Real Estate: A Prominent Sector that Attracts Foreign Investments
The Indonesian economy has seen steady growth over the past decade. Much of this could be attributed to the abundance of natural resources that the country has and also to its population which is largely made up of a young labor force. This growth stretches over several sectors of the economy and can primarily be seen through the real estate sector. Indonesia has seen a large influx of foreign investments in commercial and residential real estate. The Indonesian government has made significant transformations towards major cities such as Jakarta, Surabaya, Banten, Bali, and Bandung to keep up and sustain this growth.
Common Ownership Structure for Indonesian Real Estate
Ownership of real estate within and outside Indonesia is tricky as different rights are made available to groups of individuals for predetermined periods, with specific restrictions around them. Indonesia recognizes several rights that can be held over a piece of land, including Right to Use or Hak Pakai, Right to Cultivate or Hak Guna Usaha, Right to Own or Hak Milik, and many others. However, the most common ownership structure for commercial real estate is for the Right to Own to be held by an Indonesian company that already retains a business license that permits it to engage in commercial activities.
Aside from this, another common practice that is noticeable is for there to be an unincorporated joint venture between parties. The parties decide to contribute different factors to the venture but ultimately share the economic benefits. Typically, one party contributes the land and the other the cash or expertise required for the operations.
A prominent restriction that has stood the test of time in the Indonesian real estate regime is the prohibition for foreigners to own land in Indonesia. This restriction then fuels foreigners seeking to invest in Indonesia to enter into a financed shareholder ownership structure which acts as a ‘loophole’ to the regulations. The practice refers to a nominee arrangement that puts an Indonesian citizen as the formal owner of the land and awards contractual rights to the foreigner in exchange for a fee. It is important to note that this structure is not provided within the laws. Since the foreigner has no legal ownership over the land, this structure can therefore be classified as high risk. Cekindo provides services concerning land and property ownership services in Indonesia to help businesses further comprehend other ownership structures and their potential pitfalls.
Building Permits and Planning Requirements
For real estate with existing buildings, permits are still integral to review. Necessary permits to keep in mind have to do with the operations and worthiness of said building. It may also be worth mentioning that the zoning and usage have to align with the business itself. The Indonesian government regulates the planning and zoning restrictions at national, provincial, and regional levels through a General Spatial Layout or Rencana Tata Ruang Wilayah that extends for 20 years but is periodically reassessed every five years. Following such a general plan, a Detailed Spatial Plan or Rencana Detail Tata Ruang is also determined by the same, which goes into the zoning details and each region’s intended function.
What to Prepare Before Purchasing Land in Indonesia
The main theme of the spatial use activity in Indonesia is suitability. The particular spatial use of a piece of land shall be relevant and in line with the government’s appropriate spatial layout plans. The suitability of the usage shall be verified through a Spatial Plan Conformity Confirmation that is to be derived via the integrated Online Single Submission system. This step has to be done before applying for the business license. The procedure involves a general registration to confirm suitability, evaluation of spatial use within the proposed documents, and the issuance of the Spatial Plan Conformity Confirmation.
To secure the confirmation, the documents that are mandatory to provide are:
- description of location;
- proposed spatial use;
- ground coverage of building;
- plot ratios;
- indicative spatial use program; and
- practical considerations related to implementing the spatial use proposal contained in the application.
A Spatial Plan Conformity Confirmation shall be issued upon confirming that the location and intended activities confirm with the Spatial Layout as drawn up by the government.
Relevance of Due Diligence
Due diligence is a general precautionary exercise conducted before making business decisions to avoid and mitigate potential risks that may impact future operations of the business. Primarily, land ownership is a matter that is investigated in the initial stages to identify rightful owners over a piece of land and the relevant certificates that are required. Following this, it is also essential to look into the licenses associated with land and the relevance to the purchaser’s intent. In this stage, due diligence also looks into the restrictions that could hinder operations as intended by the purchaser. Further information, which includes but is not limited to the payment of taxes, the authenticity of relevant documents, the validity of ownership, and the existence of ongoing agreements, shall also be looked into. Cekindo offers services that would help any purchaser iron out these details by conducting thorough due diligence before purchasing any real estate.