Foreign Property Ownership in Indonesia – 1 Step Forward and 2 Steps Back?

Recently announced changes in the rules governing foreign ownership of property in Indonesia, may have raised more questions than it has answered. In our continuing effort to decipher what is a complicated legal situation, Bali Update has once again sought out the highly respected Sanur-Bali-based Notary Rainy Hendriany to understand challenges facing foreigners involve in property transactions in Indonesia.

Bali Update Interview with Rainy Hendriany

Bali Update: Rainy. thanks again for your time. Your willingness to share your time and expertise on property law is much appreciated. In the light of recently announced “changes” in the property sector has anything really changed with regard to ownership of property in Indonesia by foreigners?

RH: Actually, the short answer is no, not really, although there has been a lot of noise and, I might add, misinformation in the foreign community. There has been an evolution in the Regulatory environment and some further clarity, but not a revolution. For context, I would like to refer back to the earlier discussions we had. Despite all the noise since we last spoke, actually the vast majority of my inputs in these earlier interviews remain completely valid today.

Bali Update: Why do you think that is the case?

RH: The ownership of property by foreigners in Indonesia is a very complex matter. You must remember that Indonesia only became an Independent Nation in 1945. Prior to that, Indonesia was under the control of the Dutch for over 350 years. Since independence, Indonesians have been determined to maintain integrity over their own land, defiantly refusing to ever again surrender their sovereignty to any foreign interests.

When looking at what has happened to property prices in major world cities like London, Sydney, New York and Vancouver where unrestricted foreign investment was allowed, escalating to the point that local people are excluded from buying property in their own country, I think that this restrictive policy approach has some merit.

Bali Update: But there has been a lot of talk in the media over the last several years about an “Opening Up” the Indonesian property market to foreign investment?

RH: Yes, there has, but this ‘talk’ has been mostly advanced by the large property developers in Jakarta, most of whom are not that politically well connected and who obviously have a vested interest in selling property. Let me come back to property titles for apartments and why that doesn’t help foreigners much, a little later.

On the other side of this debate, there has been a very strong reaction against such liberalization over the years by the so-called “Nationalists”, who are of the view that The Indonesian Constitution and The Basic Agrarian law of 1960 are fundamental governing principles, upon which the Republic was established and which cannot be challenged. Without going into detail here, past attempts to open up property ownership to foreigners have been appealed by the Nationalist factions all the way to the Supreme and Constitutional Courts – the highest Courts in Indonesia, which thus far always ruled against any attempt to expand foreign ownership of Indonesian property, especially landed property.

Bali Update: Is it fair to say that the new rumors of greater ease of foreign property ownership in Indonesia have raised false expectations among aspiring foreign owners?

RH: I think there are several issues. Firstly, in Bali, there have been several high profile cases involving disputes between so-called foreign “Beneficial Owners” of landed property and so-called “Indonesian Nominee Owners” of properties. In fact, Indonesian law does NOT acknowledge the beneficial ownership of landed property.

Secondly, the Indonesian media, especially the English-speaking Indonesian media, tend to reflect the interests of foreign investors without a proper grounding in current practice and substantiated fact.

Bali Update: Moving to the legal issues, could you share a simple summary of what has changed and what has not changed?

RH: That’s not easy, but I will do my best. Although to do so in full, it would be best if your readers took the time to scan my earlier inputs. (Editor Note: See related articles below.)

Several years ago, primarily the English media in Indonesia started to publish that an intention existed to liberalize property ownership laws in Indonesia. There were hyped expectations; never realistic in my view that ownership of properties by foreigners would be extended to include Freehold properties.

Bali Update: What went wrong?

RH: Well what went wrong is a lack of understanding, or perhaps misinterpretation, of Indonesian law.

The Indonesian Constitution and the “Basic Agrarian Law” (Law 5/1960) prevents foreigners from owning landed property in Indonesia. The Basic Agrarian Law established a range of land titles and a hierarchy of land titles that creates the basis for many legal principles governing the control of property.

As of that time, foreigners were only able to lease land (”Hak Sewa”) or control land under HGB title (The right to build and use for commercial purposes) held by a Registered Indonesian Legal Entity, both Indonesian or foreign owned.

I should add here that it is not possible to establish a foreign investment (PMA) Company for the sole purpose of owning a landed property.

Under these basic legal principles, foreigners were only able to lease land as individuals. It wasn’t until 1965 that the “Right of Use Regulation”, (Government Regulation 40/1965) was introduced that regulated the use of Hak Pakai (The Right of Use) title. In the same year the “Foreign Ownership Regulation” (Government Regulation 41/1965) was introduced to regulate foreign land.

The Foreign Ownership Regulation clarified the availability of Hak Pakai title, with certain restrictions, for a single residential property to a foreigner who is legally resident in Indonesia (KITAS Visa or higher) to assist that foreigner in “Contributing to the Development of the Nation”. Under the 1965 Regulation, Hak Pakai title could be granted to a qualified foreigner for an initial period of 25 years that could be extended for a further period of 20 years. The Regulation was silent regarding Rights of Inheritance.

Since then, there have been no significant changes.

Bali Update: Which brings us to the recent new regulations.

RH: Yes, that’s right. “The (New) Foreign Ownership Regulation” (Government Regulation 103/2015) was introduced to replace the 1965 Foreign Ownership Regulation. Against high expectations, this Regulation is not revolutionary but more evolutionary in that it merely clarifies the rules for foreign property ownership.

Hak Pakai Title for a single residential property by a foreigner legally resident in Indonesia (KITAS Visa or higher) is now available for an initial duration of 30 years and can be extended for a further 20 years then renewed for another 30 years, for total of 80 years. In this respect, the Regulation has brought the terms and duration of Hak Pakai title into line with existing terms and duration of HGB title. The new Regulation also clarifies that a qualified heir who is also legally resident in Indonesia can inherit a Hak Pakai held by a foreigner. The Regulation and other prevailing law provide that when the foreign holder of a Hak Pakai title leaves Indonesia and so is no longer legally resident; the property must be transferred to a qualified party within a period of 12 months of departure. If not, in simple terms, the State has the right to auction the property and transfer the proceeds to the foreign owner.

Incidentally, because Hak Pakai is granted to a foreigner as a single residential property, it is not possible to use the property for commercial purposes. So, for instance, it would not be possible to obtain the necessary Licenses and Permits to rent out the property during periods in which the foreign owner may not be resident.

Foreigners, even non-resident foreigners, may still enter into leasehold of limited duration in broad recognition of the hierarchy of land titles and their duration as set forth in the Basic Agrarian law.

Foreigners, even if legally resident in Indonesia, may still not own landed property (Freehold) and the beneficial ownership of landed property using a nominee remain illegal.

Bali Update: Please clarify: Is Hak Pakai just another form of leasehold?

RH: No, that is a common misunderstanding. Hak Pakai title is a type of ownership title, which, as set forth in the Basic Agrarian Law, is a higher title than leasehold. It can be sold to another qualified foreigner or an Indonesian citizen, although as a practical matter, most Indonesians will not buy a Hak Pakai title for a number of reasons.

Bali Update: What types of property does the new Hak Pakai title apply to?

RH: It applies to a residential landed property such as a house and also to apartments, but only an apartment in a development, which is built over Hak Pakai title. However, most apartments – or more correctly, condominiums – developments in Indonesia provide owners with strata title over HGB land, which is only available to Registered Legal Entities and Indonesian citizens.

Bali Update: But, I read somewhere recently that foreigners were allowed to buy “High End” Apartments of over a certain size and value?

RH: That is more misinformation. In the extensive discussions that took place over the past few years within the context of the ‘Reform’ of foreign property ownership, this is something that was proposed during the discussion phase but was NOT implemented in the new regulation, or any other regulation/law that I am aware of.

The problem with the foreign ownership of even high-end apartments was one of title. As I just mentioned, essentially all apartment developments in Indonesia are built on HGB land title. So allowing even High End Apartments to be acquired by foreigners would have required either a change in Law to create an entirely new “Hybrid” land title or allowing foreigners to acquire HGB title via strata title. This has seemingly been placed in the ‘Too difficult’ File. Ultimately, that was ‘A bridge too far’ for the Nationalist faction which had a “Red Line” on any land title liberalization for foreigners. This is ultimately why the new ‘Reform Agenda’ failed and the “Nationalists” still remain firmly in control.

Bali Update: What about the property rights of Indonesians who are married to Foreigners?

RH: Don’t get me started! That’s a whole different subject that would take up another complete discussion. And some may know, this also once applied to me until my foreign husband became an Indonesian citizen. Perhaps we should revisit this subject during future discussion?

Bali Update: Any closing thoughts?

RH: Not really much to add except that the comments I have made here are for general interest and discussion purposes and are NOT intended to be specific legal advice. As in the past, it remains very important that you consult a qualified Notary/PPAT in any Indonesian property transaction.