A NEW government regulation scheduled for implementation in May is being heralded as an important milestone in reforming Indonesia’s complex and highly restrictive land ownership laws.

Indonesia’s land laws date back to 1960, and are so different from the laws and practices that apply in the developed countries that any attempt at liberalisation or simplification just has to be a good thing.
It would be wise, however, for Singaporeans and other foreign investors to exercise caution.

The liberalisation is limited in scope. It also comes with restrictions, the implications of which potential investors may not fully appreciate.

Currently, there are basically five categories of land holding. The simplest is the right of ownership (hak milik). This is the closest thing in Indonesian law to what the rest of the world considers freehold. Hak milik can be enjoyed only by Indonesian individuals.

Then there is the right to cultivate or exploit state-owned land (hak guna usaha). This is essentially a lease valid for a maximum of 25 years but extendable for a further 25 years. It can be held by Indonesian individuals or entities, as well as foreign joint-venture companies. This land can be mortgaged, but the rights cannot be resold.

Another category is the right to build (hak guna bangunan), which involves the right to build on land owned by others. This right can be held by Indonesian entities or foreign joint-venture companies.

Yet another category involves government land handed over for a limited period for a specific purpose (hak pakai), usually for the construction of foreign embassies or for use by international institutions. Once again it is a lease, usually for 25 years, with a provision for an extension. Payment is made either annually or as a lump sum. This right cannot be sold or exchanged without the agreement of all parties involved.

A further form of landholding is the right to operate (hak pengelolaan). This involves state-owned land leased to state-owned companies for a specific purpose. But the right can be transferred to a third party in the form of hak guna bangunan or hak pakai.

Adding to the general confusion is the fact that the various categories of land holding not only differ from each other, but also include subtle internal variations regarding lease periods and other conditions that make it difficult to be sure about the legal standing of any specific case.

Under the new regulation, which is expected to be issued in May, foreigners will be allowed to buy an apartment or condominium for a period of 60 years, which may then be extended for another 60 years. Unlike most existing leases, it will also be tradeable.

Currently, foreigners wishing to buy a condominium in Indonesia sometimes attempt to gain strata title by signing a contractual agreement with the developer that recognises their holding and allows them to sell it at a later date. However, property consultants in Jakarta say that such arrangements are of dubious legality and involve considerable risk to the buyer.

The new regulation seeks to get around a 1960 law prohibiting foreigners from owning land by providing them with the right to apply for the purchase of a Building Ownership Certificatethat is completely detached from land rights. In other words, the foreigner owns the apartment, but not the land on which it stands.

There are also other restrictions. Non-nationals will not be allowed to participate in condominium resident associations. These are the organisations which manage the condominiums and have the right to negotiate with property developers and government officials. The regulation is also expected to limit the number of units in a condominium tower that can be held by foreigners.

Foreign property consultants in Jakarta interviewed for this article were reluctant to be quoted. Privately, however, they pointed to yet another little known restriction which is unlikely to be changed in the current liberalisation exercise. For the purpose of the land laws, a foreigner is defined as someone who is living in Indonesia and is deemed “useful” to the country. For some time now, this has been taken to mean that he or she holds a kitas, or work permit, issued by the Indonesian authorities.

In other words, Singaporeans and other foreigners not resident in Indonesia will not be eligible.

Legal certainty has always been an issue for foreign investors. In the past, many foreign companies and individuals have tried to get around restrictive land legislation by using local proxies. This is particularly so in the case of Bali, where illegal “purchases” by foreigners are regularly blamed for housing price rises.

But while the proposed liberalisation is good news for resident foreigners concerned about certainty and predictability, the move is unlikely to have wider implications.

(C) Singapore Press Holdings Limited