Bali, Indonesia is a captivating tropical haven that lures in millions of visitors annually. Its stunning beaches, thriving jungles, and rich culture make it an irresistible destination for many international travelers who seek to acquire property in Bali for investment purposes, as a secondary residence, or both. In this article, we will explore the various ownership choices open to foreign individuals interested in investing in Bali's real estate market.

To gain a deeper understanding of property ownership in Indonesia, let's begin by exploring the broader context of property ownership worldwide. On a global scale, two prevailing forms of property ownership are widely recognized: freehold and leasehold. Freehold ownership bestows complete and perpetual ownership of a property or parcel of land, while leasehold ownership confers rights to the property for a specified duration, which can span from several years to multiple decades. Numerous countries have provisions for both freehold and leasehold property ownership.

In the United Kingdom, for example, leasehold ownership is highly prevalent, especially for flats and apartments, where the property's freehold is typically held by a landlord. Under a leasehold arrangement in the UK, a leaseholder typically possesses property rights for a duration of 99 to 125 years. Leasehold ownership is also found in the United States and Australia, although it is less widespread than in the UK, and leasehold rights can encompass periods ranging from a few years to several decades.

Freehold ownership is what most people expect when they purchase a property. However, because leasehold rights can extend over several decades, some leaseholders can mistake leasehold ownership for freehold ownership.

Shifting our focus to property ownership in Indonesia, it's important to note that both freehold and leasehold ownership are prevalent forms of property ownership in the country. Additionally, there is a third type of ownership that bears similarities to leasehold ownership. Nevertheless, there are restrictions on the ownership rights that foreigners are allowed to obtain. In the subsequent sections, we will delve into these three categories of property ownership in Indonesia.

1. Freehold or “Hak Milik”

In Indonesia, freehold ownership rights are restricted to Indonesian citizens only. To circumvent this restriction, many foreigners have acquired freehold property using an Indonesian nominee who acts on their behalf to obtain the freehold title. However, this approach should be avoided since the nominee legally holds full ownership of the property and has the power to claim the property at any time.

2. Leasehold or “Hak Sewa”

Leasehold ownership in Indonesia is available to both Indonesian citizens and foreigners. Foreigners can even acquire leasehold properties without any residency status in Indonesia. This arrangement involves an Indonesian freehold landowner leasing their land or property to a buyer, who pays the landowner for the initial lease period and each time they wish to extend the lease. Leasehold rights in Indonesia are executed before a notary and have strong legal protection for the leaseholder. During the leasehold period, the leaseholder hasvirtually the same rights as a freehold landowner, including the ability to sell or bequeath theleasehold right as an inheritance.

In Bali, leasehold agreements are typically for 25 to 30 years and can be extended by purchasing additional years from the freehold owner. While there are no legal restrictions on the duration of leaseholds, it is common practice to extend them to maintain the duration at 25 years. Some leaseholders aim to extend their leases every few years, while others top up the leasehold duration back to 25 years only when they are ready to sell the leasehold property to capture its full value in the selling price.

One major advantage of leaseholds in Indonesia is their affordability, with typical prices ranging from a third to a fourth of the cost of a freehold property. This makes leasehold ownership an attractive option for investors seeking higher ROI while enjoying most of the benefits of freehold ownership. As a result, leasehold ownership is the most popular form of property ownership among foreigners in Indonesia.

3. Right to Use or “Hak Pakai”

Hak Pakai is another ownership right available to foreigners in Indonesia– it is virtually identical to another form of ownership known as the Right to Build (“Hak Guna Bangunan” or HGB). To keep things simple, we will only refer to Hak Paki in this section.

When a freehold property is sold to a foreigner, it must be converted to Hak Pakai ownershipand if the Hak Pakai property is sold back to an Indonesian, it reverts back to freehold ownership. Hak Pakai ownership shares similarities to leaseholds as ownership is not indefinite and must be extended. This title grants ownership rights for an initial period of 30 years and can be extended for 20 years, and then renewed for a maximum period of 30 years, corresponding to a total ownership period of 80 years.

When an Indonesian sells their freehold land or property as Hak Pakai, they are effectively giving up all rights to that property. As a result, extensions of a Hak Pakai ownership are done through the government by submitting an application to the National Land Agency and paying the appropriate extension administration fees – unlike in leasehold extensions where the leaseholder pays the freehold owner for extensions. Hence, extensions of Hak Pakai are administrative processes with the government and unlike leaseholds, are not dependent on negotiating with a freehold owner or on the market price of the land at the time of extending.

However, acquiring property in Indonesia through Hak Pakai can be a more arduous andcostly process for foreigners due to several factors:

• First, foreigners need to establish an Indonesian limited liability company (also known as a PT PMA) in order to obtain the Hak Pakai property. This form of ownership cannot be obtained under a foreign individual's name, unlike leaseholds.
• Second, a minimum investment of 10 billion IDR (approximately USD $660,000) isrequired for the foreign-owned PT PMA.
• Third, maintaining the PT PMA in Indonesia involves ongoing compliance, administration and costs that are legally required for companies.
• Lastly, purchasing land or property under the Hak Pakai title tends to be 3-4 timesmore expensive than purchasing a leasehold, resulting in longer payback periods.

Despite these challenges, some foreigners still find the predictability offered by Hak Pakai ownership extensions to be a viable option.

No matter which ownership method you select, the value of working with a professional who can provide guidance throughout the process cannot be overstated. Many foreign buyers who attempt to purchase land and property in Indonesia without proper due diligence fall prey to common pitfalls. Beyond ownership rights, there are numerous other factors to consider, such as land zoning and permitted activities, to ensure that the property can be used for its intended purpose. At Nalu Surf Villas, we partner with PROPERTIA, Bali's no. 1 Real estate agent to ensure a seamless and stress-free purchasing process, They will also guide and advise you on all aspects of your investment asset, so you are fully informed.