Looking to invest in Lombok? This island is rapidly emerging on the radar of international investors. However, as a developing market, it’s essential to be aware of potential challenges, including land and property-related issues that can arise.
For any investor or developer looking to acquire property or open a business in Indonesia, conducting thorough due diligence and meticulous contract review is not just recommended; it’s absolutely crucial for a secure investment.
Disputes regarding land ownership and road access are unfortunately not uncommon in Lombok. Therefore, whether you are looking into buying property in Lombok or planning to acquire land for a business, it is vital to perform proper due diligence before committing any deposits.
This article will guide you through the main points to consider and verify during your due diligence process and before signing any contracts when investing in Lombok.
Business Considerations Before You Invest in Lombok
1. Soil test and Infrastructure
When considering where to invest in Lombok, you’ll discover a variety of appealing beaches and locations. Currently, most investment is around Selong Belanak on the Southwest and in the Kuta Lombok area.
However it is important to take into consideration the logistic and business perspective for your investment. Most of the land on south lombok is remote land with no proper access to the infrastructure and it might be challenging for the developers to connect the investment to public electricity and public water or waste systems.
We recommend performing a proper soil test to ensure the stability of the land. Indeed South Lombok offers a beautiful landscape with some lands located on a hill with instability of the land, and difficulty to access the water or later connect the property to the PLN and PDAM.
- Ability to connect to PLN (electricity)
- Water supply from government (PDAM) or with water truck (Private)
- Waste management
- Stability of the land by conducting a soil test
2. Location and Road access
South Lombok is a good investment area since it has improved its infrastructure and now offers a great location for investment in remote places.
However some lands on the market are surrounded by other lands and having proper access can be challenging as you will need to deal with other business owners.
Some great lands on the beach cross other lands and business owners have to build a proper road access which can increase the initial cost and maintenance.
- Check by whom the land is surrounded
- Check if the land has a private or public access and which land do I need to cross to enter the Lombok property market
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Property Due Diligence Check List Before Investing in Lombok
Once you have found the property in Lombok, it is crucial to conduct a proper due diligence and check the documentation to avoid scam and to verify the information provided by the seller and agents.
Unfortunately a lot of sellers are not even sure themselves about the veracity of the information they provide and a few examples below might put the investor in a difficult position:
- Some local DESA (local village) might think they own some lands while it belongs to the government and issue letters without any legal authority and reinforcement
- Owners did not check with their spouse and decide to sell without their consent while the law obligates to have the consent of all the spouses
- Developers sublease the land without having fully paid the lease. This situation can lead the investor to lose the lease if the developer does not complete the payment to the owner. Unfortunately this situation happens and some notaries forget to check this point.
In order to avoid those issues some check needs to be performed.
Also Read: Why and How to Invest in Sumba.
a. What to Cover in the Due Diligence
1. Certificate and lease ownership
The land certificate is the first document you should request whether you’re buying freehold or leasehold from a direct owner or developer. The system does not permit copying this document, so if the seller refuses to share a PDF or copy, that’s already a red flag.
The document is called SHM or HGB. The developer, broker or seller shall have the document and be able to share it quickly.
2. Land and building tax
This document confirms if the owner of the land has paid its tax and has not outstanding tax with the government.
3. Legal dispute and Mortgage
Recent cases show that some lands were under legal dispute for ownership and the land office was not able to confirm the ownership of the land. You can check if the land has some cease or mortgage as well to avoid any surprises in the future.
4. Zoning and construction restrictions
Most of the land in Kuta Lombok is located in a tourist area. However it doesn’t mean the government has classified all land in a tourist zone. Indonesia has some limits in terms of construction and provides building permits with licence in some areas with some restrictions.
The zoning will affect the type of licence you can obtain and the activity you can conduct with the property. Some lands are not suitable for tourism activity such as AirBnb and can be limited to residential areas.
We recommend double checking with the land office (BPN) and not trusting anyone on words as a lot of constructions are run illegally and can lead to some issues or fines.
Indonesia also imposes some construction limits. For instance, certain lands allow different ratios of land occupancy and have specific height restrictions for construction.
At the opposite of Bali there is no 15 meters rule regarding the construction height but each construction needs an approval (PBG) before the construction can start.
An application number is not sufficient and we recommend asking the developer for the building permit (PBG) despite some can say it will be obtained later, the construction cannot start legally without this document.
The land to building ratio and construction limitation can be checked at the PUPR to ensure the purchased land can be developed in line with the regulations.
5. Land boundaries and access
As mentioned above Lombok experienced some issues and difficulties defining the boundaries of a land. Some lands have no land certificate and it is difficult to ensure the correct boundaries of a land.
Despite what the DESA or village can promise regarding the land, the only office to define the boundaries is the BPN. The land office needs to inspect the land and confirm the boundaries. Some disputes can arise between land owners if nothing is certified and checked.
The road access to the property investment in Lombok has also to be secured with the owners and the surrounding land to avoid any dispute in the future with different owners and heirs.
b. Securing the process with a proper contract
The first rule when you invest in Lombok is to never pay a booking fee or make any payment before thoroughly reviewing and signing a contract. The process typically involves several steps before the official transfer of the property.
- Draft and review of an Intention to Purchase (ITP), Memorandum of Understanding (MOU), Booking agreement etc.
- Negotiation on the terms and conditions
- Payment of deposit on an escrow account
- Due diligence
- Signing of final agreement
The first agreement is important as it will also condition the return of the deposit and facilitate the negotiation for the final agreement. We recommend securing several clauses specially if the agreement is on a leasehold property.
1. Delays and Building permit
“If you purchase an off-plan property, we strongly recommend you ensure the contract includes several clauses with strong penalties. Delays are very common in Lombok, so you must write everything down.
Some developers apply for some building permits without respecting the land and building ration or with some architecture plan not respecting the norms and regulations.
You can expect some delays with your PBG and SLF which can cause delays to be able to legally rent out the property and worst can lead to the destruction of the property after a fine. We recommend defining who is responsible for the application.
2. Mortgage and resell
If you have entered into a leasehold agreement it is important to ensure the landowner will not mortgage or sell the property to a third party.
This third party can decide to break your contract and take back the property for a small amount of money if there is no clause to stop the owner and giving important penalty if the owner breach the agreement.
3. Breach agreement penalties
The easiest way to protect yourself is to add clauses defining the penalties if there is breach of the agreement. To breach the contract and reclaim the land (and your property villa), an owner would have to pay 300% of the villa’s value and construction.
4. Road access agreement and boundaries
You must check the boundaries and ensure road access, and it is crucial to write these details into an agreement. You also need to clearly define who is responsible for the maintenance.
5. Lease extension and appraisal
How you define the lease terms for a leasehold property and its extension wording significantly impacts your future Return on Investment. We recommend carefully defining these aspects and how you adjust the price. Contact us to learn how to do it.
Depending on the land location and situation there are several clauses and terms to add to an agreement. The common mistake is to think a contract is standard and to blindly trust somebody.
Everyone is a friend before a problem arises. Our experience in Lombok and the rest of Indonesia show most investments are safe but you never want to be in the one having the issues.
