Why You Shouldn't Be Afraid of Leasehold: Unraveling the Bali Real Estate Market
By Alex Villas
June 14, 2023
Bali’s real estate market holds a myriad of opportunities, not least among them, leasehold properties. Born from Indonesia's unique land ownership regulations, a leasehold agreement provides the right to utilize a property for the first 25 years with possible extensions not exceeding 80 years in total.
This article aims to demystify the leasehold system within Bali's real estate context, addressing common concerns, and outlining why this method of property acquisition is not just viable, but potentially advantageous. Through an in-depth exploration, we aim to show that investing in leasehold properties should be considered, not feared.
Primary things you should know about land ownership in Indonesia:
1. Only Indonesian citizens can own land “Hak Milik” title.
2. You can’t own the land indefinitely.
3. Foreigners personally and via company (PT PMA) can lease the land and build on it.
4. Depending on the title, the period is usually between 50-80 years.
Land Ownership Models in Indonesia
To comprehend why Hak Sewa, or the Leasehold model, is often the most suitable option for foreign investors, it's essential to first familiarize ourselves with the various existing land titles in Indonesia.
In accordance with the Basic Indonesian Land Law #5 of 1960, commonly known as UUPA (Undang-undang Pokok Agraria), land titles in Indonesia fall into two main categories: Primary and Secondary. The UUPA law replaced previous land tenure systems with a unified structure applicable throughout the country.
Primary land titles:
Hak Malik, or "Freehold," is the typical ownership mechanism by which Indonesians own their land indefinitely. Hak Malik provides more absolute control over the land and is limited to Indonesian citizens or fully Indonesian-owned companies.
Secondary land titles offer lesser control and are time-bound:
Hak Sewa (HS) is a leasehold model used primarily by foreigners. It allows them to lease land for 30 years with a possible 20-year extension.
Hak Pakai (HP) is similar to Hak Sewa but requires filing a new land certificate with the Indonesian National Land Office. This model is exclusively for personal residences, and foreigners can only own one Hak Pakai property.
Hak Guna Bangunan (HGB) is a land ownership model suitable for foreign-owned Indonesian companies (PT PMAs). It allows the company to purchase freehold land, convert it into an HGB title, and maintain full rights to the property for 30 years, extendable for another 20 years.
Hak Guna Usaha (HGU) is another secondary right, the "Right to Cultivate," which is generally granted to companies for large scale agricultural purposes. It is granted for a period of 35 years and can be extended for another 25 years.
Hak Pakai vs Hak Sewa
While both Hak Pakai and Hak Sewa provide foreigners a means to secure land rights in Indonesia, their methods of implementation and associated privileges differ.
Filed with the Indonesian National Land Office.
Filed with a notary only, not submitted to the National Land Office.
Original Land Title
The original landowner delivers the land certificate to the Land Office.
Not necessary for the landowner to give up the title.
The foreigner receives full rights associated with the land.
The foreigner leases the land and does not have full ownership.
May qualify as a luxury residence under the Second Home Visa qualifications.
Only allowed for personal residences. Foreigners are limited to one Hak Pakai property.
Less commonly used due to the complexity of the process.
More commonly used due to its simplicity and the landowner retaining the title.
Benefits of Leasehold
Leasehold properties in Bali offer several attractive advantages that make them a popular choice among investors:
Easy filing process: No need to go to National Land Office, filing with a notary is enough.
Lower upfront cost: Compared to freehold properties, leaseholds generally demand a lower initial investment, making property ownership more attainable.
Flexibility: Ideal for those not planning permanent residence, leasehold properties allow for enjoyment of the property for a period without a long-term commitment.
Less maintenance responsibility: Leaseholders often have fewer obligations concerning long-term maintenance and property management, as these are typically handled by the property developer or management company.
Variety of options: The Bali property market offers a wide range of leasehold properties, from luxury villas to condominiums, catering to various preferences and budgets.
Potential for rental income: Leasehold properties can be rented out, providing an opportunity for profitable returns.
Mitigating Risks and Concerns
While investing in leasehold properties in Bali can be a lucrative opportunity, it's essential to consider potential challenges:
Legal safeguards: Indonesian property laws offer protective measures for leasehold buyers, but they can be complex.
Leasehold agreements: Clearly defined terms of the lease, including possible extensions or renewals, are critical for long-term planning and peace of mind.
Due diligence: Comprehensive research is key. Investors should carefully evaluate the property, its location, lease terms, and condition. Also, consider factors like amenities, potential for rental returns, and future development prospects in the area.
Nominee method: When a foreigner finances a land purchase by a local and creates a side agreement for indefinite use, is often recommended to foreigners in Indonesia due to restrictions on freehold ownership and the complications of other methods. However, this method is strongly discouraged as these unofficial side agreements are illegal and invalid in Indonesian law, with the only valid leases adhering to Hak Sewa (leasehold) regulations, including proper contracts, tax payment, notarization, and filing processes.
Bali's vibrant real estate market and leasehold properties offer substantial opportunities for foreign investors. The Hak Sewa, or leasehold title, provides advantages such as lower initial investment, flexibility, and the potential for rental returns, making it an appealing choice.
Nevertheless, understanding Indonesian property law and conducting comprehensive due diligence are key to a secure and profitable investment. It's crucial to avoid risky practices like the nominee method.
At Alex Villas, we're committed to supporting you through this journey. Our professionals possess deep knowledge of the Bali market and can provide expert consultation to guide you in making the right choices. We ensure smooth and secure transactions, handling all the legal aspects for you.
With Alex Villas, you can navigate the leasehold system confidently, unlocking the abundant opportunities within Bali's thriving real estate market.