Freehold Vs. Leasehold In Bali: Which Is The Better Choice?

Investors and property buyers have to choose between a freehold or leasehold for their investment in Bali, Lombok or the rest of Indonesia. What is the best option for a foreigner? Which option is better, freehold or leasehold?

Plunge in Bali’s history

Historically, the Bali real estate market has been selling property under a leasehold agreement. First, foreigners who invest in Indonesia and Bali were looking at options for investing in a property. The law did not allow foreigners to own property. At the time, two options were possible.

• Invest under a nominee (wife, husband, partners) but without any insurance to get rights on the property as a nominee agreement is illegal even between husband and wife.
• Invest by renting the property for several years under a leasehold agreement.

Indonesians who used to sell their freehold certificate with a notary pursued the process by using notaries with foreigners purchasing leaseholds.

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What is a Leasehold?

Purchasing a leasehold property is a long-term rent of a property with some terms and conditions. A leasehold is a private agreement between several parties that defines some rights and obligations. The lessor and the lessee can write an agreement about a land or a building. Both parties can be individuals or corporations.

A leasehold agreement delegates some rights on a property to the lessee (the buyer). The rights and obligations are in the agreement for both parties. The agreement frames the relationship between the lessor (seller) and the lessee (buyer). A lease agreement can be notarized or non-notarized. The notarization can be helpful in case of a dispute.

A lease agreement can be transferred or subleted to a third party if the agreement authorizes the lessee. In the case of the transfer lease agreement, the lessor has to be informed by the current lessee who is substituting its rights and obligations.

Some agreements differentiate between the building and the furniture to minimize the tax. Lessees and lessors in Bali often sign both an official agreement and a non-official one. They usually state a minimized amount in the official agreement to reduce the tax, while keeping the unofficial document on the side until they complete the payment.

• First, this practice is totally illegal.
• Second, the lessee will not be able to justify the purpose of the funds transferred to the tax office in its country.
• Third, if the lessee buys through a company, the lessee will not be able to claim this amount as part of the investment.

Especially in areas like Bali, where long-term lease agreements are common, understanding the legalities and tax implications is crucial for both parties involved.

Also read: How To Buy A Property In Bali: What Is the Most Tax Efficient?

What is a freehold (SHM, HGB, Hak Pakai)

A freehold property (Setifikat Hak Milik) in Indonesia is only for an Indonesian Citizen. The SHM will be transferred to the next generation. However, in order to facilitate investment in Indonesia, the regulator has introduced other forms of ownership.

Hak guna bangunan (Right to Build)

The HGB (Hak Guna Bangunan), or Right to Build, authorizes Indonesian companies to own land and build on this land and property. This form of ownership is valid for a first period of 30 years, extendable for 20 and 30 years. The extension is done at the Badan Pertanahan Nasional (BPN). The company owning the land will see its name written on the land certificate, while the SHM owner will see its property rights revoked.

It is possible to convert the HGB to an SHM if the owner decides to resell the land title to another Indonesian or to another company.

Hak Pakai (SHP)

The SHP (Sertifikat Hak Pakai) or Right to Use is for an individual or a company willing to own a property already built. The initial term of a SHP is 30 years.

This certificate is usually for apartments and to encourage foreign investment. It allows foreigners to own the apartment or the house they want to live in. The same principle as the HGB, the Hak Pakai is extendable for a certain period of time (20+30).

The conditions for a property under Hak Paki are depending on the province of the property location. For example, Jakarta and Bali apply different criteria based on the size and value of the property. The criteria vary if the property is an apartment or a villa.

Also read: Bali Property Market Trends 2023 to 2024

Freehold or Leasehold

The answer to the question of Freehold vs Leasehold in Bali property depends on the profile of the investor. From a legal point of view, the HGB and SHP grant more rights to the buyer, making the purchase more secure and providing more peace of mind regarding what the buyer can do with the property.

From a business or economic point of view, this is depending on several factors:

• Purchasing power of the buyer and its financial situation
• Market Value of the Freehold and Leasehold

The price of the leasehold has reached such a peak in the last few years in Bali that the gap difference with a freehold is reducing. For an investor looking to invest in a property with more than 25 years’ duration, the price of the freehold should be mathematically advantageous.

Another criteria is the investment plan of the investor. If the investor decides to cash out and make its return on investment (ROI) without taking advantage of the capital gain, then the leasehold can be advantageous. A leasehold is surely a good first investment for investors with a lower budget.

However, each investor in their home country will usually take into consideration the appreciation of the property, its liquidity and potential capital gain. The frenzy in Bali over the last few years undeniably changed how people look at investment from a short-term perspective. When comparing freehold vs leasehold in Bali property, it is essential to consider both the legal and economic factors to determine which is the better choice for your investment strategy.