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Henry Riady strides across a construction site in the outskirts of Jakarta, trailed by executives scurrying to keep up. He passes between half-finished tower blocks, snaps at a construction worker to put out his cigarette and shakes hands with shopkeepers. The scion of one of Indonesia’s richest families inspects a 42sqm flat for sale at $28,000 to one of the country’s rapidly expanding urban middle class.
Henry’s hands-on approach illustrates how seriously the Riady family is taking the threat to their reputation if they fail to complete the $19.5 billion residential development called Meikarta.
However, even for one of the most powerful families in Indonesia, hitting deadlines is proving challenging. As of August, the first phase of the project was running around 12 months behind schedule, said Henry in an interview with FinanceAsia at Meikarta.
The Riadys’ biggest-ever undertaking, the Meikarta township has been dogged by a graft scandal that erupted in October last year, with banks temporarily refusing to extend new mortgages and credit rating agencies responding by downgrading the debt of Lippo Karawaci, the crown jewel in the family’s holding company, the Lippo Group.
The corruption investigation sideswiped Lippo Karawaci, catching it at a particularly vulnerable time. With economic growth slowing in Indonesia and digital disruption spurring consumers across the archipelago to shop on the internet rather than in physical stores, its shopping malls are not the prized assets they once were.
So the Riadys hit the reset button. John Riady, Henry’s older brother, took over as the chief executive of Lippo Karawaci in March and the family fully underwrote a $788 million rights issue to cover construction costs at Meikarta through 2020.
Lippo Karawaci’s equities bounced 15% year to date and its 2022 and 2026 bonds have soared, making them among the best performers in the Asian junk dollar bond market this year, as investors concluded that the Riadys were set to back their most valuable company to the hilt.
On taking control, John outlined the two key tenets that will shape Lippo Karawaci’s strategy for the coming decades. First, focus on catering to Indonesia’s middle class, which is already 59 million-strong and growing at about 10% a year. And second, pick sectors less vulnerable to changing consumer habits: affordable housing projects like Meikarta, healthcare and malls configured more like a day trip for the family, all connected by a shared data pool analysing buyers’ shopping habits.
The rest of Lippo Karawaci, which controls around $15 billion to $17 billion worth of assets spanning high-end hotels to waste management, is for sale at the right price.
“As growth rates come off a little bit and as we enter an era of consolidation, the winners will be not necessarily those who are the biggest, but those who are the best operators,” John told FinanceAsia in a separate interview in Jakarta.
The Riadys’ efforts to transform their unwieldy conglomerate, which was founded by family patriarch Mochtar Riady in 1948, will be watched closely by other Indonesian magnates – such as the Soerydadjayas, Salims and Widjajas. Collectively, these clans own swathes of the Indonesian stock market and, like the Riadys, they too are scratching their heads over how best to deal with slowing economic growth and digital disruption.
While the share prices of Indonesia’s traditionally dominant conglomerates have largely stagnated, foreign investment has surged in recent years into digital startups such as Gojek, Tokopedia and Traveloka, which run apps providing a ragbag of life hacks for consumers.
“When Indonesia was at an earlier stage of development, being a conglomerate meant you could get things done in cities where there was little infrastructure and little competition,” John said. “Now that Indonesia is more mature, open and competitive family-owned empires need to rethink their business models.”
THE RELUCTANT CEO
Mochtar Riady sat down with his grandson John late last year and asked him a question. Would the 34-year-old take over as chief executive of Lippo Karawaci?
John said he would consider the position. It took a few more tries before the family could convince him to say ‘yes’. “Subsequently, my uncle asked me and my father asked me as well,” John recalled.
The flurry of conversations was prompted by an escalating corruption scandal at Lippo Karawaci. Corruption police had questioned John’s father James Riady and had raided his home last October.
The investigation into bribes for construction permits at Meikarta by Indonesia’s Corruption Eradication Commission (KPK) has led to at least nine people being charged. The probe may yet widen to include a unit of Lippo Karawaci, the KPK said in July.
John’s reticence illustrates the enormity of the challenge ahead and perhaps a reluctance to step into the long shadow cast by 90-year-old Mochtar, who is still the guiding force behind major strategic decisions at Lippo Group.
“My grandfather said even my driver can buy and own a house” so we should focus on housing for the mass market, Henry said.
Only about 10% to 15% of enterprises globally remain in family hands by the third generation, according to the London Business School, as younger family members look to realise their own dreams.
“To be honest, I'm not someone who grew up wanting to be in business and wanting to make money,” John said. Born in New York, the Columbia Law School graduate taught constitutional law at a university in one of Lippo’s townships as one of his early jobs.
When the scandal broke, John and his brother Henry were working at the family’s fast-growing payments startup, Ovo.
Henry is particularly frank about his reluctance to switch gears: “When the family asked me to move from a tech startup to a property company, and a property company in trouble at that, I’ll be honest, it was a nightmare,” said Henry, who is 30 years old.
But the ethnic-Chinese family has weathered storms before by sticking together. After the Asian Financial Crisis of 1997 battered Indonesia’s economy, the race riots of 1998 and the downfall of Mochtar’s personal friend President Suharto, the family’s empire was on the brink of collapse.
Scandal is not new either, James was fined $8.6 million for breaching US federal election laws by making donations to Bill Clinton’s presidential election campaign.
Despite such setbacks, they rebuilt and thrived. The family brought in professional managers and expanded overseas. Forbes magazine pegged the family’s wealth at $2.3 billion as of September.
The Riadys are also an unusually tight-knit dynasty, perhaps brought together by their shared Christian faith in what is a predominantly Moslem society. So when the family needed to show investors their commitment to the business this year, embodied by John and Henry, the brothers stepped up.
GHOST TOWN
Meikarta’s 3,000 high-density high-rise tower blocks sit at the heart of Indonesia’s version of Shenzhen, the booming Chinese city bordering Hong Kong.
A year ago, rumours spread that production had halted at Meikarta and the project was doomed because Lippo Karawaci was running out of money. Others fretted that the development could turn into a ghost town if the Riady concept of a township built slap bang in the middle of Southeast Asia’s largest industrial zone turns out to be a dud.
Indonesia’s residential property market peaked in 2013 and the gradual cooling of the market since then contributed to several previous Lippo Karawaci projects failing or missing deadlines. This, in turn, has dented the confidence of prospective buyers at Meikarta, making it harder for the Riadys to collect the advance payments they will need to help fund construction costs.
“That’s our biggest challenge now – perception,” said Henry, who is working hard to spread the news of the development’s progress, right down to live-streaming construction and posting photos of the township’s parks and restaurants.
Although significant progress has apparently already been made, challenges remain.
“We're over the hurdle of whether or not we will complete it,” Henry said. “Now is really about trying to focus the team on how we make this place a place where people can imagine themselves living.”
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Lippo Karawaci was due to finish the first phase of Meikarta by May this year but that’s slipped to June next year, which is not bad by Indonesian construction standards but is hardly a great confidence boost.
Lippo Karawaci has pre-sold just Rp122 billion ($8.6 million) of the mega-development’s properties in the first six months of this year, compared with more than Rp5 trillion in 2018 and Rp7.5 trillion in 2017 when selling began.
The stakes are high and the margin for error, thin. Credit analysts estimate that construction costs at Meikarta will soak up cash flow until at least 2020 and Standard & Poor’s pegs Lippo Karawaci’s interest payments coverage at just 1 times core earnings in 2020.
However, in the long term demand does seem assured given Meikarta sits in Jakarta’s eastern corridor to Bandung, Indonesia’s fourth-biggest city.
Infrastructure is gradually sliding into place that could turbo-charge the zone’s economic activity. This includes a Japanese-funded deep seaport in nearby Subang, a Trans-Jakarta Toll Road and a Chinese-backed $6 billion high-speed railway between Jakarta and Bandung is likely to complete in about three years, which passes right by Meikarta’s parkland.
This infrastructure will feed materials to a hive of factories owned by companies such as Honda, Toyota China’s Skyworth and Daihatsu pumping out cars and electronics to sell to the world’s fourth-biggest population. Factory workers need homes that don’t force them to commute along some of the world’s most congested streets, as well as universities, malls and entertainment close to hand for their families.
John dubs this emerging middle class as a “generation of firsts” because many of these families are sending their kids to university, travelling abroad, buying a house or taking out a mortgage for the very first time. He sees homeownership levels soaring in Indonesia from 60% to 85% over the next decade, providing a deep well of growth for Lippo Karawaci.
“The most promising and the most hot real estate market today in Indonesia is that whole eastern industrial corridor,” John said.
A broader boost for demand is coming from Joko Widodo's administration efforts to cut the backlog of housing across Indonesia and has eased mortgage rules for borrowers.
Now that Henry is chivying construction along, pre-sales at Meikarta are gathering momentum, given an extra fillip now that Indonesia’s general elections is over. The closely fought vote on April 17 dampened enthusiasm among home buyers to make large financial commitments without first knowing the results.
We are on track: We are building 22,500 units [for Meikarta phase 1] and we’ve sold 63% to 65%,” John said. “I expect to sell the remaining [ones] over a 24-month period.”
And if Meikarta does succeed, the Riadys plan to launch similar residential developments across Indonesia.
FOR SALE SIGNS
John’s plans to transform Lippo Karawaci from a bloated conglomerate into a data-driven, consumer-focused group is inspired by his time spent investing venture capital.
His first major enterprise, an ecommerce venture called Matahari Mall, failed after struggling to compete with more established players such as Tokopedia and Alibaba’s Lazada.
“I underestimated how significant an advantage being a first mover is in the digital world,” said John.
Undeterred, John returned to the digital space with payments app Ovo, borne out of the need for a deeper understanding of how and when the Lippo Group’s customers were buying products.
Ovo really took off after it partnered with fast-growing ride-hailing app Grab and ecommerce site Tokopedia. The mobile banking platform recorded its billionth transaction in December 2018 and was recently valued at $2.9 billion according to two people familiar with the matter.
“We live in a world that's much more open, much more connected, and the key to success is opening up … and so conglomerates must change,” John said.
Now he can deploy his ideas on a much larger scale. And in view of the large pool of data that a company the size of the Lippo Group can access, this gives it an edge over its peers.
Last year, Lippo served about 40 million unique Indonesians and generated about 10,000 transactions every minute of the day across its businesses. That is “a lot of data [and] a lot of consumer-touch points,” John said, making the group the largest consumer-services group in Indonesia.
Like he learned at Ovo, focusing on core competencies means selling assets and partnering with experts. Asset-heavy models offer owners control but tie up capital and often prove less flexible in a fast-changing environment such as Indonesia’s consumer-facing market.
“Coming out of the 1997 crisis, many groups as a result of restructuring, have ownership structures that were just completely convoluted … Today, we streamline,” John said. “In the past we used to be control[ling] investors, control[ling] operators … today, we prefer not to control,” said John.
In a departure for Lippo Karawaci, which has traditionally controlled every aspect of their townships, it has brought in China State Construction Engineering Corp as the main contractor to help it hit deadlines.
There is one potential hitch on the horizon: The promised $260 million sale of Lippo Puri Mall is dragging out as the family struggles to acquire all of the necessary strata title certificates.
“It is on track for Q4,” John said firmly. “And once we deliver that ... I think we would have delivered everything I announced in March of this year … Big tick.”
If John can nail the disposal of Lippo Puri Mall then he has lined up banks to refinance Lippo Karawaci’s US-dollar-denominated 2022 bonds in rupiah, according to a person familiar with the plans. That would be a boon given the rupiah has been weakening versus the US dollar in recent years and Lippo has only partially hedged its exposure.
“If we do things well and do things right, over a 20-year period I think we can create one of the largest groups in Asia,” John said.
