Outside looking in: Reforms to laws could see foreign investment bolster the economy

Real estate professionals in Indonesia are convinced that one of the biggest things the government could do to juice the market is to lift restrictions on foreign ownership. Several such limitations in existence have put a lid on market returns and growth potential, they say. It is a tough call. Foreign ownership of real estate assets, particularly in prime locations such as central Jakarta, Bali’s beaches, or other prime pieces of waterfront could trigger a populist backlash.

Like in many other developing countries, Indonesians are sensitive to the notion that foreigners could come and reap the financial rewards while they pay the price for an unpredictable government that struggles to stamp out corruption. But allowing foreigners a greater role in the market could result in benefits for all, and hope remains that laws capping foreign interest may change in the short or medium term.

A COMPLEX SITUATION: Indonesia’s land ownership laws are more complicated than most, defining five main legal relationships with a parcel of land: the right to own it, to build on it, to cultivate it, to use it and to rent it. Ownership rights confer the highest amount of control but are limited to Indonesians and Indonesian firms. The latter category can include foreign companies domiciled in the country. All other foreigners and foreign entities are limited to the right to use land, which is essentially a leasehold contract. Usage rights last for 25 years and can be extended for another 25 years. There are exceptions, such as embassies or consulates, for which an extension can run longer.

Two recent proposals in Parliament for reform would open up the sector – to an extent. One idea is to limit foreign ownership on a right-to-own, or freehold, basis, for condominiums priced at $150,000 or more. That would allow foreign ownership, but at a cost only a few million Indonesians could afford themselves. Establishing such a threshold would ensure Indonesians are not priced out of the markets they want to participate in, or lose out to foreigners on properties through bidding wars. It would also prevent well-capitalised foreigners from buying on speculation and later selling at a profit to locals, which would inflate prices.

The other option is extending the right-to-use option from 25 years to 90 years. That would follow on the model of neighbours such as Thailand, where foreigners have been given more ownership options, depending on the location and type of real estate. However, this sort of leasehold arrangement is not expected to attract foreign interest because these contracts are not transferable, making them of lesser utility. While for some foreigners a leasehold contract of 90 years would be acceptable, Indonesians are generally not kind on the idea, said Anton Sitorus, the head of research for Jones Lang LaSalle’s Indonesian office. So condominiums sold on a leasehold status would likely be foregoing sales to the domestic market, and developers are unlikely to build on a basis that severely limits potential buyers.

POSSIBLE BENEFITS: A true liberalisation of the sector, however, could attract additional foreign direct investment inflows of $3bn to $6bn annually, industry projections show. “Foreign direct investment has showed positive increases demonstrating the interest level of companies looking to capitalise on the growth of the region. However, fiscal incentives and tax holidays are a necessary step if the country is to remain competitive in the region,” said Mike Gundy, the president of Bluescope Steel, a local steel manufacturer.

Data from the Indonesian Real Estate Developers Association indicates an open sector would boost real estate’s contribution to GDP from 2.7% to around 10%.

Another benefit could be additional tax revenue from the sales and higher prices of holiday homes. The island of Batam, for example, the closest to Singapore, has become a favourite holiday and second-home destination with Singaporeans, and many have found loopholes in order to buy holiday homes, such as buying in the name of an Indonesian. “The potential to tap into the foreign market is huge for condos, luxury houses and villas,’’ Sitorus told OBG. “ If the government changed the land regulations there would be more revenue.’’

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The Report: Indonesia 2012

Construction & Real Estate chapter from The Report: Indonesia 2012

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