Indonesia’s much-hyped foreign ownership of Property Rule has had ‘zero impact’

Photo by Pruculy Yongki. Taken from flickr

By: Ardi Wirdana

The buzz surrounding Indonesia’s new regulation on foreign ownership of property has been “much ado about nothing”, a panel of property experts agree, as the policy does not substantially offer any new incentives to encourage foreigners to buy houses in the country.

“People read the headlines and get excited about it, but for those of us who know about it, it seems like there has been no impact, other than good press,” Michael Broomell, managing director of global real estate company Colliers International Indonesia.

The new policy, which is issued in the form of government regulation no. 103/2015 on House Ownership of Foreigners Residing in Indonesia, allows foreigners who work or live in Indonesia to own a landed house under the so-called ‘right-of-use’ title for a total period of 80 years, subject to tenure renewal processes.

The regulation follows a similar regulation on apartment ownership for foreigners enacted last year. The government hopes that the opening of the property market to foreign buyers will boost Indonesia’s property industry’s competitiveness against regional counterparts, bolster economic growth and increase the government’s tax income.

Speaking in a discussion on property with foreign journalists on Wednesday in Jakarta, Michael outlined a number of reasons why the new regulation has not achieved its aim of enticing more foreigners to buy property in Indonesia.

Michael said that the old regulation, which has been effectively replaced by the new 103/2015 regulation, had already allowed foreigners to own houses and apartments in Indonesia, though for a period shorter than the 80 years granted in the new regulation.

Moreover, the criteria for foreigners to own a house in Indonesia is problematic. The regulation states that the foreigner would need to be living in Indonesia and hold a limited stay permit (KITAS) or permanent stay permit (KITAP) in order to be eligible for house ownership. Michael said that the number of foreigners with such permits is small as most expats only live in Indonesia for two or three years.

Another condition in the regulation states that if the foreigner leaves Indonesia to live in another country, then he/she needs to release or transfer the ownership rights to another person who meets all requirements to own property in Indonesia within one year after departing from Indonesia. The penalty is to have their house confiscated by the Indonesian government. This makes the idea of buying houses even less appealing for foreigners.

Breakthrough Policies Needed

According to Real Estate Indonesia (REI) Vice Chairman Ignesjz Kemalawarta, the new regulation needs complementary regulations and breakthrough policies for it to work well.

Among suggested changes is to allow foreigners to purchase a house before obtaining their stay permit. The process of obtaining stay permits for foreigners needs to be simplified. Yet another suggestion was to ease mortgage lending to foreigners.

However, he added what would really make the new regulation successful is the implementation of a couple of breakthrough policies. The first is to allow foreigners living overseas to own property in Indonesia. This will have a big impact on property sales in locations like Jakarta, South Jakarta, Batam and Bali.

“Perhaps many foreigners would like to have a residential home in Bali but not necessarily want to work in Indonesia. There is a market for this,” he said, adding that Malaysia, Singapore and Vietnam have adopted such a policy and because of these countries have been more attractive to foreign property buyers in the region.

Confusion over Property Ownership Titles

The second policy that Indonesia needs to consider is the controversy concerning property ownership licenses.

Indonesian law recognises three property ownership category: right-of-ownership (hak milik), right-to-build (HGB) and right-to-use (hak pakai), with hak pakai considered the least valuable category.

The ‘sacred’ 1960 Land Law clearly stipulates that foreigners can only obtain property under the right-to-use category, a law that has been in effect until now and cannot be changed except with the agreement of parliament.

Historically the main difference between HGB and hak pakai is the period of tenure, a total of 80 years for HGB and 70 years for hak pakai. The new regulation however has increased the tenure of hak pakai also to 80 years, making it legally as valuable as the HGB.

However, this has not changed the locals’ traditional perception of hak pakai as the inferior title, which makes it problematic for developers who may want to tap the foreigners market by using hak pakai but would run the risk of having their property being considered of low value by the local people.

A way to eliminate the problem is to simplify the property status by combining HGB and hak pakai or get rid of either one, as both are now of the same value.

Though this would solve a lot of problems, Michael said that it is easier said than done given the nature of the Indonesian people.

“If we eliminate HGB and say all HGB titles are now hak pakai titles, there might be a lot of people who will be upset because they feel that their titles are being downgraded when in reality it doesn’t matter,” he said.

“And if the foreigners have HGB then also there will be the nationalists in parliaments who will say they’re selling our country to foreigners.”

In Talks with Government

Ignesjz said that REI has formed a special task force to engage in talks with the government regarding the issue of foreign ownership.

He assured that REI will continue to offer insight and suggestions to the government on the best policies for Indonesia in the property sector.

Proposing the five supporting regulations and the two breakthrough policies will be the main agenda in REI’s discussions with the government, but Ignesjz says that the association will remain realistic in their expectations of the outcome of the talks, especially with regard to the two big policies it is suggesting to the government.

“For the simplification of permit, we think it can be achieved, but for the property categories it will be difficult because that is related to the 1960 law,” he said.