OREANDA-NEWS. Fitch expects the Indonesian government's proposal to introduce unit price criteria to the existing 20% tax on luxury properties to have limited impact on rated developers. This is because most of these developers have the flexibility to adjust their product mix or their existing projects' average unit prices are below the taxable threshold. As a result, Fitch does not expect the regulation in itself to result in rating action on any of the Indonesian property developers that it rates.

The government defines luxury properties as landed homes that are larger than 350 square metres (sqm) or apartments larger than 150 sqm. Buyers pay the existing luxury tax of 20% when they purchase such homes. The government has proposed extending the tax to any residential property that sells for more than IDR2bn (around USD 150,000). Fitch observes that a IDR2bn unit price typically buys a home in the upscale range, which historically made up a sizeable portion of rated developers' presales.

For 2015, rated developers say they expect the proportion of upscale product sales to form 20% or less of their total marketing sales. PT Lippo Karawaci Tbk (Lippo; BB-/A+(idn)/ Stable), plans for upscale properties to make up about 16% of sales in 2015, while PT Modernland Realty Tbk (Modernland; B/Stable) plans for about 20%. PT Alam Sutera Realty Tbk (ASRI; B+/Stable) will be less affected than the other two because the company is not planning to launch any luxury products, in terms of both size and unit price. Fitch believes the rated developers also have the flexibility to adjust their product mixes, which could further reduce the impact of the new tax.

The strong growth in average selling prices over the past four years, tight mortgage regulations, and high interest rates have dampened demand for upscale properties from a peak in 3Q13. Since then, developers have been shifting into selling homes in the mid-low segment, where demand appears to be more resilient.

The government is still discussing the new tax regulation and there is no concrete timeline for implementation yet.