Is it time to invest in Indonesia’s future capital, Nusantara?

In September, Indonesia's President Joko Widodo laid the first stone for the first hotel in Nusantara, the country’s future capital located in East Kalimantan. Hotel Nusantara is being developed by a group of Indonesian magnates led by Sedayu Group’s Sugianto Kusuma.

The first global hotel chain has also gone in. Last month, Marriott International signed a deal with Pakuwon Jati to manage three hotels there, a 300-room Four Points by Sheraton, a 200-room Westin and a 150-room Tribute. Pakuwon Jati’s President Commissioner Alexander Tedja billed the hotels as a “historic project” for the company.

Whether or not all this is mere grandstanding remains to be seen.

While shifting capitals isn't new to Asia – Myanmar, for example, moved from Yangon to Naypyidaw in 2005 – Nusantara’s sheer scale and its site are unprecedented in the modern history of capital moves. It spans 256,000 hectares of virtually undeveloped land in the rainforests of Borneo and will cost a hefty $32 billion to build. Getting there from Jakarta is currently a two-hour flight, then another two-hour drive.

Since its announcement in 2019, Nusantara has also drawn opponents, including indigenous people fearing displacement and tree-huggers in disbelief that rainforests will be razed to the ground for an envisioned ecological-friendly city.

What’s more, President Widodo is serving his final term, causing a wait-and-see among investors if a new president, to be elected in February 2024, might have other thoughts on how to alleviate an overcrowded, polluted and sinking Jakarta, the existing capital.

Strategic bet

But investment strategists believe the pioneers are making a calculated risk rather than just helping to drum up support for Nusantara.

Those with staying power will have the benefit of securing prime sites that are sure to benefit them in the long run.

Eric Levy

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“In my experience, Alex Tedja [of Pakuwon Jati] does not grandstand. He is commercially oriented and one of the sharpest developers that I have worked with in Indonesia over the past 30-plus years,” said Eric Levy, managing director of Tourism Solutions International, Singapore.

Levy added that this development is not for the thinly capitalized developer. “However, those with staying power will have the benefit of securing prime sites that are sure to benefit them in the long run,” he said.

Ross Woods, founder and CEO of Jakarta-based Hotel Investment Strategies, said Marriott and Pakuwon Jati are making “a strategic bet” on a region poised for significant growth. “It’s a profound vote of confidence,” he said.

Groundbreaking for the Marriott hotels is planned for November 2, the chain’s President Asia Pacific excluding China, Rajeev Menon, shared with Hotel Investment Today.

Menon said the timing isn’t premature; moreover, Marriott has a working relationship with Pakuwon Jati stretching back to 1995 when the two partners opened the Sheraton Surabaya Hotel & Towers. This has since expanded to seven Pakuwon Jati hotels operating in Jakarta, Bali and Yogyakarta.

“We have full confidence that with their local expertise; they are able to bring this milestone project to life,” Menon said.

Marriott is also comfortable with virgin territories in Southeast Asia. In Indonesia, it was the first international chain to open a hotel in Senggigi (1991) and Lampung (1990). Both Sheratons are still operating. In Malaysia, it was first in Putrajaya with a Renaissance in 1995. In Vietnam, its recent agreements with Vinpearl Group should make it the first in at least five markets, including Cam Lam where Vinpearl is planning a mega-urban township.

It’s moving

So far, construction of basic infrastructure such as roads and water supply is happening in Nusantara, local media photos show. Officials are also sending progress signals to local media, such as reaffirming that the government will start to relocate nearly 17,000 staff by early next year.

This is in line with Nusantara’s Masterplan (Presidential Regulation No.63 of 2022) that details a five-phase development.

• Phase 1 (2022-2024) focuses on the moving of agencies and institutions from Jakarta.
• Phase 2 (2025 to 2029) should be of interest to hotel and tourism investors. It focuses on developing facilities to accommodate business and industrial districts, education and tourism facilities. By 2029, around 1.2 million people are expected to have relocated to the new city.
• Phase 3, 4 and 5, spanning from 2030 to 2045, will focus on growing the city to nearly 2 million people and the development of infrastructure such as mass transportation and more residential areas to support this population.

Officials are continuing in earnest to woo investors in Asia, including China and Australia, the Middle East and Europe. Indonesia relies on them to fund 80% of the project while it foots 20% of the bill. It dangles incentives, including tax reductions and tax holidays for projects above Rp100 billion ($6.4 million), according to hotel investment broker and consultant Aldi Hermansyah, founder and CEO of Ald Indo Bumi Perkasa, Indonesia.

What hotels to build

As to how many hotel rooms are needed, Hermansyah said, “We can't confirm the number of hotels and rooms yet, but it will be very large. For a start, they will need 3- to 5-star hotels, minimum 200 rooms, and green-oriented to support the vision of a green capital. There are opportunities for quality tourism developments.”

The shift to Nusantara as a new capital is an ambitious project,” he said. “While tax incentives and initial commitments by global chains like Marriott are positive indicators, the uncertainties of infrastructure development, demand dynamics and political stability add layers of risk.

Ross Woods

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Ross believes 4- and 5-star four hotels should lead the way in setting the quality and style, as this will help in the marketing of Nusantara.

“In the initial phases, corporate or business hotels are likely to be the demand drivers. These hotels cater to professionals, government officials and delegates. So, facilities like meeting rooms, business centers and conference facilities are needed,” Ross said.

As the city develops, Woods and Levy foresee demand for extended-stay hotels, as well, to accommodate professionals and government officials who might have to stay for longer durations.

Budget hotels/hostels could also work as the city starts to attract budget travelers or those related to the moving business, Woods said. And if Nusantara develops areas of cultural or recreational significance, there’s potential for high-end, resort-style accommodations, as well as boutique and eco-friendly lodging, given global trends on sustainable travel and unique experiences.

Right timing

For Woods, the right time to invest is when infrastructure projects ensuring connectivity and accessibility are firmly underway; when there is clear and stable regulatory framework for business and property rights; when there are early signs of demand such as embassies, government departments and businesses relocating to Nusantara; and emerging tourism promotions.

“Jumping in too early might mean higher carrying costs and uncertainty, while waiting too long might result in missing out on prime locations or competitive advantages, including more favorable land prices, construction and labor costs,” he said.

Woods added that any investment in a developing or nascent region carries inherent risks. “The shift to Nusantara as a new capital is an ambitious project,” he said. “While tax incentives and initial commitments by global chains like Marriott are positive indicators, the uncertainties of infrastructure development, demand dynamics and political stability add layers of risk.

“However, pioneering investors often bear this risk for the potential of high returns. So, the investments in the early hotels should be seen as a high risk, high return investment.”

Jakarta’s future

It is unfathomable that Jakarta would end up being a jungle that Nusantara is largely today. New cities may rise, but they can never replace old ones, especially cities such as Jakarta with rich history, vibrant culture and established commercial sectors.

As Woods said, “For both Nusantara and Jakarta, the future is bright, yet nuanced. Jakarta will always have its appeal, but its role might evolve. It may see a decrease in government-related travel, including diplomatic travel, but could solidify its status as a commercial and cultural epicenter. This shift might change the guest demographics for hotels.”

Last year, Jakarta started recovering from COVID-19 with a 686% rise in foreign arrivals to 935,000, compared with 119,000 in 2021. This, however, is not even half the 2.4 million foreign arrivals it received in 2019.

But Hermansyah points out the upward trend has continued into 2023 and he is optimistic the city will welcome between 1.8 million to 2.2 million arrivals this year.

Hotels in Jakarta rarely change hands and are tightly held by local conglomerates and local public-listed companies, but significant transactions have occurred in the 1H23, said Xander Nijnens, senior managing director and head of Advisory and Asset Management, Asia-Pacific, JLL Hotels & Hospitality Group.

Two such sales are the Pullman Central Jakarta (as part of a hotel portfolio sale with two hotels in Vietnam), and the Mandarin Oriental Jakarta in early July.

Nijnens expects Indonesian and foreign investors, particularly HNWI, to contribute about US$220 million to transactions in both 2023 and 2024, compared to US$174 million in 2022, and especially in the luxury segment. Both luxury and upscale markets saw RevPAR growth of 3% and 14% respectively in 1H23 over 1H19.