Rent Capitalization and Transportation Infrastructure Development in Jakarta

Abstract

Using Jakarta, Indonesia as a case study, we evaluate the degree to which proximity to freeway interchanges gets capitalized into office rents, controlling for factors like regional accessibility. The research shows strong capitalization effects, with rent premiums decaying exponentially with distances from freeway access points. It also shows that office rents are a stronger function of distance to Jakarta’s historical center, Monas, than a gravity‐based measure of accessibility to upper‐income households. Thus, a monocentric measure of location explained variation in office rents better than a polycentric measure of proximity to labor markets. While value capture principles are attractive in theory, implementation is particularly difficult in developing countries like Indonesia. Jakarta’s own betterment tax program has been plagued by poor administration and enforcement. We argue that shifting betterment tax financing away from a focus on residential properties to high‐end office and commercial land uses would likely yield higher rates of return and be far easier to implement.