posted by REB Team on October 31, 2014
Property ownership type; freehold or leasehold

Property market in Bali is growing a by leaps and bounds, fuelled by an increase in demand and supply availability in Bali. It has remained favourable for both local and international investors’ inline with the property price that is continuously showing an upward trend. Bali is still considered a safe location for investment amid the global economic uncertainty. This fact has attracted number of investors, both local and international to acquire property in Bali, they are confident about the island’s business climate. Some of investors’ top concerns of investing in Bali are long-term investment (land banking), as 2nd home, or to be used as a business source either for long term rental (annual rental) or daily rental basis, as holiday rental villa. 

It is important to know some kind of ownership (property title) prior to acquiring a property in Bali which is slightly different than the ones you may know outside of Bali. Having a better understanding of ownership type is the most important knowledge that will help you in making a decision of what type of ownership that suits your investment needs.

Basically, there are 2 property of ownership type that is commonly used in Bali, freehold title and leasehold title.

For foreign investors, leasehold property is the most simple and preferred method of acquiring property in Bali. This is the easiest method in terms of legality and the price is not particularly expensive compared freehold property.

In some upscale locations such as Seminyak, the property prices have gone up drastically. The market has yet to reach the saturation point that will cause stagnant prices, so now discourage Balinese land owners from selling land outright, they would still generally prefer a leasehold in some areas of Bali, the leasehold structure is the only option available for acquiring a property for foreign investors. But keep in mind, this ownership structure, the buyer has no rights or control the underlying title of the land, so that they will not receive benefits from the land price increases in the future time.

If you are considering the purchase of a leasehold property, be sure you understand what the lease entitles you to, and your obligations, before you sign.  It is imperative to carefully examine how a contract is written when acquiring an existing property through a leasehold structure, with careful considerations to pricing and lease extensions. Most lease agreements have some sort of extension option, although you should be careful to fully understand the means by which the extension may be activated. Sometimes the extension can only be activated by mutual agreement, which means that the time at which extension discussions can begin must also be agreed upon mutually by the landowner and the leaseholder. This can lead to problems if the landowner does not agree to give an extension at the time the leaseholder requires it.

Secondly, many contracts are unclear about the cost of extending and often use the term "market price" to indicate the price for the extension. The central drawback with this is that the real estate market in Bali is not the most liquid or easily measured market in the world, i.e., every piece of land is different. Oftentimes the leaseholder (who has invested considerable money into a villa) might wind up in a disadvantaged situation where the landlord can set a price and say, "Pay this amount or give me back the house." The best forms of lease extensions are the ones that are indexed to physical commodities and the option is exercised by the sole decision of the leaseholder.

When choosing whether to buy land freehold or leasehold, you should be aware of the ramifications of each with regards to the potential value of the investment. Purchasing land freehold allows you to enjoy the appreciation in the value of the land, which has been fairly dramatic in Bali in past years.

If you opt to purchase land leasehold, you lose out on this, as depreciation starts relatively soon, depending on the term of the lease. Every year that passes on a lease devalues the entire deal. For example, if you have got 30 years on a lease, it actually might appreciate for the first 5 years, but over the next 25 years the value of the whole package goes down. Depreciation is even more dramatic if you invest a large sum of money into renovating the house 5 or 10 years before the end of your lease, as you are improving a facility which you are not going to own in 5 or 10 years. A rising value of the land or improvements of any structures on the land can, in certain situations, offset time driven depreciation.

At the end of any lease, the building and the land is returned to the original landowner. So, by purchasing leasehold, you are, essentially renting the property long term. In the intermediate period you will enjoy the benefits of the property, including the possibilities if sub-letting, but you are denying yourself the potential for capital appreciation on the property. By purchasing freehold, you get the best of all worlds. You have a house in Bali, which you can continue to add to, safe in the knowledge that you have a sellable asset at such time as you choose to sell.

A Typical Transaction

The following summary outlines the essential steps involved in a foreign investor transacting a Hak Milik ("Freehold Title") property in Indonesia and creating a Hak Pakai ("Right of Use") certificate of title directly in the name of the foreign investor as an en encumbrance on the underlying Hak Milik.

This certificate of title is highly secured and known as Hak Pakai atas tanah Hak Milik which translates as "Right of Use over Freehold Land".

Phase A- Due Diligence
The Notary initially checks all aspects of the Hak Milik property and advises in relation to any impediments to acquisition of the Hak Milik property.

Phase B - Hak Milik Transfer
Should the foreigner decide to proceed on the basis of the favorable outcome of the due diligence, the Indonesia Hak Milik owner executes with the nominee/designee of the foreigner, who must be an Indonesian citizen, either:

  1. an Akta Jual Beli ("AJB" or "Sale and Purchase Agreement") pursuant to which 100% of the purchase price is paid; or
  2. a Perjanjian Pengikatan Jual Beli ("PPJB" or "Agreement Binding for Sale and Purchase") pursuant to which a deposit is paid subject to payment of the balance of the purchase price. The deposit is generally not held by a stakeholder but is typically paid to the vendor.

Phase C - Hak Pakai atas Tanah Hak Milik
The Notary executes a Deed of Grant of Hak pakai ("Akta Pemberian Hak Pakai atas Hak Milik") between the Hak Milik owner/designee and the foreigner pursuant to which the Hak Milik owner grants the Hak Pakai title to the foreigner.

By separate Notarial Deed, the Hak Pakai owner may also prepay to the Hak Milik owner a number of agreed twenty-five year renewals (i.e. 25 years + 3 x 25 year renewals + 100 year tenure).

The Hak Pakai owner obtains a certificate of title in his name and with the agreement of the Hak Milik owner is entitle to keep the original Hak Milik title in his possession until expiration of the term. Often as part of the transaction, where a number of Hak Milik titles are held, an amalgamation of titles must occur prior to creation of the Hak Pakai as the Hak Pakai must be granted over only on Hak Milik title.

Leave a Comment

Fields with * are required.

Please enter the letters as they are shown in the image above.
Letters are not case-sensitive.