Leasehold vs freehold property in Indonesia: What are the pros and cons?

If you’re interested in investing in Indonesian real estate, you must decide between investing in leasehold or freehold properties. Although foreigners can buy freehold properties through a PT PMA, this option may be more challenging than leasing leasehold properties in Indonesia. Before starting your search for villas to buy in Indonesia, weighing the pros and cons of leasehold vs freehold properties is crucial. By doing so, you’ll be able to decide which option is most appropriate for you.

Leasehold vs freehold Indonesia: Which one is better?

Choosing between leasehold and freehold property in Indonesia depends on individual priorities. Foreign nationals (WNA) are typically limited to owning property through a leasehold agreement, which typically lasts 30 years and can be extended up to 80 years. It is worth noting that a leasehold agreement does not grant ownership of the property. However, if a foreign national wishes to buy freehold property, they can establish a foreign-owned company, PT PMA, which operates as a legal entity in Indonesia.

Before weighing the pros and cons of leasehold vs freehold properties, it’s essential to understand the following basics about property ownership in Indonesia:

• Foreign nationals are not allowed to buy freehold property in Indonesia, as only Indonesian nationals have the right to buy Hak Milik (HM) properties.
• Foreign nationals can start a PT PMA, which is a foreign-owned company that can buy and hold freehold property.
• Hak Guna Bangunan (HGB) is a land title needed to lease land and use it to construct or own a building on top of the land.
• Foreign nationals can buy a property with a Hak Pakai (HP) title. However, not all properties in Indonesia are eligible for an HP title. Foreigners who bought Hak Pakai property cannot rent it out, as Hak Pakai is only for residential purposes.

Benefits of freehold property in Indonesia

Freehold, locally known as Hak Milik, is Indonesia’s highest title for property ownership. When comparing leasehold vs freehold properties, buying freehold property in Indonesia has several benefits.

1. Freehold gives full ownership

Freehold allows the owner to control and utilize the property according to their desires, without any time limit. The owner can hold the real estate property for the entirety of his lifetime and transfer it to whoever he wishes. The most significant benefit of this land title is that freehold gives full ownership over the property.

2. PT PMA can buy freehold property in Indonesia

A foreigner can only buy freehold property in Indonesia by using a PT PMA. Foreign investors can buy and utilize the property for business and commercial activities. Buying freehold property through a PT PMA is perfect for foreigners who want to start a villa rental business in Bali or elsewhere in Indonesia.

3. Taking advantage of increased land value

One reason why real estate is a profitable business is that most buildings rise in value over time. The same counts for land. When the value of the land or structure goes up, the person who owns the real estate can sell it to generate a return on investment.

Cons of freehold property

There are numerous benefits to buying freehold property in Indonesia. Nevertheless, one significant disadvantage exists. It is prohibited for non-Indonesians to own freehold property in Indonesia. Only Indonesian citizens have the right to acquire freehold property as individuals. The sole alternative for foreigners is to purchase freehold property via a PT PMA. Furthermore, freehold properties typically entail a higher cost than leasehold properties, necessitating a considerable initial outlay of funds.

Benefits of leasehold property in Indonesia

Foreigners are drawn to Indonesia’s leasehold properties, which grant a 25-year lease with the option to extend up to 80 years. Investing in Indonesian leasehold properties offers numerous benefits.

1. Foreign individuals can lease leasehold properties

Foreign individuals and PT PMAs can acquire property through leasehold agreements, which is a legally sound alternative despite its potential drawbacks. Acquiring leasehold property is a more straightforward process compared to freehold property.

2. Less responsibility for the tenant

Leasehold offers a convenient solution for individuals seeking short-term accommodation without the commitment of purchasing property. This option relieves you of any burdens associated with property ownership, as the landlord assumes responsibility for the leased property.

3. Leasehold properties cost less money

Acquiring a leasehold property in Indonesia is generally cheaper than purchasing a freehold property, which makes it easier to enter the real estate market due to lower initial costs.

Cons of leasehold property

It is essential to consider the drawbacks of possessing a leasehold property in Indonesia despite the existence of certain benefits. The most significant disadvantage is the restricted ownership rights. As a leasehold property owner in Indonesia, you will not fully control it. Negotiations with the freehold owner regarding the maintenance and utilization of the property are necessary, and this is unlikely to change.

How can foreigners buy property in Indonesia?

There are several ways foreigners can buy property in Indonesia:

• Hak Pakai: Foreign individuals can use the Hak Pakai title to buy property in Indonesia. However, not all properties can be purchased with an HP title. Foreigners must meet specific requirements, like having a valid work permit and making a minimum investment. Buying Hak Pakai property allows foreigners to obtain Indonesia’s Second Home Visa.
• Hak Guna Bangunan: Hak Guna Bangunan is a land title that gives foreigners the right to build and own property on land owned by someone else, such as an Indonesian national or the state. The HGB title, mostly valid for 30 years and extendable up to 80 years, makes it possible to own a villa in Bali without owning the land.
• Leasehold: Foreigners can lease land and properties through a leasehold agreement, which is mostly valid for 25 years. These leasehold agreements can be used for residential or commercial purposes, making them popular among individuals and PT PMAs.
• Investment through PT PMA: Foreigners considering investing in Indonesian property and generating rental income can buy Indonesian property through a PT PMA. Foreigners can obtain a KITAS visa, which allows them to stay in Indonesia for two years.
• Buying with a passport: The Indonesian government announced in 2023 that foreigners can buy property with just a passport. There are several requirements to be eligible, such as minimum investment capital and maximum land size.

Buy property in Indonesia with Own Property Abroad

Are you looking to buy property in Indonesia? Own Property Abroad can assist you and ensure a seamless and hassle-free property journey. Thanks to our extensive knowledge and local experience in the Indonesian market, we can help with legal requirements, finding suitable properties, negotiating the best deals, and conducting due diligence.

With our expert team, you won’t have to navigate the complexities of the Indonesian market alone. For further information on how we can assist you, kindly drop your details below or email us at [email protected]. Let’s start working on your property success story today!

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