Indonesia’s Real Estate Market Under Pressure from High Interest Rates

Indonesia’s commercial real estate sector is facing growing pressure following the Bank of Indonesia’s decision to raise its benchmark interest rate to 5.75%. The industry is seeing higher borrowing costs, reduced investment attractiveness of projects, and more cautious behavior among developers, according to TEMPO.

Interest Rate Hike and Market Reaction in Indonesia

Expensive Loans

Bank Indonesia increased its benchmark BI Rate from 4.75% to 5.75% in an effort to support the rupiah amid global economic uncertainty. Following this move, the average interest rate on new loans rose from 8.95% in April to 9.31% in May 2026, while deposit rates increased from 2.65% to 2.70%.

As a result, new projects that have not yet secured financing are likely to face higher borrowing costs. Commercial real estate development typically relies on large loans with long construction and repayment periods.

Permata Bank Chief Economist Josua Pardede stressed that higher interest rates intensify competition for capital, making real estate less attractive compared with government bonds and Bank Indonesia instruments.

Offices and Warehouses

The office segment was identified by the expert as particularly vulnerable, as its returns depend directly on occupancy levels, rental rates, and tenants’ ability to expand operations. Warehouse assets are more resilient when supported by logistics, distribution, and trade activity, as well as long-term anchor tenants. However, this segment is also negatively affected by higher interest rates.

In addition to rising financing costs, developers are also facing rupiah depreciation, which has increased the cost of imported construction materials, equipment, and other building components.

Impact on Hotel Real Estate in Indonesia

Rising interest rates are also putting pressure on Indonesia’s hospitality sector, with entry barriers becoming higher. More expensive financing, along with broader macroeconomic and geopolitical uncertainty, is leading to more cautious investor strategies and slower transaction activity, according to Savills.

The hotel asset market is seeing changes in deal pace and structuring approaches. Investors — from private and family offices to institutional players — remain interested, but have become more selective. Savills experts describe the market as being in a “conviction gap,” where buyers are still willing to consider assets but are making decisions more slowly and cautiously. Contract negotiations are taking longer, legal and financial due diligence is becoming more important, and risk assessments are more conservative.

At the same time, the fundamentals of the hotel sector remain stable. The segment continues to be supported by domestic tourism, limited supply of high-quality assets, operational upside potential, and possible land value revaluation.

Investment in Indonesia’s Commercial Real Estate

Josua Pardede emphasized that developers must take into account the combined impact of rising construction costs, higher interest rates, currency risks, slower sales, and lower occupancy levels when evaluating new projects. These factors affect not only financing conditions but also investor return expectations and tenants’ ability to expand.

Rising financing costs reduce the viability of previously planned projects, as land values, construction expenses, and asset valuations become harder to justify without higher rental income.

REI Secretary General Raymond Ardan Arfandi noted that higher interest rates are reducing the attractiveness of real estate investment, especially in the commercial segment. He added that property prices may decline over the next few years, while developers are already delaying expansion plans due to weaker demand and reduced buyer interest.

Conclusion

Analysts at International Investment note that the increase in the benchmark rate has intensified pressure on Indonesia’s real estate market and reinforced a shift toward a more cautious investment phase. Rising capital costs and currency volatility are reducing the number of new projects while increasing financial sustainability requirements.

In the short term, the market is expected to operate in a more selective environment. Developers and investors are shifting their focus toward projects with clear profitability, lower leverage, and more resilient segments.

An additional pressure factor is stricter regulation in the property market. While this currently affects villas and rental housing more significantly, restrictions on the construction of certain tourism and entertainment projects have already been introduced in parts of Bali. Oversight of developers’ legal compliance has also increased. Such measures may expand further, adding an additional regulatory risk for investors when planning projects.