Understanding Freehold vs. Leasehold Properties in Bali: A Buyer’s Guide

Are you looking to invest in Bali’s real estate market? With the number of property owners continuing to rise, understanding how freehold and leasehold properties work is key. With our buyer’s guide, you can gain a comprehensive understanding of the differences between these two types of ownership structures so you make an informed decision when it comes to purchasing your dream holiday home or investment opportunity. From knowing your legal rights as a lessee or owner to potential tax implications for each structure, learn all about freehold vs. leasehold properties here!

1. What is Freehold Property Ownership?
2. What is Leasehold Property Ownership?
3. Pros and Cons of Freehold vs. Leasehold Properties in Bali
4. Fees/Costs associated with buying a Freehold or Leasehold Property in Bali
5. Factors to consider when deciding which type of property ownership is best for you

What is Freehold Property Ownership?

Freehold ownership in Bali refers to a form of property ownership where an individual or entity owns a property and the land it is built on without any time limitations. In other words, the owner has complete ownership rights over the property and the land, including the right to sell, transfer, lease, or inherit the property, without any restrictions. It is the type of ownership you probably have if you own a house in Europe or in America for instance.

In Bali, as well as in many other parts of Indonesia, freehold ownership for foreigners is restricted. Indonesian law prohibits foreigners from owning land outright in Bali, except in specific circumstances. Foreign buyers have often used local Indonesian nominees to acquire land or properties but the nominee system is not accepted by Indonesian courts. Never use one.

For foreigners, there is however a way to get close to a freehold title: the right to build (“Hak Guna Bangunan (HGB)” title). The HGB title can be owned by a PMA (a legal entity that can be owned 100% by foreigners).  With the HGB title, the PMA has the freedom to construct and develop buildings on the land during the term of the HGB (usually 80 years, split as 30 years + 20 years + 30 years). 

Setting up a PT PMA is a legal procedure that involves lawyers and notaries and that should be conducted thoroughly : at Emas Estate, we work with trusted legal partners to ensure a seamless and hassle-free process for you.

What is Leasehold Property Ownership?

Leasehold ownership in Bali refers to a form of property ownership where an individual or entity leases the right to use a property and the land it is built on for a specific period of time, usually for 25 to 30 years, with an option to renew – usually at market price. Leasehold is a common option for foreigners in Bali, as Indonesian law restricts foreigners from owning land outright in Bali.

Leasehold ownership in Bali typically involves a lease agreement between the foreigner and the Indonesian landowner. The lease agreement specifies the terms and conditions of the lease, including the duration of the lease, the rights and responsibilities of the parties, and any renewal or extension options. The foreigner, as the lessee, usually pays a one-time upfront lease payment to the landowner for the duration of the lease. There are cases where you could pay periodic lease fees, depending on the terms of the contract negotiated with the landowner. 

During the lease period, the foreigner has the right to use, occupy, and manage the property, subject to the terms and conditions of the lease agreement. Although the ownership of the land remains with the Indonesian landowner, the lessee is usually allowed to sell, transfer, or inherit the property (more precisely the lease agreement), with the landowner’s consent.

Leasehold ownership in Bali can be a viable option for foreigners who wish to have a long-term investment or residency in Bali, but it’s crucial to thoroughly understand the terms and conditions of the lease agreement, seek professional legal advice, and conduct due diligence before entering into any leasehold transaction. It is one of the many reasons why it is critical to rely on a real estate professional when buying land or a house in Bali.

Pros and Cons of Freehold vs. Leasehold Properties in Bali

Freehold :

+ Absolute ownership: complete and unrestricted ownership rights over the property and the land it is built on, including the right to sell, transfer, lease, or inherit.

+ Flexibility and control: Freehold ownership allows the owner to make decisions about the land use without having to seek approval from other parties.

+ Inheritance and legacy planning: Freehold ownership allows the owner to pass on the property to heirs or beneficiaries as part of their estate planning.

+ Potential for long-term investment: Freehold ownership allows the owner to hold onto the property for an indefinite period of time, which can provide potential long-term investment opportunities, such as capital appreciation, rental income, or development opportunities.

+ Potential for financing and leveraging: Freehold ownership can provide potential opportunities for financing and leveraging the property as collateral for loans or other financial transactions, which can be beneficial for investment or development purposes.

+ Sense of security

– Higher costs: Freehold ownership may come with higher upfront costs, including the purchase price, taxes, fees, and potentially ongoing expenses for property maintenance, insurance, and other associated costs.

– Not directly available to foreigners : setting up a Foreign-Owned Company (PMA) is the only way for foreigners to buy a Freehold property in Bali.

– Legal complexities: Freehold ownership may involve complex legal processes, such as land registration, etc.

– Responsibilities and obligations: Freehold ownership comes with responsibilities and obligations for taxes, and compliance with local regulations, which can require time, effort, and financial resources.

– Scarcity : as an effort from locals to remain owners of their island, there are less available Freehold lands for sale than Leasehold lands.

Leasehold

+ Lower upfront costs: leasehold properties are generally less expensive than Freehold properties, making it easier for foreigners to access real estate in Bali.

+ Quick return on investment: generally offers a greater return on investment and shorter payback period than Freehold (provided that Freehold ownership is more expensive).

+ Exit strategy: Leasehold ownership may provide an exit strategy as the lease term comes to an end, with options to renew or exit the lease agreement, allowing for flexibility in the future.

+ Lower legal complexities: as a foreigner, you can lease a land or a property on your own name.

+ Availability and Location: prime beachfront properties or other sought-after areas may not be available for freehold ownership or may come at a significantly higher cost.

– Limited ownership rights: more or less, depending on the terms and conditions of the contract negotiated with the landowner. Note that, in most cases, you will still be able to enjoy your land as freely as if you were the owner.

– Lease term limitations: a lease lasts in general between 25 to 30 years, with a possible extension. In most cases, the leasing cost at renewal will be adjusted to current market price.

– Limited inheritance: passing on the property to heirs or beneficiaries may not be as  straightforward as for Freehold.

Factors to consider when deciding which type of property ownership is best for you

When deciding between freehold and leasehold ownership in Bali, it’s important to consider several factors :

• The duration of your investment: where will you be in 30 years? In 50 years? If you believe Bali will have a place in your life for a very long time, and you might want to pass the beautiful home you have built to your children or grand-children, then you might consider going for a Freehold.
• The level of involvement you want: if you are just looking to buy your vacation home, or a rental property to generate passive income, but don’t want the hassle of setting up a company, with the recurrent obligations it involves, we would recommend you to look for a Leasehold property.
• Your budget: buying Leasehold will be more accessible than buying Freehold.

There are other, more specific, factors than you need to consider before deciding which type of property ownership is right for you. At Emas Estate, we have the expertise to help you craft your ideal investment, under the best possible conditions. Our network of professionals will make the process of buying your dream piece of land hassle-free, whether you choose Freehold or Leasehold ownership.

Let’s discuss your project !