Investing in Bali’s real estate market offers lucrative opportunities and one of the most important decisions when considering property ownership in Bali is whether to opt for freehold or leasehold property. There are different benefits and drawbacks to both ownership types that can greatly affect your investment.
This guide will look at the main differences between freehold and leasehold properties in Bali, so you can make a smart choice based on your objectives. Specifically, we’ll delve into the legal frameworks, financial implications, and practical considerations associated with each property type. We will also share useful investment advice for Bali to help make your investment successful and safe.
Understanding Freehold vs Leasehold in Bali
Bali’s real estate market presents two primary property ownership structures: freehold and leasehold. In simple terms, freehold property means you own the land outright, whereas leasehold property means you are only leasing the land for a set period, typically 25 to 99 years. Each comes with its own set of advantages, limitations, and legal stipulations, especially concerning foreign ownership, so understanding these distinctions is crucial when deciding where and how to invest in Bali real estate.
What is Freehold Property in Bali?
Freehold (Hak Milik/SHM) property grants the most extensive property rights in Indonesia, equivalent to full ownership. With this type of property ownership, owners have the full, indefinite rights of the land and the building on it. As the freehold owner, you have complete control over the property, and you can sell, rent, or develop it as you see fit, provided you comply with local regulations.
In Bali, though, foreign citizens cannot possess land directly as freehold owners. According to Indonesia’s property regulations, freehold land ownership can only be held by Indonesian citizens or legal entities. However, foreign nationals may still indirectly own land through a nominee agreement, where a foreign national investor designates a third party (nominee) to possess legal ownership of the land for them, or by establishing an Indonesian-owned company, as stated in Article 44 of Act No. 5 of 1960. Nonetheless, these methods are limited and pose legal risks.
For foreign investors, freehold ownership is typically not an option, but some alternatives can give you the benefits of owning property without direct land ownership.
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What is Leasehold Property in Bali?
Leasehold (Hak Sewa Bangunan) property allows foreign investors to lease land for a long-term period, generally ranging from 25 to 99 years. Leasehold ownership means that while you do not possess the land itself, you are permitted to utilize it for residential, commercial, or development activities throughout the lease duration.
Unlike freehold ownership, leasehold property in Bali can serve as a practical choice for foreigners. This type of property gives investors the opportunity to use the land for building a home, establishing a business, or developing real estate without the need for complicated legal arrangements.
Leasehold agreements are also regulated by Indonesian law, where the length of the lease, terms for renewal, and the permitted uses of the property are usually arranged. Favorable, hassle-free contracts acknowledging both the buyer and seller allow foreign investors to enter property investment easily, ensuring peace of mind and security.
Other Types of Land Rights in Bali
While the freehold (Hak Milik) and leasehold (Hak Sewa Bangunan) are types of property ownership rights in Bali, additional ownership rights related to land ownership are also granted to investors based on usage purposes, durations, and specific restrictions.
Hak Guna Bangunan (Right to Build)
Hak Guna Bangunan (HGB) titles provide holders with the right to construct and own buildings on a specific plot of land that is owned by someone else, typically an Indonesian national. This right is transferable–you may sell them, buy them, and even pass them down through inheritance–and can be used as collateral, making it a versatile option for property ownership. But remember, unlike the Hak Sewa Bangunan, this title is only given to foreigners through legal entities such as foreign-owned companies (PT PMAs) and joint ventures established under Indonesian law. In other words, if you’re a foreign investor, you can’t snag an HGB title.
Initially granted by the National Land Agency for up to 30 years, HGB titles can be extended for an additional 20 years and subsequently for another 30 years. After these extensions, a new HGB title may be issued under similar terms, ensuring long-term usability and investment stability.
Hak Pakai (Right to Use)
Hak Pakai (HP) titles allows individuals or entities to use and benefit from land controlled by the state or owned by an individual landlord through an agreement. This right is accessible to both Indonesian nationals and foreigners, provided they have valid residency permits such as KITAS or KITAP visas. Foreign-owned companies (PT PMAs) and certain legal entities domiciled in Indonesia can also obtain Hak Pakai, making it a practical option for those who wish to invest in Indonesian real estate without direct land ownership.
The flexibility of Hak Pakai is one of its key advantages. It allows holders to use the land, access natural and water resources, and even transfer these rights, making it suitable for long-term investments. This title can also be used as collateral, enhancing its appeal for financial transactions. However, with Hak Pakai titles does not allow for significant structural changes or commercial use without further permissions of the land owner.
Hak Pakai titles are initially valid for 30 years and can be extended for an additional 20 years, with the possibility of further renewal for another 30 years, reaching a maximum duration of 80 years under recent government regulations (Act No. 103 of 2015).
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Hak Guna Usaha (Right to Cultivate)
Hak Guna Usaha (HGU) titles grants holders the right to use a specific plot of land for agricultural, plantation, or farming purposes. This title is ideal for businesses or individuals looking to engage in agriculture-related activities, whether for crop cultivation, livestock farming, or other forms of plantation-based projects. However, HGU is strictly limited to such uses and cannot be used for residential or commercial development.
The duration of an HGU title typically spans 35 years, with the possibility of extension for additional periods, depending on the regulations in place at the time. However, unlike other land titles such as Hak Guna Bangunan or Hak Pakai, HGU is not transferable for non-agricultural purposes.
With its purpose, eligibility for HGU titles is generally restricted to individuals or companies actively engaged in agriculture. Foreigners can acquire HGU rights, but typically through an Indonesian legal entity, often a local company specializing in agricultural activities. While HGU provides extensive rights for land cultivation, it is unsuitable for those looking to develop properties for residential or commercial purposes, making it a specialized option for those seeking to invest in Indonesia’s agricultural sector.
Real Estate Guide: Freehold and Leasehold in Bali
Freehold Property
Freehold property ownership offers several attractive benefits but comes with some notable limitations, especially for foreign buyers. Navigating its legal complexities will give you the upperhand in controlling and making sure your long-term investment is secured.
Pros
- Full Ownership: Freehold ownership grants the buyer full control over the property, allowing them to sell, rent, or develop it without restriction.
- No Time Limits: Ownership is perpetual, without concerns about lease expirations.
- Long-Term Security: Provides a stable asset that is transferable and can be passed down through generations.
- Investment Appreciation: Potential for significant capital appreciation over time.
- Unrestricted Use: Perhaps the best advantage of the freehold property ownership is the flexibility to make property modifications or renovations, given they are subjected to local regulations.
Cons
- Legal Restrictions for Foreigners: Foreign nationals are prohibited from owning freehold property directly. Instead, they can do workarounds like nominee agreements or setting up a PT PMA, which can be risky and complicated if not implemented properly.
- Legal Risks: Nominee agreements are not officially recognized and may be deemed illegal, putting the foreign investor’s property at risk. Even with a PT PMA, the rights granted may not be as extensive as those of an Indonesian national.
- Higher Initial Investment: Purchasing freehold property typically requires more capital upfront. Legal fees, taxes, and costs associated with establishing a PT PMA also adds up to the initial investment.
- Administrative Complexity: Owning property via a PT PMA involves regular compliance with Indonesian corporate laws, including ongoing reporting. Operational restrictions may also apply, requiring additional licenses or approvals for certain business activities.
Leasehold Property
On the other hand, leasehold property ownership in Bali offers a more accessible option for foreign investors. It provides a flexible and cost-effective alternative to freehold ownership, though it comes with its own set of limitations.
Pros
- Foreign-Friendly: Leasehold agreements are permissible under Indonesian law, making it easier for foreigners to acquire property in the country. The process of acquiring one is also not complex, therefore, the possibility of having legal loopholes is reduced to a minimum.
- Flexibility: With leasehold property ownership, lease duration, renewal options, and property use can be negotiated, providing more flexibility to the investor. It also allows for easier adjustments to investment strategies over time based on changing needs or market conditions.
- Cost-Effective Entry: Lower upfront costs compared to freehold purchases.
- Budget Management: Lower initial costs allow for better allocation of funds towards property development or other investments.
Cons
- Limited Ownership Period: Ownership rights are limited to the lease duration of usually 25 to 99 years. Also, if not renewed, there is a possibility of losing the rights to the property after the lease ends.
- Renewal Uncertainty: Renewal terms may be challenging to negotiate, and landowners could unilaterally increase lease costs significantly upon renewal.
- Reduced Capital Appreciation: Leasehold properties may appreciate less than freehold properties. Also, the property value may decrease as the lease term shortens.
- Resale Difficulties: Leasehold properties can be less attractive to buyers, especially with a shorter remaining lease term. Limited buyer pool also contributes to this, particularly since certain investors favor freehold properties for long-term stability.
For a more simplified look of these property ownership types and rules, here’s a table comparing both in several different criterias:
| Criteria | Freehold Property | Leasehold Property |
|---|---|---|
|
Ownership Rights |
Permanent ownership of land and structures; full control. |
Temporary right to use land and structures for the lease term. |
|
Legal Accessibility |
Not directly accessible to foreigners; requires complex legal arrangements (e.g., PT PMA). |
Legally accessible to foreigners through straightforward lease agreements. |
|
Initial Investment |
Higher upfront costs due to land purchase and additional legal fees. |
Lower upfront costs as you are leasing rather than buying. |
|
Legal Risks |
Potential legal complications with nominee agreements or PT PMA setup; risk of invalid ownership. |
Minimal legal risks if lease agreements are properly executed and comply with Indonesian law. |
|
Duration of Ownership |
Unlimited; ownership can be passed down to heirs. |
Limited to the lease term (25-99 years); renewal depends on agreement with the landowner. |
|
Administrative Complexity |
High; involves setting up and maintaining a PT PMA, ongoing compliance with corporate laws. |
Low; standard lease agreements with clear terms reduce administrative burden. |
|
Capital Appreciation |
Potentially higher; property may appreciate significantly over time. |
Lower potential; value may decrease as lease term shortens, affecting resale value. |
|
Flexibility |
High in terms of property use and development, but limited for foreigners due to legal barriers. |
High; lease terms can be negotiated to suit investment goals, but limited by the lease duration. |
|
Resale Potential |
Generally easier to sell due to perpetual ownership; more attractive to a wider market. |
Harder to sell, especially as the lease term diminishes; appeals to a niche market. |
|
Risk Profile |
Higher legal and financial risks due to complex ownership structures and potential changes in law. |
Lower risk if lease agreements are clear and legally compliant; however, still subject to lease renewal risks. |
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Which Option is Better for Foreign Investors?
Choosing the right property ownership option in Bali depends on the investor’s goals, risk appetite, capital, and tolerance for legal complexity. Each option offers distinct advantages tailored to different investment strategies.
Leasehold Property
In general, leasehold property ownership type is ideal for:
Foreign investors who seek legal simplicity as it avoids the complexities of circumventing ownership laws.
Investors with lower initial investment capital or those looking to enter the Bali property market without taking out much from their banks.
Investors wanting flexible terms to customize lease agreements to fit their investment timeline.
Freehold Property via PT PMA
On the other hand, freehold property ownership type via the PT PMA is your safest bet if you opt to exercise full ownership. Specifically, this is ideal for:
- Long-term investors or those committed to a permanent presence in Bali and willing to invest in navigating legal structures.
- Investors with higher risk tolerance or are comfortable with the legal and financial risks involved with the setup.
Investors who desire full control of their property. Specifically, this option is favorable to those who require complete ownership rights and are prepared to manage the associated responsibilities.
Investment Advices and Considerations for Foreign Property Investors in Bali
Understanding the ins and outs of freehold and leasehold property ownership rights is one thing. Next, you need to consider key factors that can influence your investment decision as a foreign investor in Indonesia. Here are few advices we can provide you with:
- Legal Advice: Always seek legal advice before entering into any property agreement in Bali, whether freehold or leasehold. A lawyer familiar with Indonesian property laws can guide you through the complexities and ensure that your investment is protected.
- Property Market Research: Do thorough research on the Bali property market, as location and property type will greatly affect the potential return on investment. Popular areas like Ubud, Canggu, and Seminyak are great for tourists and long-term rentals, while areas like Sanur and Jimbaran offer more residential opportunities. Stability of the property market can also guide you to choose what property ownership rights you should after.
- Maintenance Responsibilities: Think whether you have the additional resources to allocate for property maintenance. Remember, freehold property owners bear full responsibility for property maintenance, ensuring the property remains in good condition. In leasehold agreements, maintenance duties can either be shared or assigned to the landlord or tenant, depending on the lease terms, which could impact overall costs and responsibilities.
- Property Inheritance Issues: Freehold properties can be inherited, providing long-term security for the owner’s family. Conversely, leasehold properties revert to the landowner upon lease expiration, creating challenges for inheritance planning and long-term asset management.
- Fees and Costs: Freehold property costs typically include land transfer fees, notary fees, and taxes, which can add up significantly at the time of purchase. In contrast, leasehold properties usually involve annual lease payments, renewal fees, and associated legal costs, affecting long-term financial planning.
- Long-Term Viability: Consider the long-term viability of your investment. While leasehold agreements may be easier to obtain, you should also consider whether you want to be tied to a lease agreement for many years or whether you plan on developing the property in the future.
- Exit Strategies for Investors: Freehold property owners have the flexibility to sell or transfer ownership anytime, providing a straightforward exit strategy. Leasehold property owners, however, must adhere to lease terms, which may restrict selling or subleasing options, potentially complicating the exit process.
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FAQ
Foreigners cannot directly own freehold property but can acquire it through a PT PMA (foreign-owned company).
Freehold offers permanent ownership, while leasehold is a rental agreement for a set period (typically 25-99 years).
Freehold is better for long-term ownership, while leasehold is ideal for shorter-term, lower-cost investments.
Leasehold agreements typically last for 25 years, extendable up to 80 years.
Both have taxes, legal fees, and notary costs. Freehold may also require PT PMA setup, while leasehold has lease payments.
Make Your Bali Property Dream a Reality: Invest Wisely Today!
Bali’s real estate market presents incredible opportunities for foreign investors, but navigating the complexities of property ownership is key to making a successful investment. Regardless of whether you choose the flexibility of leasehold property or explore the possibilities of freehold ownership through a PT PMA, coupled with proper legal advice and a clear understanding of your goals, both options can lead to successful and profitable property investments in Bali’s booming real estate market.
