Indonesia - Property
Relative to Australia, buying property in Bali is still reasonably cheap, but the ownership structure is complicated. Always seek legal assistance when purchasing property. And, before buying, it is wise to rent to ensure you understand the area, legal system, values and, indeed, whether it is worth buying at all. You’ll be pleased to know, though, that the cost of renting in Bali is more than 75 per cent lower than in Sydney.
A non-Indonesian citizen cannot own freehold property—land, villas, houses or apartments in Indonesia. However, a foreigner can acquire a leasehold title to a property. This is almost the same as a strata title except that the title lasts only for 25 years (or less), with an extension of 30 years for a maximum of 55 years, and then reverts to the original owner (lessor).
Lease periods vary but the leases themselves are tradable. They can be bought and sold just the same as freehold property. Some foreigners still insist on freehold ownership and can engineer it in one of two ways: they can use an Indonesian nominee or set up an Indonesian (PMA or Penanaman Modal Asing) company. We see this as presenting potentially serious problems. Nevertheless, it is quite common practice.
Leases are the safest way of holding property in Indonesia because they do not involve an effort to circumvent the law, unlike many freehold ownership arrangements. Leaseholds do not require the participation of Indonesian nominees.
The process of purchasing or renting a property in Bali is simple. There is a sophisticated, and foreign-friendly, real estate industry in Bali. Well-known agencies like Ray White and Century 21 are there to offer advice to foreign buyers.
Geoffrey and Michael are absolutely comfortable with their leasing deal and don’t see their lack of freehold ownership as a major problem. Geoffrey compares it to the lease situation in many parts of London. ‘To buy a property in most areas of the city of London requires the purchase of a lease, not the freehold title,’ he explained. ‘You can sell the lease, rent it out, leave it to your family, whatever.’
The increased demand for properties in Bali over the past few years has triggered steep price increases. Bali has had the sharpest rise in land values in Indonesia. According to research conducted by Knight Frank and Elite Havens, average land prices in Bali increased 34 per cent throughout 2011. Luxury real estate prices rose another 20 per cent in 2012.
In some areas in Bali, the price rise was far higher. Land prices near beaches in Seminyak, such as Legian, Petitenget and Batu Belig, experienced the highest jump compared to other areas in Bali; increasing by between 50 and 87.5 per cent in 2011. Knight Frank and Elite Havens said the huge increases were influenced by the high demand among investors to build property on those particular tourism sites.
However, compared to Australia, property in Bali remains cheap. (Or maybe Australia is expensive?) An attractive villa with a pool can be purchased with a twenty-year lease for A$250,000 upwards in the popular coastal areas around Canggu and Seminyak. And the further away from the tourist hotspots you go, the cheaper it becomes. In the Ubud region, prices are significantly less than this and the same sort of property starts at around A$100,000. In Australia, that kind of money doesn’t buy anything.
It is illegal for foreigners to own freehold property—land, houses, villas or apartments—in Bali. This is written into the constitution. However, foreigners can legally buy leasehold property. The leases can be for at least 25 years and perhaps as long as 100 years.
Some foreigners still insist on freehold ownership. We see this as presenting potentially serious problems. Nevertheless, it is quite common practice.
Foreign buyers can engineer freehold ownership in one of two ways:
Use an Indonesian nominee
The nominee will sign the following four documents:
- Loan agreement: This acknowledges that the foreigner has lent to the nominee the purchase price of the land.
- Right of use agreement: This allows the foreigner to use the land.
- Statement letter: In this document the nominee acknowledges the foreigner’s loan and intention to own the land.
- Power of attorney: The nominee signs an irrevocable power of attorney giving the foreigner the complete authority to sell, mortgage, lease or otherwise deal in the land.
- Use a company: A PMA
The most significant change in Indonesian investment law came in 1997 when the government introduced the Penanaman Modal Asing (PMA), or foreign investment company. This allows foreign investors to set up a company in Indonesia, without having to have Indonesian partners.
The PMA can be 100 per cent owned by the foreign investor. PMA companies are allowed to own the title of the property for a period of 25 years. Then they must apply for their company status to be renewed by the government.
To set up a PMA, you will be required to:
- Submit a detailed business plan.
- Operate in a business environment that adds value to Indonesia in terms of foreign skills, employment and environmental benefit.
- Make an appropriate cash deposit in an Indonesian based bank. The amount varies and is calculated on the capital employed in the business.
- Show that there is property investment as an asset of the company.
The process takes approximately three to four months and once it is completed, the company can apply for work permits for the foreign directors—three permits in the first year of operation. The cost of setting up the PMA is between 30 to 40 million Indonesian rupiah (A$2800 to A$3800).
- Notary: 1 per cent of the value of the transaction.
- Vendor tax and purchaser tax: Both the vendor and purchaser pay 5 per cent tax on the value of land and property sales.
- Mortgage certificate: 1 per cent of value of mortgage.
Get expert legal advice
Remember, any effort to circumvent the law is a path fraught with potential future heartache for the foreign purchaser.
To conclude a freehold property purchase with a local nominee, a notary is generally used. The notary creates the multi-party, multi-document legal construct that puts the freehold title in the hands of an Indonesian nominee.
By the way, a ‘notary’ in Indonesia is a local legal expert registered as a legal expert by the Indonesian Government.
The Indonesian nominee’s name is on the property title and it is he or she who freeholds the parcel, not the foreign purchaser fronting the money for the land.
The notary will also usually create an irrevocable power of attorney in which the nominee owner surrenders all rights to use, sell and lease the subject property to the foreign purchaser.
But is this legally enforceable? A foreigner may have to test this arrangement in court if in future he or she wishes to sell or transfer his ownership/title to another party. This transfer will be heavily dependent on the good grace and continued docility of the Indonesian nominee who will need to attend the notary and sign over the deed to the new owner or their nominee.
There is one legal view that such contracts are from the very beginning ‘void ab initio’ and therefore unenforceable in Indonesia. This is partly because the contract refers to a non-existent transfer of money between the parties during the so-called ‘purchase’ transaction.
Good legal advice is essential if you wish to buy freehold property.