Indonesian Boom Hampered by Restrictions on Foreign Ownership

27 July 2011

Although property prices are increasing in Indonesia, there are still several things which are hampering real growth within the market. One of the most important factors is the restriction on foreign property ownership.

There is growing pressure on the government to relax the rules governing foreign property ownership, with the International Real Estate Federation being the most recent body to ask for rules to be relaxed. There is huge potential for property investment within Indonesia, as rental yields in Jakarta ranged from 12% to 13.5% in April 2009, which is amongst the highest returns in the world.

At the moment foreigners can only buy property usage rights for 25 years, which can be extended by a further 20 or 25 years. Although in theory foreigners can own condominiums or strata title residential property, in practice not one single foreigner has ever received a strata title as proof of ownership, and all foreigners are forbidden to own land. It's only possible for foreigners to control landed property in the country through long-term leases or by setting up a Penaman Model Asing Company.

While these practices do allow for foreign ownership, they add extra cost and make managing property awkward and potentially risky. Some foreigners do find ways around these laws to purchase property indirectly by asking a national to buy a house using their money.

The national and the foreigner have to sign an agreement for notary saying that the national has received a loan which is equivalent to the value of the property. The agreement then allows for the loan to be made permanent, and the property is used as collateral and can be taken at any time. Removing restrictions on foreign ownership would alleviate the need for these convoluted transactions, and would greatly boost the property sector. Government guidelines could help restrict speculative purchases.

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