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The future of Chinese property investment in Indonesia

China and Indonesia are hard at work to strengthen their diplomatic relations and team up on a number of projects, meaning significant Chinese property investment could be coming to the world's largest archipelagic state. Several major developments have already been announced, and the two countries have spoken positively about future collaborations, potentially leading to a spate of new Chinese-backed building activity in Indonesia's burgeoning property market.

Why Chinese investors are looking to Indonesia

Indonesia, the fourth most populous country in the world, represents a huge - and currently unfulfilled - opportunity for Chinese backers. While China ranks as one of the top investors in many countries in the Asia Pacific region, it is just the 13th biggest investor in Indonesia, behind the likes of Mauritius, the Netherlands and Taiwan.

Furthermore, demand in Indonesia's real estate market is outstripping supply, pushing prices higher and creating a major need for more house-building. Evidence of the need for more housing is provided by Thursday's (April 30th) much-anticipated launch of the Indonesian government's One Million Houses Programme, which aims to deliver adequate accommodation for low-income families across the country.

The housing market boom is particularly obvious in the capital, Jakarta, where apartments in the high-end Regatta complex have almost tripled in value to eight billion Indonesian rupiahs ($616,000) in less than a decade. Property prices across the city have more than doubled since 2009, and with a new push to boost local infrastructure, analysts believe the growth is only just beginning.

Nicholas Holt, head of research for Asia Pacific at Knight Frank, told CNBC about the likely impact of Jakarta's first metro line, scheduled for 2018. "It will lead to some areas seeing huge growth, especially around walking distance of the new metro stations," he explained.

With Indonesia desperate for overseas investment to drive its economy forward, the country is understandably keen for China to step up to the plate. 

For its part, China appears eager to capitalise on this opportunity. The country's foreign minister Wang Yi said: "China is willing to seize the chance to deepen the mutual trust and work together with Indonesia, to forge the comprehensive strategic partnership in name and in fact."

Confirmed Chinese investments in Indonesia

China Minsheng Investment (CMI) is leading a group of 20 private Chinese companies by investing $5 billion to construct integrated industrial parks and towns in Indonesia. 

The money is part of a wider $40 billion initiative involving more than 20 Chinese private enterprises that also includes an agreement between CMI, China's largest investment fund, and the Indonesia China Business Council (ICBC).

Li Huaizhen, chief executive of CMI, explained: "We have signed the investment agreement with the ICBC as a follow up on China's commitment to invest more in Indonesia."

CMI has signalled its intent to invest in four major projects in Indonesia over the coming years, including a sea port and steel factories, although the company is yet to finalise exact locations due to ongoing talks with the Indonesian government.

How Indonesia hopes to overcome previous challenges

Diplomatic relations between China and Indonesia have only recently thawed; ties between the two were severed by Indonesia in 1967 following a failed communist coup, and were only reinstated in 1990.

Cultural differences, bureaucracy and the difficulty of finding local business partners have traditionally hampered Chinese efforts to invest in Indonesia. Citing figures from the Investment Coordinating Board (BKPM), the Jakarta Post said that of the $24.27 billion Chinese firms planned to spend on Indonesian ventures between 2005 and 2014, just $1.8 billion - equivalent to seven per cent - actually came to fruition.

BKPM chief Franky Sibarani said Indonesia is now looking to be more proactive in its approach to handling and supporting prospective investors from China. "We will maximize our special investment management team and collaborate with our embassy and affiliated economic bureau in China," he added.

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