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Property | Still Not Buying it; Foreign Property Ownership in Indonesia

In 2015, amid a worrying economic slowdown, the Indonesian government issued a selection of breakthrough policies which allowed foreigners to buy and own properties in Indonesia (See Indonesia Opening the Door to Foreign Ownership of Property). However, the policy has not really had the desired effect. Even after the issuance of a subsequent supporting regulation in early 2016 that further facilitated foreign ownership of property, the initiative is still deemed unsuccessful, with developers and potential foreign buyers claiming that the new rules are still unrealistic and unfavourable which may prompt the Indonesian government to resort to further deregulation measures (See Ownership of Homes or Residences by Foreigners in Indonesia).

Still Not Buying it; Foreign Property Ownership in Indonesia
At a crucial time for the Indonesian economy, with hopes on attracting investment in order to nudge the property sector into a rebound, facilitating foreign property ownership could provide a very welcome boost.

In the hope of boosting Indonesia’s property industry’s competitiveness (See Residential Property: Indonesian Market Remains Attractive Despite Slowdown) against regional counterparts as well as bolster economic growth and increase the government’s tax income, the Indonesian government in 2015 decided to open the property market to foreigners. This was controversial as it was deemed in conflict with the 1960 Land Law which clearly stipulates that foreigners can only obtain property under the hak pakai or right of use category (not freehold) which grants a total ownership period of only 70 years, subject to a tenure renewal process. This law has been in effect since the 1960s and cannot be changed except with the agreement of the Indonesian parliament.

The regulation issued by the government in 2015, it turned out, was not as bold and daring as many had expected. After allowing foreigners to own apartments in mid-2015, by the end of 2015, the government had issued Government Regulation No. 103/2015 which allowed foreigners to also buy and own landed houses in Indonesia, still under the right of use title, but with an increased total period of up to 80 years, subject to a tenure renewal process. The regulation also specifies that foreigners eligible to own houses in Indonesia are non-Indonesians who live or bring added values to the country and possesses a valid residence permit.

While the initiative was warmly welcomed by foreigners and developers for its open and progressive nature, many remained apprehensive, as there were still several questions yet to be officially addressed by the Indonesian government regarding the regulation. The main question was one on the notion of a possible price limit for property purchased by foreigners. Government officials had given contradicting statements regarding this matter, with one announcing a 10 billion IDR price floor for apartments and another saying there will not be any price limit for foreigners.

Updated regulation

The Indonesian government eventually put an end to this uncertainty regarding price limit by issuing a Ministerial Regulation in April 2016, which detailed the price limit for properties that can be bought by foreigners. The rule sets different minimum price limits according to zones, with Jakarta having the highest price limit (10 billion IDR for landed houses and 5 billion IDR for apartments), followed by Banten, West Java, East Java and Bali, while regions such as South Sulawesi have one of the lowest price limits (2 billion IDR for landed houses and 1 billion IDR for apartments). Other than detailing the price limits, the 2016 regulation also stipulates that a foreigner who has purchased a property in Indonesia is forbidden to rent out the purchased property. As such, the owner needs to reside in the property that he/she has purchased.

In the case of the owner having to leave Indonesia to reside in another country, the owner needs to release or transfer the ownership rights to another individual who meets all the requirements to own a property in Indonesia within one year after departing from Indonesia. If ownership is not released within a one-year period after the owner has left Indonesia, then the Indonesian authorities have the right to confiscate the property.

Still unappealing

Despite the Indonesian government’s efforts to convince foreigners to purchase property in Indonesia through a series of regulations, the market does not seem intrigued. The price restriction is a key issue many foreigners see as unrealistic, as they argue that very few foreigners are able to afford such a purchase given that financing is not available from Indonesian banks to foreign residents. Another problem is the limited or permanent stay permit requirements for foreigners to be eligible to own a property. This is deemed pointless as most expats only live in Indonesia for two or three years. Furthermore, there is also the requirement of having to release or transfer ownership rights to another individual which makes purchasing properties even more unappealing.

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The biggest problem, however, is arguably on the matter of property ownership licenses. Indonesian law recognises three property ownership categories: right-of-ownership (hak milik), right-to-build (HGB) and right-to-use (hak pakai), with hak milik considered the most valuable and hak pakai the least valuable category (See Foreign Investment in Indonesian Real Estate). Historically the main difference between HGB and hak pakai is the period of tenure, a total of 80 years for HGB and 70 years for hak pakai. The new regulation however has increased the tenure of hak pakai also to 80 years, making it legally as valuable as the HGB.

However, this has not changed the local perception of hak pakai as the inferior title, which makes it problematic for developers who may want to tap the foreigners market by using hak pakai but would run the risk of having their property being considered less attractive among domestic Indonesian buyers and investors.

The possible solutions

The dilemma faced by developers could simply be solved by having a policy that makes it mandatory for all high-rise apartment building projects to be developed on land that has hak pakai status. The government has said that it would be pursuing this avenue and that the matter will soon be discussed by related ministries. Moreover, another solution to the problem would be to simplify the property status by combining HGB and hak pakai or the removal of either one, as both are now effectively of the same value. However, this may spark a reaction from members of the public with HGB titles who may feel that their title is being downgraded. The Ministry of Land and Spatial Planning has vowed to make efforts to educate the Indonesian public about the increased value of hak pakai title.

If no solution is reached, many foreigners are likely to continue to resort to existing rule-bending practices to own properties in Indonesia. One of the most popular ways is the practice of putting a purchased hak milik title in the name of a trusted Indonesian citizen. Despite the risks, this has been the most practical way for foreigners to own properties in Indonesia. At this crucial time for the Indonesian economy with hopes on attracting investment in order to nudge the property sector into a rebound, facilitating foreign property ownership could provide a very welcome boost.

Global Business Guide Indonesia - 2016

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Indonesia Property Snapshot - Real Estate

Contribution to GDP: 2.79% (Q3 2015)
Mortgage to GDP Ratio: 3.5% (2015)
Housing Backlog: 15 million (estimated 2016)
Average Condominium Price: 48,100,000 IDR/sqm (CBD, Jakarta, Q3 2015)
Average Retail Space Rental Price: 500,00 IDR/sqm/month (CBD, Jakarta, Q1 2016), 545,968 IDR IDR/sqm/month (Jakarta, 2016)
Average Office Space Rental Price: 401,010 IDR/sqm/month (CBD, Jakarta, Q1 2016)
Average Industrial Land Price : $221.51 USD/sqm (Bekasi, Q1 2016), $144.16 USD/sqm (Tangerang, Q1 2016)
Relevant Law: Government Regulation No. 41 of 1996 on Housing or Residential Ownership for Foreign Citizens Based in Indonesia allows foreigners to own leaseholds of up to 70 years subject to renewals at 25, 20 and 25 year intervals.