Sustainable real estate: unlocking the opportunity for greener and more profitable real estate in Indonesia

The real estate sector contributes to nearly 40% of the global carbon dioxide emissions and approximately 70% of those emissions are a result of building operations and the remaining comes from building constructions.

As a developing country with a population of more than 270 million, Indonesia is an enormous market for the real estate sector. The ever growing population is becoming increasingly urbanised; a combination which guarantees continuous demand for real estate development.

Whilst the status of being one of the most populated countries offers some advantages, it also poses as a significant challenge when it comes to Indonesia having to reduce its carbon dioxide emissions, particularly in the real estate sector where housing and other buildings are vital in order to accommodate the living needs of the people and to support the economic activities of the country.

Indonesia is aware that it must take a strong action in the real estate sector to achieve its ambitious commitment to net-zero emissions by 2060. To date, Indonesia has been making a good progress in fostering sustainable real estate practices through instituting regulations and incentives. One of the most prominent examples is the green building or bangunan gedung hijau (‘BGH’) framework.

Setting the foundation for a greener future: the legal basis for BGH

The fundamentals of BGH are regulated under Government Regulation No. 16 of 2021 on Implementing Regulation of Law No. 28 of 2002 on Building (‘GR No. 16/2021’). The technical aspects and requirements of BGH are elaborated upon in the Ministry of Public Works and Public Housing (‘MOPW’) Regulation No. 21 of 2021 on Performance Evaluation of Green Building (‘MOPW Regulation No. 21/2021’). Both GR No. 16/2021 and MOPW Regulation No. 21/2021 serve as the main regulations for BGH in Indonesia (the ‘BGH regulations’).

Mandatory implementation of BGH standards for certain buildings

The BGH regulations require specific technical standards for BGH (the ‘BGH standards’) to be implemented both for new buildings as well as existing buildings. In general, though implementation of the BGH standards is recommended, it remains optional. However, it is mandatory for the following:

  1. building under class 4 and class 5, which has more than four storeys and covers an area of at least 50,000 sqm;
  2. building under class 6, class 7 and class 8, which has more than four storeys and covers an area of at least 50,000 sqm;
  3. building under class 9a, which covers an area of more than 20,000 sqm; and
  4. building under class 9b, which covers an area of over 10,000 sqm.
Ranking system for BGH

In addition to introducing the BGH standards, the BGH regulations also provide comprehensive guidelines and checklists for assessing, evaluating and determining the performance of a BGH (the ‘BGH assessment’). The BGH assessment is conducted by a team of experts who are appointed by the  relevant regional government and this team shall assist the regional government in making technical considerations with respect to buildings.

The relevant BGH shall be ascribed certain scores based on the result of the BGH assessment, and such scores shall determine the type of certificate that would be issued by the regional government to the building owner or the building management. The following are the types of BGH certificates under the BGH regulations:

  1. BGH Utama certificate, for a BGH which achieved more than 80% and up to 100% of the total scores;
  2. BGH Madya certificate, for a BGH which achieved more than 65% and up to 80% of the total scores; and
  3. BGH Pratama certificate, for a BGH which achieved more than 45% and up to 65% of the total scores.

The BGH certificate is valid for five years. Upon expiration of the BGH certificate, in practice, the building owner or building management may request for an extension of the BGH certificate without re-doing the BGH assessment from scratch.

Creating more value by going green: economic advantages of BGH

Apart from the environmental benefits, sustainable real estate also offers lucrative economic advantages.

The BGH regulations provide that a BGH owner or operator is entitled to receive the following incentives from the regional government:

  1. specific relief of retribution for building approval and building-related service;
  2. compensation in the form of an additional floor-space coefficient ratio (koefisien lantai bangunan);
  3. technical and/or expertise support, including support in the form of service and/or technical advisory from BGH experts as a pilot project;
  4. award in the form of a certificate, placard, and/or other recognition; and/or
  5. other incentives in the form of a publication and/or promotion.

In addition to the above incentives, the regional governments of some areas in Indonesia also provide certain deductions in land and building tax (pajak bumi dan bangunan) for BGH. Further, BGH development is entitled to access green bond financing issued under Financial Service Regulation No. 18 of 2023 on Issuance and Requirements for Sustainable Debt Securities and Sustainable Sukuk.

Indonesia’s efforts in promoting BGH have certainly yielded significant results. As of the second quarter of 2022, Indonesia has become a proactive participant in the global shift towards promoting sustainable real estate. More than 100 buildings in the country have applied for voluntary BGH assessment, and more than 3,000 buildings have complied with the mandatory BGH standards, which collectively covers an area of more than 20,000,000 sqm.

However, Indonesia is geared towards achieving more, and aims to be one of the leading countries when it comes to sustainable real estate practice. The Indonesian government plans to issue the ‘Indonesia Green Affordable Housing Programme’ in 2024 to further promote sustainable real estate. This programme is also intended to provide several financing stimuli for BGH-based housing development, including green mortgage financing, subsidies for solar panel installation, tax incentives, and asset-backed securities specific to BGH-based housing development.

Balancing profit and impact is the motto for Indonesia. While the country has a long and challenging road ahead in achieving its commitment to net-zero emissions by 2060, it is indeed on the right track and is a promising racer.