When it comes to owning a property in Indonesia, there are 3 primary types of land titles: Freehold and Hak Guna Bangunan (HGB). Here’s an outline comparing these two titles:

1. Freehold Title Hak Milik:

• Definition: Freehold, known as Hak Milik in Indonesian, is the highest form of land ownership in Indonesia, granting the owner absolute and permanent ownership rights over the land and any structures built on it.
• Ownership Duration: The ownership of a freehold property is perpetual and can be passed on to heirs.
• Eligibility: Freehold ownership is typically reserved for Indonesian citizens. Foreign individuals and entities are generally not eligible for freehold ownership of land in Indonesia.
• Exceptions: Some Indonesian citizens of foreign descent may be eligible for freehold ownership under certain conditions.
• Permitted Use: Freehold landowners have the right to use, develop, lease, and transfer the land freely.
• Benefits: Full control over the property and the potential for long-term capital appreciation.

2. Hak Guna Bangunan (HGB) Title:

• Definition: HGB, known as Right to Build in English, is a land title that grants the holder the right to build and use a property on the land for a specified period, typically 30 years, extendable for up to 20 more years and later renewable.
• Ownership Duration: The initial HGB period is 30 years, renewable up to 20 additional years and later renewable for another 30 years, providing a total possible term of 80 years.
• Eligibility: Both Indonesian citizens and foreign individuals or entities can obtain HGB titles.
• Permitted Use: HGB titleholders have the right to build and use structures on the land, subject to compliance with regulations and restrictions.
• Limitations: HGB does not provide full freehold ownership rights, and the land reverts to the government at the end of the term, although renewal is possible.
• Benefits: Foreigners can legally and directly own landed property through HGB titles, making it a viable option for foreign investment.

It’s important to note that while HGB provides a viable option for foreign investment, it’s crucial for foreign investors to understand and comply with Indonesian laws and regulations related to land ownership. Additionally, engaging qualified legal professionals is essential to navigate the complexities and ensure a secure and successful property investment in Indonesia.

3. Hak Sewa (Leasehold)

Basically means, you rent a piece of land (with a building or without). The right to sublease the property needs to be explicitly agreed upon in the lease agreement (notary needed). Hak Sewa is a leasehold title that allows individuals or entities to lease land from the owner for a specific period. Lease agreements can vary in length, providing flexibility for both parties. Often lease contracts between the local land owner range from 25-30 years.

In addition there are several other land titles in Indonesia that cater to specific ownership rights and purposes. These land titles include:

1. Hak Pakai (Right to Use): Hak Pakai is a right-to-use title that grants non-Indonesian individuals and entities the right to use land in Indonesia for residential or commercial purposes. It is usually granted for a maximum period of 30 years and can be extended for an additional 20 years.

2. Hak Milik Atas Satuan Rumah Susun (Strata Title): This title applies to ownership of individual units within multi-story buildings, such as apartments or condominiums. Each unit owner holds a Hak Milik Atas Satuan Rumah Susun for their respective unit and a shared Hak Milik for common areas.

3. Hak Guna Usaha (Right to Cultivate): Hak Guna Usaha is a right-to-cultivate title primarily used for agricultural purposes. It allows individuals or entities to use the land for farming or agricultural activities for a specific period, typically up to 35 years and renewable.

4. Hak Guna Air (Right to Use Water): This title grants the right to use water resources for specific purposes, such as irrigation, industrial processes, or aquaculture.

5. Hak Pengelolaan (Management Right): Hak Pengelolaan provides the right to manage and control land and natural resources for specific purposes, usually granted to local communities or organizations for conservation or development initiatives.

Investing in an off-plan real estate project can offer several advantages, but it also comes with certain risks. As a foreigner looking to buy an off-plan villa or apartment in Bali, it’s essential to approach the investment with careful consideration and take appropriate precautions. Here’s a breakdown of the advantages, risks, and advice for potential investors:

Advantages:

1. Lower Initial Cost: Off-plan properties are usually sold at lower prices during the pre-construction phase, allowing investors to secure a property at a discounted rate compared to completed units.

2. Potential for Capital Appreciation: As the property is developed and the market grows, the value of the off-plan property may increase, providing the potential for capital appreciation.

3. Customization Opportunities: In some cases, investors may have the option to customize certain features or layout elements of the property before construction is completed.

4. Flexible Payment Plans: Off-plan projects often offer flexible payment plans, enabling investors to spread payments over the construction period.

5. Early Entry into Popular Locations: Off-plan investments allow investors to secure a property in sought-after areas before they become fully developed and potentially more expensive.

Risks:

1. Delays and Changes: Construction delays and changes to project plans could affect the estimated completion date and may result in additional costs.

2. Market Fluctuations: Economic and market conditions can impact property values and demand, potentially affecting the profitability of the investment.

3. Developer Reliability: The success of an off-plan investment depends on the credibility and track record of the developer. It’s essential to research the developer’s history and reputation.

4. Regulatory and Legal Risks: Investing as a foreigner in Bali comes with legal complexities. Understanding and complying with local laws and regulations is crucial to avoid potential legal issues.

5. Quality Concerns: Investors might face quality-related issues if the final product does not meet expectations or specifications outlined in the original plan.

Advice for Potential Investors:

1. Due Diligence: Conduct thorough research on the developer, the project, and the local real estate market. Seek legal advice to understand the terms of the contract and ensure compliance with Indonesian laws.

2. Visit the Site: If possible, visit the project site and surrounding area to get a better sense of the location and potential growth prospects. Location, Location, Location. Make sure you understand the overall plans for developing the area you are looking at, particularly if it’s a fast growing destination like Canggu or Uluwatu. Understand what other nearby projects might be developed and how this could impact tourism and the “atmosphere” overall.

3. Choose Reputable Developers: Invest in projects by established and reputable developers with a proven track record of successful completions.

4. Payment Terms and Escrow: Review the payment schedule and ensure that payments are held in escrow to protect against potential issues with the developer.

5. Have a Contingency Plan: Be prepared for unexpected delays or changes and have a contingency plan in case of unforeseen circumstances.

6. Resale and Exit Strategy: Consider your exit strategy in case you need to sell the property before or after completion.

7. Engage Local Experts: Seek the advice of local real estate agents or consultants who understand the Bali property market.

8. Understand Ownership Rights & Titles: Familiarize yourself with Indonesian property ownership laws, as foreigners do have restrictions on land ownership.

Investing in an off-plan real estate project can be a rewarding venture if approached prudently. Being well-informed, conducting due diligence, and seeking professional guidance are key to making a successful investment in Bali’s real estate market as a foreigner.

Renting out a property as a foreigner

Yes, one can create a return on investment with properties in Bali. A common model, is that the property or project is managed by a local management company, that does rent the property out, like a hotel or villa management. While this can be an attractive and lucrative way to create cashflow a lot of things need to be taken into consideration – legally and also fiscally.

One can for example create a local company, a PT PMA which can be foreign owned. This entity then rents the unit(s) out, creates an income for that company. Not to forget, this PT PMA has legal and fiscal obligations, has to pay taxes, needs a business license in line with the type of business etc. 

The investor, can receive payment in form as dividend. The dividend tax is 10%. 
Then, the question is, how you can get the dividend into your personal bank account. And personal income needs also to be taxed.

Establishing a PT PMA, a foreign-owned Indonesian legal organization, is a secure option to acquire property in Bali. In this method, you can get Hak Guna Bangunan, or the Right to Build, as well as Hak Pakai, or the Right to Use, in order to invest in real estate or purchase land in Bali. Although a foreigner’s property may not be freehold, the Right to Build and Right to Use titles provide legal clearance.

More in Investor KITAs and PT PMA

The promise of ROI?!

Many, many, many developers promote their developments with juicy promises. 15% ROI per year, even up to 30% ROI per year. Be careful!. Even though such a return of investment could be possible, it is often unlikely.

The calculations provided to “proof” such a Return on Investment, are very often inflated and simply too optimistic and the risks downplayed. Critical Metrics:

• average occupancy rate
• average room rate (ARR)
• operating costs

The risks of course can be, increase of labour costs, increase of marketing costs to actually fill up the rooms, cost of repair (CAPEX). The building quality is very often not very good, conditions are harsh on material, builders save costs on material such as cement, they take short cuts on building a proper foundation…the list is endless.

Bali is very competitive and rest assured, that a competitor will open nearby, putting pressure on the room rates, and the margins under pressure. And if you are unlucky, some type of business will opene nearby that is “loud”. What was once a ricefield next to your pool, will be developed eventually, unless you secured this land too.

And a real ROI should mean, cash in hand for the investor, not income before taxes paid. The question is, what taxes will apply, until you have your “return” in your pocket. Taxed and received in your bank account. Taxes can and will occur in Indonesia, and, depending on the investor’s country of residence, also “at home”.

Be advised:

Foreigners are not eligible for mortgages and are not able to receive financial support, as you will be paying cash upfront.  And if the business generates income, the question is, how will you be paid personally, and what taxes will apply here in Indonesia and also in your home country if you are a tax resident outside of Indonesia.

There are many “unreliable agents” in the real estate business, also in Bali. So one needs to make sure to work with reliable agents and developers who can guide you properly and not just have their interest in a quick commission and promising you return on investments that are simply too good to be true.

Because, many problems appear only a few years down the road. When income is generated, or local administration checks if all licenses are in place, or when maintenance and renovations investments are needed.

Crucial to understand beforehand if you LEASE a property long-term, what happens when the lease runs out after 30 years for example. What are the conditions and options to extend the lease etc., what happens to the buildings. 

Constructing your own building in Bali? Very tough if you have no experience or don’t understand the local language and regulations. 

To deal with contractors, suppliers, and workers can be a challenge in any country, and Bali is no exception.

The safer bet is to buy an already existing project and make a thorough investigation on construction quality, drawings etc, or invest into an off-plan project that is run and managed by a reliable developer. 

If you decided to build your own property in Bali, you would need to make sure you get the licenses and paperwork in order.

Deliver the completed paperwork, along with any necessary supporting documents, to the Indonesian National Land Office (BPN) for a certificate over the property.

Provide documentation of land purchase, as well as proof that the Hak Guna Bangunan (Right to Build) or Hak Pakai (Right to Use) requirements have been satisfied. Get the proper construction permit (Izin Mendirikan Bangunan IMB) and you’ll soon be able to build your property.

The certificate will then be issued in your company’s name by the National Land Office.

if you wish to run the property as a business, and for example rent it out, you would need several business licenses, and the zoning of the land needs to be accordingly. It is very important you inquire about the status of the business license before you purchase or lease any property in Indonesia.