Leasehold & Freehold: Benefits & Differences
Bali is becoming a more and more popular tourist attraction, since the cost of living (or staying here for holidays) is pretty cheap, especially if you come from countries in western Europe where the cost of living is quite high, compared to Bali. What are Leasehold and Freehold properties? Here we break down leasehold and freehold property in Bali.
As more and more people come to visit this gorgeous island with its mesmerizing flora, beaches, food, and local community, Bali attracts a progressively growing number of investments. Thus one of the most beneficial and effective ways to invest in Bali is real estate.
Freehold real estate objects on the island of Bali have a high interest in foreigners. The interest keeps growing even though it is necessary for foreigners to use an Indonesian nominee who becomes the title owner for the certificate of the land. Be aware that it is completely illegal by Indonesian law & land regulations to purchase real estate in Bali if you are a foreigner.
However, there are certain local “rules” and nuances that you need to know before planning to purchase or lease a property in Bali. If you are not a local, it can be a bit tricky, though still possible. Learn more about it in our article below.
What Is a Freehold?
Freehold is also called “Hak Milik” in Bali. It is the strongest type of land ownership in the entire Indonesia. The only people who can obtain such a title are people with Indonesian Nationality. Both PT/Perusahaan Terbatas are liability companies and foreigners have no right to purchase land in Bali and get the Hak Milik title. However, the title owner has the full right to use the land the way he/she wants, except for exploiting natural resources. Hak Milik titles can be used for mortgage, as a gift, as an object of exchange, and can be sold as well. On the other hand, foreign people can obtain the Hak Pakai or Right of use title.
To begin with, let’s answer the question: what is a freehold – it is a fancier way to describe the purchase of land with or without a building. This is so far the most beneficial form of successfully investing in Bali’s real estate market because of the increasingly rising land value.
Unfortunately, freehold is the most non-accessible form of real estate investment for non-Indonesian people. If you are not a local citizen, it is illegal for you to purchase land or land with a property in Bali.
There can be 2 solutions to this problem to gain land ownership, however, neither of them is easy:
- The first one is to marry an Indonesian citizen. After the legal marriage, you are entitled to purchase a freehold in Bali.
- The second way to obtain land on the island is to acquire a different form of entitlement, called “Right of use”. What does this mean? It means that if you have a company in Indonesia, you can purchase the land under the company’s name. This way, you can purchase real estate, however, it belongs not to you but to a business unit.
More things to know and remember – even if you purchase the land, no matter if as an individual or as a business, you are allowed to use the freehold as you please but you are prohibited from exploiting all the natural resources located on the land or under it (in the ground).
What Is a Leasehold?
Put in simple words, a leasehold is a possibility to rent the land for the long term. This also awards you the possibility to lease the land or the property to someone else. More to it, you can also sell the lease itself.
The main benefit of a leasehold is that it doesn’t limit the opportunities for foreigners who are interested in investing in real estate in Bali. You do not need to be an Indonesian citizen in order to lease land or property.
More about selling the lease: selling the lease is fully possible, however, over time, it may become more difficult. For example, if you rented a leasehold for 25 years and at the time when only 3 years of the lease are left, you decide to sell the lease, you will find it hard to find people who are interested in such a short lease. Long story short, the longer the lease, the easier it is to re-sell it to another buyer.
More On Leasing Real Estate In Bali
It is important to realize and have in mind that after the lease is over, no matter how many improvements, restorations, or constructions the leaseholder has developed, the land reverts to its original owner. Thus you need to be smart about how much and where you invest when you are leasing land. The leasehold might be cheaper than freehold at first but the more you invest to improve the property, the more your investment depreciates in value.
However, if your primary strategy is to invest in improving the real estate property and then resell the lease to another investor, you should take action in finding a buyer as soon as possible. Because as mentioned before, the shorter the lease, the less interested the buyers will be.
If at some point you decide to purchase a leasehold, an official agreement should be carried out. It should be done by a legal attorney present during the process.
Such contracts need to be documented by a notary public, where the whole agreement will be reviewed in legal terms to ensure that everything is in place according to the law. Initially, the land can be rented for 25 years and afterward, if both parties agree, the lease can be extended up to 70 years.
If the contract is not renewed due to one or both of the parties disagree, the leasehold reverts back to its original owner.
During the start of the lease, the title changes from Hak Milik (Right to Own) to Hak Sewa title (Right to Lease). When the lease is terminated, the title goes back to Hak Milik again.
What Is Important To Know About The Leasehold?
- You have the right to sell your lease. It is your lease and you can deal with it as you see fit. Just remember that the fewer lease years are left, the less the value of your leasehold, so make sure you plan this upfront.
- There are restrictions. If everything is going according to the plan, you can sell your lease to anyone at any time. However, if some unfortunate events happen or plans change and the leaseholder leaves Indonesia and does not return for a time period of 1 year or more, according to the law, the lease must be sold. Also, if the leaseholder has abandoned the property and no one from his/hers family is taking care of it for up to 12 years, the foreigner loses the “being domiciled” status.
- You can pass the lease to a family member. For the duration that is in your lease contract, you can pass it on to any of your family members.
- You can rent out or sublease the real estate property. If you are not currently staying in the property, there is nothing that can stop you from doing so.
See also >> Bali Income Property 101
For more information regarding investor protocol in Indonesia, visit BKPM.co.id
