Indonesia moves its capital city

The rationale behind this move are the economic disparities between Java and other islands, historically fewer natural disasters in the proposed location and overcrowding in Jakarta.

The proposed area stands astride two regencies, North Penajam Paser and Kutai Kartanegara, where the government already owns 180,000 hectares. The location is in the centre of the Indonesian Archipelago and it is in the middle of two major cities, Samarinda and Balikpapan.

While Samarinda is the administrative capital city of East Kalimantan province, Balikpapan is a seaport city and was home to the Indonesian operations of a number of oil and gas multinational companies such as Chevron and Total E&P before operations were taken over by state-owned Pertamina. Both cities have adequate infrastructure to support the new capital and new toll roads will connect them by end-2019; this would make the trip to the new capital less than an hour from Sepinggan Airport, Balikpapan. 

Legal preparations for the new capital will commence in 2020, construction will start by 2021 and the move will begin gradually in 2024.

What to look out for in East Kalimantan?

This move will impact sectors such as finance, real estate and construction. With at least one million people moving into this location, many facilities are needed such as residential, retail, hotels and MICE as well as education and health facilities and airports and seaports. The private sector will play an important role in supporting this move as less than 20% of the total cost will be covered by the state budget.

There are some expectations on how this new capital could create a trickle-down effect which could impact the property market in nearby Balikpapan and Samarinda, where many notable developers already have a footprint.  The industrial and logistics sectors are also expected to attract investment since these two major cities are the only entry point to the new capital for now.

What will happen to Jakarta?

Despite Jokowi stating that Jakarta would remain the government’s priority for development into a global city, there will be some consequences:

• As per 2018, the state government owns 17,900 building units worth IDR 1,123 trillion (USD 79 billion) and some of these would potentially be empty. There are opportunities for the government to monetize these assets as well as rezoning or revitalizing upcoming vacant space.
•  Since business and government officials dominate the demand profile of hotels in Jakarta, the move might affect the occupancy of hotels in the short term. See here for the opinion of Sashi Rajan of our Hotels & Hospitality team.
•  Land and residential prices are unlikely to be negatively affected by the move as Jakarta will remain the driving force behind the economy.

This move should stimulate the property market not only in the new capital city but also nearby cities in East Indonesia. As for Jakarta, the perception is that it will continue to be the nation’s commercial and financial hub.