LIPPO-MAPLETREE - Lippo Malls Indonesia Retail Trust - Investor ...

Retail Market OverviewA further constraint is that commercial buildings, including stand-alone retail developments and shoppingcentres, can only be built on land zoned for commercial use. This regulation is governed by the local cityplanning office that issued the regional master plan which details standard building codes such as sitecoverage, plot ratio and the maximum number of floors. However, the investor or developer may propose arevision/modification of the city planning schedule regarding their site as long as it is still in accordance withthe general master plan.The government has enacted a number of policies and regulations with a view to regulating and controllingmodern retailers and modern market formats and protecting small retailers and traders. So far, theimplementation and supervision of these regulations has not been strong. Legal permits to establish newmodern retail market formats are continuously being issued, even in areas where their issue is ostensiblyprohibited. As a result, government regulations are in many ways failing to control the existence of modernmarkets and retailers, and small domestic traders are becoming vulnerable.Below is the list of government regulations related to the retail industry in Indonesia:• Decree from Trade Ministry (SK Menperindag) No. 420/1997Governing the location of modern retail centres such as department stores or supermarkets i.e. must belocated within the commercial zone as in the City Planning and only permitted to build in provincial citylevel (Dati I) and regency level (Dati II).• President Decree (Keppres) No. 99/1998The opening of the retail market for foreign direct investment• Jakarta Provincial Administration Regulation (Perda DKI) No. 2/2002Regulating the operating hours of shopping centres• Decree from Treasury Ministry (SK Menkeu) No. 253/2002The collection of 10% VAT on all retail products in modern market formats• Decree from Tax Directorate (SK Dirjen Pajak) No. SE-14/2003The revision of VAT on service charge in shopping centres from 4% to 10 %2.9 Retail rentalsRents in most upper grade shopping malls in Indonesia’s major cities are generally quoted in US Dollarsbut are paid in Rupiah on a fixed US Dollar to Rupiah exchange rate, which is typically lower than themarket rate but generally tracks it. However, in many other shopping centres, rents are quoted and paid inRupiah.Retail rents in the upper grade shopping malls in Jakarta have seen relatively modest growth in the pastfour years due to intense competition amongst landlords to attract tenants. Rental growth has beenstrongest in a number of “sought-after” shopping malls that enjoy high and stable occupancy rates. Inthese popular malls, which are mainly located in the CBD or near well established residential districts,rentals have increased within a range of 5-10% per annum between 2003 and 2005, while the overall rentgrew by 2-5% annually in Rupiah terms. During this period, annual supply grew by an average of74,000 sq.m, while average occupancy was 91%-93%. However, rental growth declined in 2006 due toa quite significant additional supply of 149,000 sq.m and a weakening of retail sales. Average occupancy atthe end of 2006 decreased to 89%. The government’s decision to increase fuel price by approximately125% in October 2005 triggered high inflation and affected consumer’s buying power, leading to a stagnantretail market.At the end of 2006, the average net effective rent of prime retail space for specialty tenants (positioned onthe first three floors) in Jakarta’s shopping centres was approximately Rp. 398,000 per sq.m per month. Bygrade, Upper Grade shopping malls commanded the highest asking rentals of between Rp. 350,000 persq.m per month and up to Rp. 1.3 million per sq.m per month, while in the Middle Grade shopping centres,rentals varied between Rp. 200,000 per sq.m per month and Rp. 500,000 per sq.m per month for a typicallease of less than 300 sq.m.F-32