Villa Investment in Bali: Understanding 3 Types of Property Ownerships

Indonesia is a country rich in natural beauty and economic potential, making it an attractive destination for foreign nationals. However, its property ownership regulations are uniquely structured, especially for foreigners. To avoid misunderstandings, it’s important to know the difference between leasing and ownership rights for property in Indonesia.

1. Key Concepts of Property Ownership in Indonesia

Under Indonesian law, property ownership is divided into different categories, with the most relevant for foreigners being Hak Pakai (Right to Use) and Hak Sewa (Lease). These differ significantly from Hak Milik (Freehold Ownership), which is exclusive to Indonesian citizens.

Hak Milik (Freehold)

• This is the strongest form of property ownership in Indonesia.
• It grants the holder full, perpetual ownership of the property.
• Unfortunately, foreigners are not permitted to hold Hak Milik under Indonesian law. This right is strictly reserved for Indonesian citizens.

Hak Pakai (Right to Use)

• Foreign nationals can legally acquire Hak Pakai to use a property for a fixed period.
• It can be applied to land or buildings and is typically granted for up to 30 years, with extensions possible under certain conditions.
• Hak Pakai allows foreigners to build or occupy the land but does not grant full ownership.
• This right can be obtained through agreements or leases with individuals, companies, or the government.

Hak Sewa (Leasehold)

• Hak Sewa allows foreigners to rent or lease a property for residential or commercial purposes.
• Leases are typically valid for 1 to 25 years, depending on the agreement.
• Unlike Hak Pakai, Hak Sewa does not require formal registration or legal ownership transfer. It’s more flexible but limited to contractual agreements between the tenant and the property owner.

2. Differences Between Lease (Hak Sewa) and Right to Use (Hak Pakai)

3. Challenges for Foreigners with Hak Milik

Foreigners often ask why they can’t own land in Indonesia outright. The answer lies in Indonesia’s Basic Agrarian Law (UUPA) of 1960, which restricts Hak Milik (Freehold Ownership) to Indonesian citizens. This policy is aimed at protecting Indonesian land sovereignty.

4. Practical Advice for Foreign Nationals

If you are a foreign national planning to invest or reside in Indonesia, here are some tips to navigate property ownership:

1. Leasing for Flexibility

   If you need short- to medium-term arrangements, leasing (Hak Sewa) is the simplest option. It involves fewer legal complexities and allows you to rent property for personal or business use.

2. Hak Pakai for Long-Term Use

   For long-term residency or investment, consider properties with Hak Pakai. While it requires formal registration, it offers greater stability compared to leases.

3. Ownership via Indonesian Entity

   Foreigners can indirectly gain control of property by forming a PMDN (domestic investment company) or PT PMA (foreign-owned company). These entities can hold Hak Guna Bangunan (Right to Build) or Hak Guna Usaha (Right to Exploit) for commercial purposes.

4. Partnering with an Indonesian Citizen

   Another common method is to co-own property with an Indonesian spouse. The property title will be under the Indonesian citizen's name, while the foreigner can secure usage rights through agreements.

5. Engage Professionals

   Always consult with local lawyers or property experts to ensure compliance with Indonesian laws. Missteps in understanding these regulations could lead to legal issues or financial loss.

5. Why Leasing and Usage Rights Work Well

While the inability to own freehold property may seem restrictive, Indonesia’s system balances protecting its land for citizens with allowing foreign investment and residency. Leasing and Hak Pakai offer viable alternatives for foreigners to enjoy the benefits of living or investing in the country without violating local laws.

Understanding the differences between leasing (Hak Sewa) and usage rights (Hak Pakai) is crucial for any foreigner considering property in Indonesia. Although outright ownership (Hak Milik) is off-limits, the available options allow flexibility and legal pathways to use and enjoy property. By navigating these rules wisely, foreign nationals can secure their space in this vibrant and growing market.