial/officeland appreci-
ated far above the increase in low-income residential land. The price increases for formal-
sector residential land and commercial/office land also vastly exceeded the 1990 inflation
rate of 9.53 percent and returns on one-year time deposits of approximately 20 percent.
54 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia

However, from mid-1990 to mid-1991-the time of this researchdevelopers and others

report that land values have stagnated or even declined slightly.
In sum, urban land and property appreciated at average annual rates of 20-33 percent
from 1985-88, well-above the average inflation rate of approximately 7 percent, producing
inflation-adjusted appreciation rates of 13-26 percent. From 1989-90, land, housing, and
property prices rose rapidly,but have stagnated since then. How unusual is this experience
in an international context? Comparisons with other Asian countries during periods of
rapid economic growth provide some perspective on this question.
From 1972-82, Malaysia and Thailand experienced strong economic growth comparable
to that of Indonesia during the last half of the 1980’s (World Bank, 1988). In Malaysia,
the value of housing during this period increased at an annual average rate of 17.34 percent
compared to an average inflation rate of approximately 7 percent. Land appreciated at
similar rates. Thus, housing and land price rises in Malaysia during this period rose at
inflation-adjusted rates of about 10 percent, somewhat below the real Indonesian rates of
13-26 percent for 1985-89.
Housing and land prices in Thailand from 1972-82 were more moderate than either
those in Malaysia during this period or in Indonesia recently. One recent study of the
Bangkok land and housing market (PADCO, 1987), for example, found that land values
rose at approximately the same rate as the consumer price index between 1975 and 1985.
This study attributes these low price rises to a flexible regulatory system that allowed the
development industry to meet demand. However, a subsequent study (PADCO, 1990)
showed real inflation-adjusted land costs for five sample housing projects increasing at an
annual compound rate of 67 percent from 1987 to 1990.
Large Japanese cities experienced a land boom in the late 1980s that dwarfed the price
increases in Indonesian cities. Property values for all types of land in Tokyo more than
doubled in 1987-88. An article in Far Eastern Economic Review (1990) notes: “The rapid
rise in Japanese land values over the past five years has created a gap between those who
own property, and those who are unlikely ever to be able to afford even the small average
apartment.” Since then, Japanese land prices have declined, although not to the levels of
prior to the boom.
Thus, in the context of other rapidly growing Asian countries, the Jakarta land price
appreciation of 1985-90 appears above average, but not unusual.
Land prices should not be viewed in isolation from the rest of the economy; rather,
they are part of a larger story involving two factors:
1. Changes in the broader supply and demand for new residential and commercial/
office projects provoked by sharp increases in the cost of development. Urban land is only
one of a number of the components of the development process whose cost has soared
dramatically. Construction materials and financing costs have also grown rapidly, at rates
above their historical norms: from 1985-89, construction materials costs increased at accel-
erating rates (table 3). Interest rates followed a different pattern. From 1986 to August
1990, they varied, but have risen dramatically since then (table 4).
The increases in the cost of development and land have shifted supply and demand,
particularly for housing. Jakarta residential developers report that they can no longer build
 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban lndoncsia 55

Table 3
Inflation Adjusted Construction Materials Cost Increase, 1985-90 (in percent)

Year Increase

1985 4.6
1986 6.2
1987 10.0
1988 9.9
1989 11.0
1990 12.5
Source: Bank Indonesia. 1990. Indikator Ekonomi, Bank Indonesia
Weekly Report.

Table 4
Lending Rates

Year Rate

1985 14.99
1986 8.97
1987 9.80
1988 14.13
1989 13.43
1990 12.00 (est.)
1991 20.00 (est.)
Note: Inflation adjusted interest rate on loans by State Banks.
Source: Government of Indonesia. 1990. Indonesian Financial Statis-
tics, v. XXIII, No. 11.

homes affordable to households around the 70th income percentile (US $150-300/month),
which represented the bulk of the formal sector housing market up to 1990, much of it
financed by the government housing bank, Bank Tabungan Negara (BTN).
2. Factors specific to land use and property development. These include the develop-
ment approval and land-titling process, delays, informal and formal fees, the structure of
the development industry, and infrastructure shortages. These factors have joined to en-
courage the holding of urban land out of development.

3. The Impact of Regulation on Formal-Sector Development

Various government practices and other factors join to encourage holding urban land
out of development, thus decreasing supply and increasing its price. This section dscusses
the most important and concludes with a quantitative estimate of the regulatory cost im-
posed on development.
The Indonesian land titling and development approval system is complex and lengthy-
56 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia

for a full description, see Struyk, Hoffman, and Katsura, 1990. The foundation of the
system is the Basic Agrarian Law of 1960 and the concept that land has a social function.
The steps in the process include award of a location permit to the developer, release of the
land from the original owner to the state, grant of the land from the state to the developer
with a master certificate, and conveyance of individual certificates to the purchasers of the
developer's product. Figure 1 diagrams this process.
Although these steps often occur in this order, they are not necessarily sequential.
Many variations arise from local custom and special arrangements. Also, many forms of

Figure 1
Steps in Land Tilting (release and granting)

CONSULTATIONS
WITH LOCAL

LOCATION
P E W&
PERMIT TO
RELEASE LAND

.1
RELEASE OF
RIGHTS TO
STATE

m I

MASTER TITLE
J. I

APPROVAL OF
SITE PLAN

MASTER TITLE
SPLITTING OF
MASTER TITLE
1
REGISTRATION
OF SPLIT
TITLES

J.
TRANSFER OF
TITLES TO
PURCHASER OR
LENDER

Source: Struyk et. al., 1990.

 B . Ferguson and M . HofSman, Land Markets and Regulation in Urban Indonesia 57

title with different rights and length of tenure exist. Badan Pertanahan Nasional (BPN)-
the national land agency-has the responsibility for administering the development and
land titling process and keeping the country’s urban land records.
Three aspects of this system affect land prices substantially: location permits, process-
ing delays, and informal and formal fees. The structure of the development industry and
infrastructure provision also have an important influence. Two factors that might seem
important-zoning and the time limits of the land title typically used for formal-sector
development (hak guna bangunan)-appear to have less effect.

3.1 Location Permits

3.1 .a Purpose
The public purpose behind location permits is to encourage contact between develop-
ers and government officials at an early stage in the process and allow officials to monitor
and shape development. In practice, government authorities often do not use location
permits to promote better development and land use.
Developers look upon location permits as a means of solving the problem of assem-
bling land at reasonable cost for large formal-sector projects. Urban Indonesia has highly
fragmented land ownership; many people hold some sort of right to land, often small
parcels. Location permits serve a vital function in assembling land for formal development,
particularly residential subdivisions that require a large amount of land. However, location
permits also allow developers to hold large amounts of urban land out of development,
constraining urban land supply.

3.1 .b Process and procedures

The location permit process is the first official step in acquiring and titling land for
formal sector housing development. Most often, the developer begins the location permit
process with a series of informal consultations with local officials. The formal request for
the permit starts with the submission of an application to either local officials (if the parcel
is over 15 hectares) or provincial officials (if over 200 hectare^).^ The application must
include six items of supporting documentation? In addition to the national land agency
(BPN), the local office of the national planning ministry (BAPPEDA) has a major role in
reviewing location permit applications. Statute sets out the criteria for approval of location
permits only in general terms. Although approving entities are to take into account plan-
ning and land-use, little coordination occurs between government agencies that provide
infrastrucmre and approval of location permits. Location permit regulations do not provide
for any charges to be levied against the applicants. In practice, developers pay both formal

51n addition, if the proposed location is over 200 hectares, the submission of the application is
also to the governor, but approval is still needed from the Minister of Home Affairs.
6A copy of the Articles of Incorporation of the developer; the developer’s Tax Payer Identifica-
tion Number; a sketch map showing the proposed location; information about the location, includ-
ing its area and existing land uses; a formal statement of the developer’s willingness to pay compen-
sation to the landowners; and a description of the project accompanied by a description of environ-
mental impacts.
58 B . Ferguson and M . Hoffman, Lnnd Markets and Regulation in Urban Indonesia

and informal fees totalling a minimum of one percent of the cost of the land. The process
takes an average of 6.5 months.
In practice the time for acquiring the land varies according to the size of the project
and the difficulties of settling the level of compensation with the original land owners.
Legally, location permits are limited in time; within Jakarta, the validity is one year. Fixed
time periods also exist for purchase of land and titling, which is the last step in the
development approval process, once the location permit has been received. In practice,
however, government officials renew location permits as long as the developer maintains a
good relationship with them and makes some progress in purchasing and developing land.

3.1 .c Developers’ use of location permits

Once government awards a developer a location permit for a parcel of land, other
developers cannot buy and develop land within the permitted area against the wishes of the
permitted developer. Thus, the location permit reserves this land for the approved developer.
Although laws prohibit transfer of location permits between developers, such transactions
occur either directly, or through changes in ownership of the development company holding
the location permit.
Often, the receipt of a location permit for a substantial, well-located piece of land
provides the cornerstone for establishing a development company. The development com-
pany then sub-divides, installs infrastructure (water, sewer, streets, electricity, telephone,
parks), builds residential units and commercial areas, and sells the residential units while
maintaining some equity interest in the commercial area. Although developers are legally
prohibited from selling sub-divided but unimproved lots, they often do so, particularly to
upper-income households that prefer to build their own homes. Developers of very large
tracts of land may build the infrastructure of entire communities. Small and medium-sized
development companies customarily develop the land within one or two location permits
held by their partners (see box 1 for a description of such a firm).
As market conditions warrant, the development company gradually buys the land from
the individual owners in the permitted area. This period is often ten to 25 years for
residential developments of 100 to 2,000 hectares where the problems of land assembly are
often daunting. The period tends to be shorter for commercial/office developments and
shopping centers on two to eight hectares where the problems of land assembly are less.
Overall, the location permit process encourages holding urban land out of develop-
ment. A comparison with land development in the United States helps clarify this effect.
U S . developers typically enter into an option agreement to purchase land conditioned on
the approval of their project by local government. Upon government approval, the developer
then buys the entire parcel and develops the land in phases timed to meet market demand.
Thus, U.S. developers typically have considerable carrying costs including the interest on
the money they invest in the purchase of land and property taxes-property taxes range
from one to three percent of land value per year.
In Indonesia, the location permit process allows developers to control large tracts of
land while only gradually purchasing them. Property taxes are also very low, based on a
maximum legal rate of 0.1 percent of appraised value per year. The location permit
process also often allows Indonesian developers to pay a below-market price for land. For
 B . Ferguson and M. Hofman, Lnnd Markers and Regulation in Urban Indonesia 59

Box 1
P.T.Cherry Grove

One of the partners in P.T. Cherry Grove (a fictitious name) received a location permit for
325 ha. of land on the edge of Jakana in the early 1970’s. At that time, he purchased 70
hectares of the land for Rp. 200/m2. He and other investors established P.T. Cherry Grove
in 1984 10 deveIop this land in what had become an attractive suburb. This is the company’s
only development site. The investors had no problem in renewing the permit annually and
transfening it to the new company, one of many firms owned by these investors.
By 1985, the company had purchased a total of 290 ha. and the price had risen to Rp.
15,000-30,000/m2; development of roads and other infrastructure in the area had stimuhted
the rise in price. P.T. Cherry Grove then sub-divided this land and built infrasuucture
suitable for middle and upper-income development, including parks and schools. The
company’s agreement with the local government requires that they transfer the infrastructure
to the city in stages. However, the company fears that the city will fail to maintain the
infrastructure, reducing the value of the land the firm still owns; they are retaining control
until all land is sold.
‘The company has developed most of this tract as middle and upper-income residential. P.T.
Cherry Grove customarily builds the middle-income housing and just sells land to upper-
income households, who typically prefer to build their own homes. In addition, the firm has
built a shopping center at the comer where the tract meets the main commuter artery to
downtown Jakarta. Several Indonesian and other financial institutions have provided con-
struction and long-term financing.
Since 1985, the company has purchased another 40 hectares of land within the permitted
area, and by 1989, the price had increased to Rp. $70,000-150,000/m2. The firm attributes
this increase to both improvements in infrastructure and increased development of the area
and the overall rise in land values in Jakarta. Land values jumped in 1990 to Rp. 100,000-
20,000/m2, but have since threatened to fall. At this high level, the company is uninter-
ested in purchasing more land immediately. In general, the company waits for landowners
with pressing financial needs such as weddings or religious pilgrimages to offer their land at
lower prices. The company counsels the purchasers of its sub-divided home sites now
interested in selling their lots against reducing their asking price, which would result in
lower appraisals of the value of land that the company still owns.
____ __ _.__ ~

these reasons, Indonesian developers make a small initial investment in land and pay low
carrying costs compared to U.S. developers.
Thus, the location permit process both legally allows and makes economically feasible
stretching out the development process over extraordinary lengths of time compared to the
us.
Data available on location permits and associated development in West Java support
the conclusion that location permits are used to hold land. In the Botabek’ area, figures from
the Provincial Land Agency show that over 48,000 hectare were included in such permits
during the 1983/84 through 1987/88 fiscal years. The total amounted to approximately 8

7Botabek comprises the three districts (kabupaten) which surround the City of Jakarta. In the
metropolitan area this is the fastest growing region.
60 B . Ferguson and M . Hoffman, Land Markets and Regularion in Urban Indonesia

Figure 2
Botabek: Annual Location Permits (ha)&
Cumulative Total Permitted Area (in percent of total area)

Area (LOO0 Ha) % of Botabek (cumulative)

25 - - 10%
Housing Other
4 % of Botabek
20 - - 8%

15 - - 6%

10 - - 4%

5 - - 2%

0- ?a-0%
1983~~

percent of the Botabek land. This area could house over 4,000,000 residents at current
average urban densities-well above the demand for formal-sector development in the next
decade. Almost all of this permitted land was intended for housing development with the
balance being mainly for Government uses and industry (figure 1).
Location permits for development financed by the National Housing Bank-a sub-set
of this total-covered about 15,200 hectare of land in West Java province in 1983 - 1988.
But, by 1988, only 4,700 hectare of this total had moved through the titling process during
that period to the point of receiving the master certificate-a development approval that
occurs prior to building. Further, only a little more than 1000 hectare had registered
individual certificates-the end point of the formal-sector development process-see fig-
ure 1.
More significantly, this low level of titling appears to have occurred in the areas under
the greatest development pressure where land prices rose most rapidly. In Botabek-the
central part of the Jakarta region under the greatest development pressure-the titled area
equaled only 28 percent of the permitted area. In the balance of West Java Province where
development pressures are less, the figure was 76 percent (table 5). Thus, only about one-
quarter of land in location permits has moved through the development process in the area
with the hottest market compared to roughly three-quarters in an area with cooler markets.
These figures are only approximate.* Nevertheless, this data presents a reasonably ac-
curate picture of a large and growing amount of land held out of the development process.

*Because some of the land in location permits is undoubtedly in the process of titling (lowering
the land reserve figure) while some of the titled land was not included in the permitting process
(raising the land reserve figure).
 B . Ferguson and M. Hoffman, Land Markets and Regulation in Urban Indonesia 61

Table 5
Comparison of Location Permit and Titling Data for BTN Housing
in Botabek 1983-87 (in hectare)

Location Permits Master Cert’s Master Cert’s in %

~-

Bekasi 1,203 636 52.87

Bogor 1,037 506 48.79
Tangerang 12,196 2,942 24.12

TOTAL BOTABEK 14,436 4,084 28.29

Other West Java 808 617 76.36

TOTAL WEST JAVA 15,244 4,701 30.84

Source: Badan Pertanahan Nasional

Table 6
ReleasedgLand, an@Land Uses in Compliance with Spatial Plans in Areas
Included in Location Permits: Botabek 1983 -1%8 (in percent of permitted area)

Housing Other

Area Released 10% 25%

Area in Compliance with the Jabotabek Spatial Plan 8% 23%

Source: Direktorat Jendral Agraria. Konsep Saran Perubahan Rencana Umum Tata Ruang
Jabotabek, 1988

It supports the view that developers use location permits more to invest in land than
develop housing.
Once a developer acquires a location permit he is entitled to begin acquiring the land
from the original owners. However, the common practice, as noted above, is to acquire
only a small portion of the site initially. Table 6 places the amount of land within location
permit areas that has gone through the next major stage in development (“release” to the
government-see figure 1) at only ten percent for housing developments. Again this figure
is only an approximate indicator. Still, given that most of the land going into development
in Botabek needs to be released (90 percent according to Struyk, Hoffman, & Katsura, p.
125), it signals that developers hold land in location permits rather than acquire and build
on it.

%‘Release”refers to the next major step in the land purchase process after location permits. It
typically occurs after a price has been negotiated but before construction. It refers to the transfer of
rights from the original landowner to the state, from whence rights are “granted” to the developer in
the form of a “master certificate.” See figure 1.
62 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia

Nothing is inherently wrong with developers storing some land for future projects-a
common and unavoidable practice in both advanced and developing countries. But the
nature of the Indonesian land-law system and the way the location permit process functions
raise efficiency and equity issues.
One problem is that the original land owners included in a development find selling
their land to a third party difficult. In effect the developer has obtained a free option to
buy their land. The limited options of landowners depress the price at which they can sell
their property to developers and, understandably, provoke conflicts. We now turn to this
subject.

3.1 .d The price of land in permitted areas

Developers often pay an extraordinarily wide range of prices for land within areas for
which they have location permits. Uninformed small farmers on the urban fringe and
homeowners in informal settlements ("kampungs") on centrally located land may sell their
land at a fraction of its market price. Speculators who have bought up land in anticipation
of development may hold out for prices many times higher.
Overall, the price the developer pays to acquire land from small owners tends to be
below market. Small landowners are at a great disadvantage in negotiating with developers
for many reasons. First, many small landowners lack information on alternatives to selling
at the price asked by the developer and knowledge of their legal rights. Hard, specific
information on land prices is difficult for many people to get. High-level government
officials often exhort small landowners to become informed before they sell their land, or
to become a partner in the development in return for their land.1° But no systematic
mechanism exists for collecting or disseminating information on land prices, the alterna-
tives to selling land, or informing people of their legal rights.
Second, the exclusive right of the developer who holds the location permit to develop
the permitted area reduces landowners' options. Generally, the only alternative of the
landowner to selling his land to the permitted developer is to refuse to sell it. This
alternative lends some power to a stubborn landowner in negotiations, particularly as land-
owners are not legally required to sell their land at the price offered by the permitted
developer.
Third, developers and local government officials have powers of persuasion and, as a
last resort, coercion over landowners. If the developer has difficulty purchasing the land
directly from the landowner, the firm seeks the assistance of local officials in persuading
the landowner to sell. Legally, only developers of projects with a public purpose-such as
BTN-financed moderate-priced housing-are able to ask government officials to mediate
with landowners. In practice, developers of projects that are private with no public pur-
pose also ask local officials to help them if they run into problems in land acquisition.
Urban government officials or the village head can bring substantial social pressure to
bear on small landowners. Local officials typically remind small landowners that land has
a social function and that they should be willing to use their land to contribute to national

''The location permit law specifically recognizes this possibility (PMDN No. 3i1987).
 B . Ferguson and M. Hoffman, Land Markets and Regulation in Urban indonesio 63

development under Indonesian tradition and practice. This argument is often persuasive.
Less frequently, local officials support small landowners in their negotiations with devel-
opers. When government officials support small landowners, developers complain that
they are failing in their duty to contribute to development and that they have paid formal
and informal fees to government officials for the location permit that entitles them to low
prices.
Occasionally, developers have built walls around the land of owners who refuse to sell
or cut off their access in other ways. Not surprisingly, the ambiguities of the location
permit process and land acquisition for development cause land disputes and many com-
plaints about and to government. The Indonesian press is full of such accounts.
Overall, location permits have two major effects on land prices. First, they decrease
the price of land paid to small landowners by developers who hold location permits. The
reasons for this below-market price consist of the monopoly power permitted developers
hold, the corresponding weak bargaining position of landowners, social norms that support
developers and government officials in persuading local people to sell land at below-
market prices (the “social” value of land), and the lack of information of small landowners
about market prices and alternatives to selling outright-such as retaining an interest in the
development.
Second, the location permit process tends to increase the price of land and improved
property paid by homebuyers and other end users because it encourages developers to hold
land out of development and, hence, limits land supply.”
Developers that hold location permits enjoy oligopoly profits from the extra difference
between the below-market purchase of land and above-market prices for land and improved
property.

3.2 Fees, Time, and Complexity

The location permit is only the first stage of the formal development approval process.
Subsequently, most formal development requires that land be released to the state from the
original landowner and then granted to the developer; in West Java, 90 percent of the land
developed for BTN housing has gone through the release and grant procedure (Struyk,
Hoffman & Katsura, 1990:125). Suuyk et. al. (1990) estimate that the entire development
approval and titling process takes an average of 32 months. As the pace of development

~~ ~~

“A third but more minor conseql;ence is that location permits may have made development of
BTN-financed moderate-priced housing projects more economically feasible. BTN imposes limits
on the purchase price of the land and homes that it finances. By buying land at beiow-market
prices, developers can more easily build and market BTN-units at prices below these ceilings while
maintaining the same or greater rate of profit. Hence, the developer sometimes may share the
subsidy of below-market land prices with the purchaser of the BTN unit. In such cases, this transfer
amounts to a perverse form of cross-subsidization,where poor landowners subsidize better-off BTN
unit purchasers. However, even with BTN-housing, Gilbert and Larkin (1989:19) conclude that
flexibility in the price ceilings and financing allow “private developers to recover all or part of their
(additional) costs by raising the price.” For strictly private development, the developer receives
most of the benefit of below-market land prices because no ceiling exists on the price for his
product.
64 B . Ferguson and M.H o j h a n , Land Markets and Regulation in Urban Indonesia

increased in the late 1980s, average processing times have also lengthened (Bertaud: 1989).12
This delay results in carrying costs to developers, including interest charges on funds
invested and property taxes, although, as noted, the location permit process allows the
developer to acquire land gradually and, often, at below-market rates, thus reducing these
carrying costs. More important, informal and formal fees total 10-29 percent of land costs
and burden the development process (Struyk, Hoffman, & Katsura, 1990:152).
Five types of charges are associated with titling: those whose amount is set in regula-
tions; those set out in regulations without specific amounts: payments without regulatory
support, but which correspond to operating and administrative costs; minor payments to
maintain good working relations with officials: and major payment to initiate a project or
to ensure that it moves forward (Struyk, Hoffman, & Katsura, 1990:152). In practice, the
distinction between these types of payments blurs.

3.3 Structure of the Development Industry

Many regulatory factors discriminate against small developers and erect barriers to
entry into the formal development industry. Smaller developers lack the political clout and
money often necessary to secure location permits, change the zoning of land, and acquire
other development approvals. Thus, such developers lack the large tracts of land and
substantial financial backing necessary to undertake BTN-projects, the mainstay of formal
development until recently. In sum, complex regulatory procedures force developers to
compete mainly for government approvals and information-particularly location permits-
rather than focus on efficiently building a better product. In this environment, small
developers are at a disadvantage.
In addition, government regulations require that developers of residential properties be
incorporated as firms specializing in development. Other corporations, partnerships, and
individuals are not permitted to develop housing.
Not surprisingly, ten large firms have come to dominate the Indonesian formal-sector
development industry. They typically engage in all types of formal development, including
residential, commercial, and industrial projects, although they may specialize in one and
shift from one to another with changing economic conditions. With the decline in attrac-
tiveness of BTN-financing and production for the lower rungs of the formal residential
market, many of these firms were shifting into commercial/office and upper-income resi-
dential development. These firms’ investments range far beyond land and property, including
many other businesses (Gilbert and Larkin, 1989: 3-10). In addition to moving between
different types of real estate development, they shift in and out of their other businesses to
achieve maximum gains.13 Typically, they own large tracts of land, although they also
acquire new land. Land price appreciation further strengthens their position relative to that

‘*Bertaud (1989: 7) notes that the average time for development processing of subdivisions had
risen from 17 to 28 months in Jawa Barat Province and that large developers were using full-time
“file pushers” to quicken the pace of processing.
13A survey of 30 private housing developers in the Jakarta area found that 67% had other
businesses before entering the housing field. See Gilbert and Larkin (1989) for a discussion of the
structure of the development industry.
 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia 65

of firms with little land. Economic theory and studies of areas with oligopolistic develop-
ment industries suggest that this concentration limits competition and raises the price of the
product.

3.4 Zoning
When enforced, zoning plays a role in limiting the supply of land available for devel-
opment and creates large and sudden profits and losses. However, Indonesian developers
indicate that zoning plays less of a role in constraining the supply of land for development
than in many countries. One larger developer comments: “Zoning has little connection
with actual land-use.”
A number of reasons help explain the low influence of zoning on land use. The
planning capabilities of many local governments are low while many also use structure
plans that broadly indicate rather than specify land-use. Much development, including that
of 80 percent of residential units, is informal and falls largely outside of government
regulations. Finally, large formal-sector developers, in particular, frequently influence
government officials to change zoning. Data from the Botabek area support this conclu-
sion. While the location permit regulations state that the proposed development should
comply with regional development and/or city master plans), table 6 shows minimal com-
pliance.
This conclusion goes against conventional wisdom in developed countries and one
conclusion of Bertaud’s study (1989) on the regulatory environment of urban land in
Indonesia. Bertaud (1989) examines two basic issues: the effect of development regulations
on urban land and that of rules and practices involving trunk infrastructure. In examining
zoning, Bertaud’s study largely appears to consider zoning regulations as written rather
than as practiced and felt by developer^'^ and concludes that zoning has an important ef-
fect in raising urban land prices. However, interviews with major developers who under-
take an important share of formal-sector development in Jakarta indicate that zoning, in
practice, has little effect.
Bertaud’s study is on stronger ground in its analysis of how infrastructure provision
might limit land supply.15 The location of trunk sewer and water lines and major roads, it
might be argued, largely determines the amount of available land for formal-sector devel-
opment. However, even infrastructure provision may affect land availability and increase
costs for formal-sector development less than expected in urban Indonesia.16 The reason is
that much formal-sector development does not rely much on publicly provided water and
sewerage.

‘*The impact of zoning may vary between Indonesian cities. Arguably, Jakarta enforces its
zoning regulations more than most other cities. However, even in Jakarta, the effect of zoning on
urban land appears to be minor relative to other factors.
lSBertaud’soverall conclusion-that very high densities of poor urban settlements in Indonesia
result from rigidities in the land market largely caused by government-is also one that our analysis
supports.
16An indication is that Jakarta’s urban development plan has had limited success in stopping
development in environmentally sensitive areas towards the north and south of the city.
66 B . Ferguson and M.Hoffman, Land Markets and Regulation in Urban Indonesia

Instead, many formal-sector developers and households provide their own water and
sewerage. Government has extended piped sewers to less than 5 percent of the urban
population. Septic tanks with a drainage pit or leach field serve 35-40 percent of the urban
population; the remainder discharge directly to surface drainage networks (ditches), into
septic tanks without a leach field, and elsewhere. Even when sewers exist, local and
provincial governments frequently fail to enforce regulations that require formal-sector
development to connect to them. Piped water serves only 34 percent of the urban popula-
tion, while much of the remaining population use groundwater for drinking and other
purposes.
In contrast, government provision of roads and telephones may limit formal-sector
development more than that of piped water and sewers (see “Other Factors Affecting
Development”, below).

3.5 Duration of Land Rights

Ownership of land under the Indonesian legal system consists of various property
rights for different time periods and types of use. Only one form of holding property, hak
milik, allows ownership of land in perpetuity. However, only Indonesian individuals can
hold land in hak milik. Corporations can not. Normally, government grants development
firms and corporations another title-hak guna bangunan-which has a 20-30 year term
that can be extended an additional 20 years. The land supposedly reverts to the state at the
end of this term. However, little practical experience of this overall limitation of 40-50
years exists because the hak guna bangunan title was created in 1960.
Despite the letter of the law, some commercial and residential development occurs on
hak milik parcels. In the case of commercial development, Indonesian individuals can
hold hak milik title on behalf of a corporation. Generally, the individuals-who may be
directors of the company or relatives-execute a power of attorney to permit the develop-
ment company to build on their land. For residential development, the regulations are
clearer and prohibit housing development on hak milik parcels. Nevertheless, the practice
occurs through the use of powers of attorney. Data from BPN in Tangerang show that
approximately 25 percent of the BTN-financed housing development in the area during the
1983-1988 period occurred on hak milik land.
Nevertheless, the uncertain term limitation of hak guna bangunan might be expected to
force adjustments in the economics of development by creating additional risk. Develop-
ers might charge more in rent to recoup their investment in a shorter period of time or be
willing to pay less for land.
Developers and property consultants report little concern about the time limitation of
hak guna bangunan, and little effect on rent levels or land prices. We are unable to
document any adverse effects. One explanation of this apparent lack of concern is that the
added risk of this time limit may be small and unnoticeable compared to the larger economic
and political hazards that already impact development in Indonesia. Another is that the
ability of developers to use hak milik rather than hak guna bangunan may have made the
term limits of this second form of title largely a fiction.
 B . Ferguson and M. Hoffman,Land Markets and Regulation in Urban Indonesia 67

3.5 Other Factors Affecting Development

A number of factors besides government regulations and industry structure also raise
urban land prices and affect formal development. These include the ability of developers
to acquire bank finance to purchase land, the shortage of roads and telephones, and, less
important, the property tax.
Regulatory systems and business relationships that allow the finance of land encourage
land speculation and a boom and bust cycle. Hence, in both developed and developing
countries, governments often enact laws and banks apply procedures that force developers
to acquire land with their own funds. Although the Indonesian government has taken steps
to limit bank finance of the purchase of land, developers comment that this practice is still
widespread.
During the flush times of the late 1980s up to mid-1990, developers bought land that
quickly appreciated in value and then used this land as collateral for loans used to buy
more land rather than to develop the property that they had already bought. Although
central bank regulations now constrain banks from making land loans, this practice still
continues since banks need not verify that loans borrowed with land as collateral are
indeed used for development rather than purchase of more land.I7 Other mechanisms exist
for bank finance of land although documenting the frequency of these quasi-legal means is
difficult. The finance of land is particularly common for centrally located, high-value
parcels suitable for commercial/office development. In contrast, developers of informal
and modest formal-sector development typically lack access to institutional credit, and
must often borrow from money-lenders at high rates (Hoffman, Walker, Struyk, 19895.2).
The lack of roads and telephones also limits the supply of urban land suitable to formal
development and raises its price. Increasingly, developers must provide road and tele-
phone lines18 at their own expense. Although the cost of private provision of this infra-
structure might be justified as a de facto development fee, it nevertheless raises the cost
and s h r i n k s the market for formal development.
The Land and Property Tax (PBB) replaced two older taxes in 1986. The goals of this
substitution included broadening the tax base and simplifying the tax structure. The national
government of Indonesia collects this tax and distributes it to localities. The PBB tax has
proved successful in increasing tax receipts. However, the maximum rate of only 0.1
percent of assessed value is very low. Collecting PBB in urban areas has also been a
problem although individual households have a very high rate of payment (Hoffman and
Marbun, 1990). In Jakarta,city government collected only Rp. 30.6 billion of a projected
Rp. 58.6 billion for 1989-90 fiscal year. Nonetheless, PBB collection rates are better than
those for property taxes in many developing countries. As discussed, low property taxes
are one of many factors that make holding land inexpensive.

17A more important constraint to bank finance of land appears to be the uncertain title of much
property (Gilbert and Larkin, 1989: 22).
'*Within the subdivisions built out by developers.
68 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia

3.7 The Regulatory Cost of Formal Development

Table 7 presents quantitative estimates of some of the major costs imposed on a typical
residential development that went through the development approval and titling process
between 1985-89. It is meant as a rough illustration of how regulation has raised the price
of development in Indonesia rather than an accurate measurement. The cost of these
regulations sums approximately one-third of the total project cost. The elements of this
cost are discussed briefly below and Annex A presents the assumptions on which these
calculations are based.

Table 7
The Cost of Regulation: Typical Residential Project 1985-91

Type of Cost Percent of Total Project Cost

Interest carry 9.31

Property tax carry .05
Informal and formal fees 6.80
Cost of resmction on land supply 18.15
Total 34.31
Source: See text & Annex A.

3.7.a Interest carrying cost

As the development approval process takes an average of 2.67 years to complete,
developers incur interest costs on the money invested in their project over this period.
Sometimes, this interest is in the form of payments on bank financing used by Indonesian
developers to purchase land. More frequently, it represents the opportunity cost of the
developer’s own capital. Developers want to avoid the high opportunity cost imposed by
delays in processing, particularly because the rates on interest at commercial banks often
far exceed inflation and represent a lucrative alternative (Gilbert and Larkin, 1989: 19).

3.7.b Property tax carrying cost

Similarly, developers pay property taxes during the development approval process on
the land that they have purchased. In Indonesia where property taxes are very low and
location permits allow developers to gradually purchase land, the property-tax carry is
insignificant.

3.7.c Informal and formal fees

Struyk, Hoffman & Katsura (p.152) have calculated the total of informal and formal
fees at 10-29 percent of land costs. Assuming that land represents 35 percent of the market
value of an improved property, these fees represent, on average, 6.8 percent of the total
project cost.

3.7.d Cost of restricting the supply of land

The location permit process, urban infrastructure shortages, below-market land prices,
and low property taxes join to encourage the holding of land out of development, thus
 B . Ferguson and M . Hofman, Land Markets and Regulation in Urban Indonesia 69

restricting supply and raising its prices. The complexity of this interaction makes direct
estimation of this cost difficult. It also makes distinguishing and quantifying the effect of
individual factors difficult, if not impossible. However, the real price increase in land
values during the development approval process is a rough proxy of the overall effect.
At the level of an individual project, the delay caused by the development approval
process results in a higher real price to the consumer during periods of rapid property
appreciation. The consumer could have bought the product earlier at a lower real price, but
ends up paying a higher real price because of delay caused by processing. The hotter the
market, the more this procedural delays ends up costing the consumer. Thus, regulations
impose their greatest cost when a boom already puts pressure on supply and demand.
At a system-wide level, economic theory suggests that the price of residential develop-
ment will rise at roughly the same rate as disposable incomes when land markets are
unregulated and competitive. Thus, the difference between the increase in the real price of
residential development and that of real disposable incomes derives largely from constraints
on land supply, many of them due to government regulations. In Indonesia, developers
report that real disposable incomes of the middle-class have risen little if any in recent
years. Hence, the real increase in land prices roughly approximates the costs of constraints
imposed on land supply.
For the 1985-89 period, real increases in land values during the average processing
time of 2.67 years represented 18.2 percent of total project cost. This is the major regulatory
cost imposed on development.
In Indonesia, the idea that government regulations impose costs on development is a
new concept to many. Our evidence suggests that these costs are, indeed, significant.
Interest and property tax carrying costs are modest (a total of 9.36 percent of total project
cost) compared with many other countries such as the US because the location permit
process allows developers to purchase land gradually over long periods. The main regula-
tory costs result from informal and formal fees imposed directly by government and the
reduction in the supply of land from regulatory incentives to holding land out of development.
Together, they total 24.95 percent of total project costs.
Who bears these costs? Regulatory and other costs that are imposed on the land
development process do not necessarily fully translate into higher prices for the home
buyer, renter of an apartment, or lessee of an office. Developers attempt to pass these costs
backwards to landowners by paying lower purchase prices for land or forwards to consum-
ers by raising the price of their development product, but do not necessarily succeed. The
outcome depends on many factors that affect the elasticities of supply and demand, includ-
ing hsposable incomes, concentration of the development industry, and the availability of
comparable locations. Consequently, these costs are often shared by the three actors in the
development process: the landowner, the developer, and the consumer.
Our evidence suggests that Indonesian developers are able to pass on the great bulk of
regulatory costs to small landowners and consumers. Owners of land in an area covered by
a location permit are in a weak bargaining position because they can sell their property
only to the developer who holds the location permit, But, while land has a “social func-
tion” under Indonesian law that holds down its price, development does not. In general,
developers are able to sell their product to consumers at the highest price the market will
bear.
70 B . Ferguson and M . HofJman, Land Markets and Regulation in Urban Indonesia

4. Recommendations
Deeply held notions about land in Indonesia and the mission of the Basic Agrarian
Law make change a delicate prgcess. However, Indonesia has outgrown many of its
current land regulations. The location permit process, for instance, may have been work-
able when rates of urban land appreciation and development were much lower. Now, it
fails to balance the interests of developers, small landowners, and government. Hence, we
make the following recommendations, mindful of the need to build on rather than replace
the current system:
Improve the efficiency of the land administration agency, BPN. We have dealt with
the details of agency reform elsewhere (Hoffman and Ferguson, 1991). They include
training, creation of a reporting and monitoring system, review of expenditures and
revenues, improved record keeping, more and better equipment (file cabinets, vehicles,
proper storage facilities, and, eventually, computers), indexing and cross-referencing
of legal codes governing land regulation, and smoother procedures for granting and
registering land rights. Efforts should focus on the provincial and local levels, where
much of the processing of land titles occurs.
In the longer term, direct transfer of property from buyer to seller without gov-
ernment in the middle. The government should consider a system of direct transfer
between buyer and seller of property, instead of the current system that puts the
government officials in between. The government could maintain the underlying right.
Reduce legal and financing barriers to entry into the property development busi-
ness. The government should remove the legal restrictions on entry into the property
development business, and reform regulations to encourage small new firms. The
capital requirements for BTN finance of housing development help cause the industry 's
extreme concentration and should also be reviewed. Encouraging small developers to
enter the industry would increase competition and help keep down prices.
Reform of the location permit process. The location permit process needs reform
that retains its virtues and corrects its vices. The location permit process succeeds in
providing a mechanism for land assembly and, hence, development of large projects in
Indonesia's urban areas, where landownership is highly fragmented. l9 However, the
location permit process fails to balance the interests of developers for land assembly
with that of small landowners for a reasonable price. It also fails to promote develop-

lgMany countries undergoing urban development face similar land assembly problems and have
developed mechanisms that balance competing interests with more or less success. In the U.S., the
law of eminent domain and redevelopment law and practice have allowed for assembling land for
development. Under eminent domain, government can acquire land needed for a development with
a public purpose, but must pay a fair market value-usually determined by an appraisal. Beginning
in the 1950s, U.S. redevelopment law and redevelopment agencies became the means for assem-
bling urban land for large projects in urban areas. At first, redevelopment often led to abuse, such
as wholesale destruction of large neighborhoods and displacement of their residents with little
warning and compensation. With time, redevelopment law has been modified and its practice
become more sensitive.
 B . Ferguson and M.Hoffman,Land Markets and Regulation in Urban Indonesia 71

ment rather than land speculation. To achieve these goals, reforms should put greater
pressure on developers to build, strengthen the bargaining position of small landowners,
and free the urban land market to operate. The spirit and, to some extent, the letter of
location permit law allow some important changes that would contribute to these
objectives (Hoffman and Basuki, 1989). The following recommendations adopt and
build on those in Hoffman and Basuki. 1989:

0 In judging applications for location permits, government authorities can

consider the reasonableness of the amount of land for the proposed project.
Government authorities should closely examine location permit requests and
authorize only the necessary amount of land for the proposed development.
3 Location permits must be renewed on a yearly basis. Under current practice,
these renewals appear automatic. Indeed, local government officials-who often
have often accepted informal and formal fees-may feel obligated to developers
to extend location permits without much review. However, the law could be
changed to set an absolute time beyond which no further renewals are possible.
This limit should vary for projects of different size. An absolute limit would
provide a big incentive for developers to purchase and build sooner, rather than
hoard land for many years at low cost.
0 Current law prohibits sale of location permits between developers. However,
government’s main purpose is to monitor and guide urban development. Thus,
the primary concern is the project, not the developer. The spirit of the law
would be better served by allowing the project to occur through purchase and
sale of location permits. This change would encourage development by creating
a market for location permits. It well complements the establishment of absolute
time limits. Time limits put pressure on the permitted developer to act, while the
ability to sell the location permit allows additional options to meet the deadline.
G Finally, owners of land in a permitted area should be allowed to sell their
property to third parties. The right to build should continue with the developer
who holds the location permit. Currently, landowners only have the right to sell
to the permitted developer or not to sell. Expanding the options of small land-
owners would strengthen their bargaining position and raise the price they nego-
tiate for their land.

Together, these reforms would better balance the interests of the developer, original
landowners, and government within the spirit of Indonesian law.
72 B . Ferguson and M . Hoffman, Lond Markets and Regulation in Urban Indonesia

References
Bank Indonesia. 1985-89. Indikator Ekononomi, Bank Indonesia Weekly Reports. Jakarta: Bank
of Indonesia.
Bank Inonesia. 1990. Indikator Ekonomi, Bank Indonesia Weekly Reports. Jakarta: Bank of
Indonesia.
Bertaud, Alain. 1989. The Regulatory Environment of Urban Land in Indonesia, Constraints Im-
posed on the Poor by Alain Bertaud. Washington, D.C.: The World Bank.
Direktorat Jendral Agraria, Depatemen Dalam Negeri. (1988). Konsep Sara Perubahan Rencan
Umwn Tata Ruang Jabotabek. Jakarta: May, 1988.
Dowall, D. and M. Leaf. 1990. The Price of Land for Housing in Jakarta: Analysis of the Effects
of Location, Urban Infrastructure, and Tenure on Residential Plot Prices, Working Paper #519,
University of California at Berkeley, Berkeley, California: Institute of Urban and Regional
Development.
Far Eastern Economic Review. 1990. The Propertied Class. 13 September, p. 23-23, Hong Kong.
Gilbert, R. & M. Larkin. 1989. Constraints Upon the Supply of BTN-Financed Housing by Private
Developers in Indonesia. Working Paper Prepared for Kantor Menteri Negara Perumahan Rakyat,
Republic of Indonesia and World Bank. Jakarta: The Urban Institute and Hasfarm.
Government of Indonesia. 1990. Indonesia Financial Statistics. v. XXIII, No. 11. Government of
Indonesia: Jakarta.
Hoffman, M.L. & B.W. Ferguson. 1991. Modernizing Land Administration. Prepard for The Badan
Pertanahan Nasional and U.S. Agency for International Deveopment. May. Washington, D.C.:
The Urban Institute.
Hoffman, M.L. & Sumario Basuki. 1989. Technical Assistance Memorandum No. 1: Recommenda-
tions for Improving the Location Permit Process . Jakarta: Urban Institute - Hasfam Dian
Konsultan.
Hoffman, M., C. Walker, R. Struyk, and K. Nelson. 1989. The Development of Rental Housing in
Indonesia: An Analysis and Proposal. Washington, D.C.: The Urban Institute.
Hoffman, M.L. & T. Marbun. 1990. Unregistered Land Rights: Their Role in Improving Housing
Quality, Jakarta: Urban Institute - Hasfarm D i m Konsultan.
Planning and Development Collaborative (PADCO). 1987. The Bangkok Land Management Study.
Washington, D.C.: PADCO.
Planning and Development Collaborative (PADCO). 1990. Bangkok Land and Housing Market
Assessment. Prepared for National Economic and Social Development Board, Royal Thai
Government. Washington, D.C.: PADCO.
Struyk, R., M. Hoffman, & H. Katsura. 1990. The Market for Shelter in Urban Indonesia. Wash-
ington, D.C.: The Urban Institute Press.
Wurta Ekonomi. 1990. Jakarta: Jaya Publishing. September Issue.
World Bank. 1988. Malaysia, The Housing Sector, Getting the Incentives Right. Based on a
mission of Nov. 2-14, 1987 that including Lawrence Hannah, Alain Bertaud, Stephen J. Malpezzi,
and Stephen K. Mayo. Draft.
World Bank. 1989. World Tables, 1989-90. Washington, D.C.: World Bank.
 B . Ferguson and M . Hoffman, Land Markets and Regulation in Urban Indonesia 73

Annex A

Assumption in Calculating Regulatory Cost

The following assumptions were made to calculate the costs imposed on a typical residen-
tial project developed during 1985-91 contained in table 7.

1. Land costs represent 35% of total project cost. In practice, the ratio of land to total
cost varies considerably around this figure. BTN allows a maximum of 40% for land
for the moderate-priced housing that this organization finances. Developers report that
they often have difficulty meeting this requirement in metropolitan areas. Conse-
quently, we chose 35% as a conservative estimate of the proportion of land to total
project cost for moderate-priced residential development.

2. The interest rate paid by the developer on a land loan is 20% per year. Nominal
interest rates varied around this figure during most of this period. Currently, they are
much higher, around 27-30%. Alternatively, 20% represents the opportunity cost of
the developer’s own funds used to purchase land, i.e. he could receive this rate of return
if this money were invested elsewhere.

3. The average time taken in processing a development approval totals 2.67 years. This
is the finding of Struyk, Hoffman, & Katsura (1990). With the increasing pace of
development and pressure on the land approval and titling system, this average time
may well be increasing.

4. The developer purchases, on average, 50% of the land at the beginning of the develop-
ment approval process and purchases the remaining 50% after the process is completed.
In practice, developers purchase land at widely varying points of time. Sometimes,
land is purchased before the first step of the development approval process (the location
permit) in order to avoid the price increases that such approvals often cause. More
commonly, land is purchased gradually over a considerable period of time.

5 . Property taxes total .1 percent of assessed value, which is the legal property tax rate.

6 . Informal and formal fees total, on average, 19.5% of land cost. Struyk, Hoffman, &
Katsura (1990) found that fees range from 10-29% of land costs; hence, 19.5% is the
average.