What is important to know when buying property in Indonesia?

Indonesia’s affordability and growth prospective make it a compelling option for international immovable property stakeholders. However, for those new to the region, purchasing real estate in Indonesia could be complicated. Investors may face unforeseen obstacles and challenges, making vigilance crucial. Our community of property buyers and local partners have shared various concerns, which we’ve compiled in this article. This piece of information suggests a brief overview of some capable pitfalls you might encounter when buying property in Indonesia.

Is capitalising immovable property in Indonesia safe or risky?

Earning money by establishing a business of immovables in Indonesia carries both possibilities and risks. While the trading environment suggests potential, issues such as fraudulent land titles and “ghost titles” pose significant risks. These scams underscore the necessity of diligent research and lawful guidance.

Foreign investors face additional challenges, including restrictions on direct absolut ownership (Hak Milik). Many use nominee arrangements to bypass these restrictions, at the same time this could be risky and may guide to jurisdictional obstacles if not handled properly.

Although Indonesia’s property for sale laws are improving, the lawful system remains complex and slow. Belonging controversies, comprising those corresponding to inheritance, can be lengthy and expensive. Transparency in real estate audits is also variable, requiring those individuals who desire to buy real estate to manage thorough checks on immovables legality and proprietorship.

Moreover, evolving authorised policies can affect international investment opportunities. Challenges like bureaucratic delays, boundary disputes, and inheritance issues emphasise the need for careful research and local competency.

Steer clear of these common pitfalls when investing in property in Indonesia.

• The term “Hak Pakai”

When purchasing real estate in Indonesia, foreigners often misunderstand the “Hak Pakai” title, which allows land use but is not the same as “Hak Milik” (freehold title) available only to Indonesian residentials. Be cautious of claims that Hak Pakai can be converted to Hak Milik, as this process is complex and uncertain. This confusion is common in tourist areas like Bali and Jakarta, where some sellers might downplay these limitations or overpromise on conversions.

• The risks associated with “Izin Mendirikan Bangunan” (Building Permit).

Another key pitfall to watch for when obtaining residence in Indonesia is the “Izin Mendirikan Bangunan” (IMB), or building permit. The IMB is pivotal as it dictates the specific construction allowed on an estate. For instance, an IMB for a building which belongs to residential properties doesn’t permit conversion to commercial use.

For foreign buyers, especially those looking at mixed-use properties in tourist areas like Bali, it’s vital to ensure the IMB matches your intended use. Often, properties are sold with outdated or incorrect IMBs, leading to potential legal troubles, fines, or even demolition orders. The process to obtain or amend an IMB can also be complex and lengthy.

• Challenges related to “Right of Way” or “Hak Guna Usaha”.

A crucial but often overlooked pitfall for international investors obtaining residence in Indonesia is dealing with “Right of Way” issues, related to “Hak Guna Usaha” (HGU) and “Hak Guna Bangunan” (HGB). HGU is used for agricultural land, while HGB pertains to construction. Obstacles arise if your householding is near land with these titles, which might include pre-existing rights for local use, such as access roads or utilities.

Foreign buyers must carefully examine these methods as they can impact estate usability and value. You might discover obligations to allow access through your land or find parts of your property are leased, affecting your householding responsibility. Always check land titles, local usage practices, and consult with neighbours and authorities before completing your purchase.

• “Adat” laws or traditional customary rights

A critical pitfall for foreign buyers in Indonesia is navigating “adat” laws or customary rights, especially in rural or community-focused areas. Adat laws, which vary regionally and are deeply tied to local traditions, can influence land ownership and use. These customary rights might not be formally documented and can sometimes take precedence over national laws.

For instance, even if a property seems legally clear under national regulations, there may be adat claims that grant local communities rights to the land for traditional or rural use. Overlooking these rights can lead to conflicts with local communities. This issue is prevalent in areas with strong traditional practices, such as Bali, Sulawesi, and Sumatra. Foreign buyers should thoroughly research local customs and laws to escape jurisdiction obstacles and respect community perquisites.

• The risks associated with “nominee structures”

A key pitfall for international investors in Indonesia involves the threat of “nominee structures” for absolute holdings. Sciencedirect foreign proprietorship is restricted, many non-residents use nominees—Indonesian citizens who are householding titles on their behalf. This specific deal typically encompasses lawful agreements like leases or power of attorney to give the foreign buyer control.

However, the nominee is the official property owner under Indonesian law, which can weaken your lawful position in controversial questions. Additionally, changes in the nominee’s circumstances, such as death or bankruptcy, can jeopardise your householding laws.

Nominee structures are legally ambiguous and carry significant risks. As an alternative, you might consider purchasing through a foreign-owned company (PT PMA), which offers a more secure legal framework but comes with its own complexities. If you choose to use a nominee, consult experienced legal counsel to protect your interests and understand the capable threats fully.

• The risk associated with “Musyawarah Masyarakat”

A key pitfall for foreign buyers in Indonesia is underestimating the role of “Musyawarah Masyarakat,” the local community approval process. In many areas, especially rural and semi-rural ones, the community’s consensus is remarkably for smooth estate operations.

Even if you complete a purchase legally, lacking community approval can lead to disputes or difficulties in using or developing the possession. To avoid obstacles, engage with the local community early on, attend meetings, and explain your plans to gain their trust and approval.

• The risks associated with “Sertifikat Hak Milik” (SHM)

A common but often overlooked pitfall for international investors in real estate involves the complexities of “Sertifikat Hak Milik” (SHM) in mixed marriages. SHM, or freehold title, is typically reserved for Indonesian citizens, so even if married to an Indonesian, you cannot directly own property under this title.

Attempting to use your spouse’s name for property ownership can lead to significant legal issues, especially in the event of divorce or the death of your spouse. Indonesian law generally favours citizens in such disputes, which can limit your rights to the property.

To mitigate these risks, consider a prenuptial agreement to clarify property rights, or explore alternatives like long-term leasehold agreements or owning property through a foreign-owned company (PT PMA), which offer more security.

• The risks associated with “Rencana Tata Ruang Wilayah” (RTRW)

A crucial but often overlooked pitfall for foreign buyers in Indonesia is navigating “Rencana Tata Ruang Wilayah” (RTRW), or local zoning laws. RTRW specifies land use and zoning regulations, which can vary widely between regions.

For instance, a property that appears ideal for your plans might be in a zone restricted to agricultural or residential use. Zoning laws are subject to change, potentially altering property values and uses.

To avoid complications, thoroughly research the local zoning regulations before purchasing. Consult local authorities, work with a knowledgeable real estate agent, and seek lawful advice to ensure compliance and avoid unexpected issues.

• The risks associated with “land certification”

Another key challenge for international investors in this region is the complexity of the “land certification” process. Managed by the National Land Agency (BPN), this process is crucial but differs significantly from Western systems.

Many parcels, primarily in rural regions, may lack official certification and rely on traditional or communal claims. Buying uncertified land or land with disputed certification can lead to legal disputes, boundary conflicts, and issues with government plans.

Additionally, the land certification process can be lengthy and bureaucratically complex, with risks of inefficiency and corruption. To avoid these problems, it’s essential to thoroughly verify land certification and understand local practices before making a purchase.

• “Tanah Wakaf” or waqf area

A critical pitfall for international investors in this country is facing “Tanah Wakaf” or waqf land. This type of land, donated for religious or charitable purposes under Islamic law, cannot be bought, sold, or owned by individuals, including foreigners.

The problem arises when properties are misleadingly marketed as available for sale despite being on Wakaf land. This issue is common in areas with significant Muslim populations, where land is often dedicated for community use. Foreign buyers may inadvertently invest in properties in the Wakaf area, leading to legal complications and the inability to convey proprietorship. Properly understanding and verifying land status is essential to avoid these risks.