One of the main considerations when thinking about investing in real estate is the ownership status of the property. Do you want to own it “forever” (Freehold title) or do you prefer to use the property for a certain period of time (Leasehold title) and then move on to the next one?
In this article, I’ll try to give you a short introduction to real estate investments in Indonesia from a legal point of view. Obviously, it does not contain all the information required to buy a property in Indonesia and it should not be construed as investment, tax or legal advice. We always encourage you to seek independent legal and other professional advice on these matters ?
Freehold in Indonesia
Unfortunately, under Indonesian law, foreigners are not permitted to own freehold land (“Hak Milik” title).
Foreign buyers have often used local Indonesian nominees to acquire land or properties. However, it is important to understand that the nominee system is not accepted by Indonesian courts. This structure is therefore deemed unnecessarily risky for land buyers and villa owners. We strongly recommend that you never use a local nominee for your real estate investments in Indonesia!
For foreigners, there is however a way to get close to a freehold title: the right to build (“Hak Guna Bangunan (HGB)” title).
Although it cannot be owned by a foreign individual, the HGB title can be owned by a PMA, i.e. a legal entity that can be owned 100% by foreigners and through which any foreign investor is allowed to conduct business activities in Indonesia. With the HGB title, the PMA has the freedom to construct and develop buildings on the land during the term of the HGB (usually 80 years, split as 30 years + 20 years + 30 years).
The buying process will look like a “normal” sale and purchase agreement with an additional process to change the Hak Milik (freehold title) to the Hak Guna Bangunan title at the BPN (Indonesian land office).
Please note that setting up a PMA has legal and fiscal implications. Think carefully before creating one and always ask for advice from lawyers and tax specialists.
Leasehold in Indonesia
Foreign individuals may legally enter into leasehold agreements, which are notarized by a public notary (PPAT) and recorded with the Indonesian Ministry of Law. Under the Indonesian Civil Code, leasehold rights are protected in the event of death or bankruptcy of the lessor or in the event of a sale of the freehold land. In these cases, the lease will continue for its full duration.
Investors own the rights of the lease for the duration paid and have the right to sell the remaining years left of the lease and transfer the lease title via inheritance.
In general, leases are negotiated for 25 years to 30 years. It is also possible to add in the agreement an extension clause. A common practice in Bali is to extend the lease every 3 to 5 years for 5 more years, trying to negotiate the same price as the initial lease agreement.
In conclusion, freehold or leasehold?
As my consultant friends like to say: “it depends”!
You need to be clear about why you want to invest in Indonesia and what is your goal?
If it is to build something so that your family, kids, and grandchildren can enjoy it, then a freehold title might be the right option for you.
If your objective is to optimise your return on investment, leasehold titles are good because of their relative “liquidity” (easier to sell than freehold, mainly because you can sell to foreigners), their cheaper prices, their faster return on investment and their availability in the market. In summary:
- You own the land, so you don’t “lose” your property one day. You know that your kids and grandchildren will be able to enjoy the property long after you are gone.
- More expensive than leasehold. For instance, prices of freehold titles in Canggu are 2 times more expensive than a 30 years lease.
- The return on your investment is, in most cases, lower than a leasehold investment (it will take more years to get your money back if you wish to rent your property).
- Many Indonesian owners do not wish to sell their land, so the number of options is very limited compared to leasehold properties. You might not be able to find the right property or piece of land, in the right location, at the right price.
- You don’t own the property, at the end of the lease, it goes back to the owner (in brief, you “lose it”).
- It is less expensive than a freehold title, so the return on investment should be higher
- More than 90% of the deals available on the market are on a leasehold basis. You thus have much more investment and development options.
Thank you for reading ?
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