This country-specific Q&A provides an overview to real estate laws and regulations that may occur in the Indonesia.
It will cover the most pertinent issues including ownership structures, restrictions, transfers, taxes and environmental contamination.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
Over the past decade, the real estate sector in Indonesia has shown strong progress due to a range of factors – most notably the country’s rapidly expanding middle class and national economic growth. International investment in the real estate sector is active in the office, retail, residential, industrial and logistics sub-sectors. Although some of these sub-sectors are currently oversupplied, the longer-term attractiveness of the Indonesian real estate market remains compelling.
How is ownership of real estate proved?
There are several types of registered land titles which will be described further in question 4. Each type has a particular purpose and permissible holders. Land titles are registered with the National Land Agency (Badan Pertanahan Nasional – “Land Office”). Ownership over registered land is evidenced by a land certificate issued by the Land Office.
In Indonesia, there remain plots of land which are not registered with the Land Office, including so-called “girik” land and customary land (tanah adat). Ownership over these types of land is normally evidenced by payment of land tax or a statement letter issued by local officials or the community. People may also claim ownership over plots of unoccupied state land (tanah negara) if they have occupied the land for more than 20 consecutive years.
Are there any restrictions on who can own real estate?
Please see our answer to question 4 for a full list of the types of land title and their permissible holders.
With respect to foreign persons:
- For business purposes, foreign persons may only own real estate by establishing a specific type of Indonesian Limited Liability Company called a foreign investment (Penanaman Modal Asing – “PMA”) company.
- For residential purposes, foreign individuals who are resident in Indonesia (holding work permits) can own a residential home where the land has a right-to-use (HP) title or a strata title apartment unit with right to use (HPSRS) title, subject to meeting certain requirements concerning the minimum sale value and maximum land size.
What types of proprietary interests in real estate can be created?
The accompanying table summarises the various types of land title in Indonesia.
Registered Land Rights
Right of Ownership – Hak Milik (“HM”)
HM is the most extensive form of land title in Indonesia that can be owned by individuals. It is the closest equivalent to the common law concept of freehold. HM can be granted over state land (tanah negara).
- Indonesian citizens
- Certain Indonesian legal entities determined by the Indonesian Government that engage in certain sectors, such as religious and social sectors
Right to Build – Hak Guna Bangunan (“HGB”)
HGB allows its holder to build, construct and use the land and buildings on the land. This is the most extensive form of land title in Indonesia available for foreign-controlled Indonesian legal entities (PMA companies). HGB can be granted over state, HPL or HM certificated land.
Maximum 30 years and extendable for 20 years. Multiple renewals and extensions permitted.
- Indonesian citizens
- Indonesian legal entities, including PMA companies
Right to Use – Hak Pakai (“HP”)
HP allows its holder to use a plot of land (including, subject to permitting requirements, the right to construct buildings) and/or collect produce derived from such land.
HP can be granted over state, HPL or HM certificated land.
Foreign citizens residing in Indonesia may be granted an HP (subject to certain requirements) derived from conversion of HM or HGB when they purchase a residential home.
Over state land
Maximum 25 years and extendable for 20 years. Multiple renewals and extensions permitted.
HP is granted for a term determined on a case-by-case basis to Indonesian government institutions, representatives of foreign states or international organizations, and religious or social institutions.
Maximum 25 years, with any extension requiring a new agreement with the Indonesian landowner holding the HM title.
For foreign citizens residing in Indonesia
- A HP which is derived from conversion of a HM: Maximum 30 years and can be extended for 20 years and renewed for 30 years.
- A HP which is derived from conversion of a HGB: valid for the remaining term of the HGB and can be extended for 20 years and renewed for 30 years.
- Indonesian citizens
- Indonesian legal entities, including PMA companies
- National and regional government institutions
- Social and religious organisations
- Foreign citizens residing in Indonesia
- Foreign companies with a representative office in Indonesia
- Representatives of foreign states and international organisations (eg diplomats/ embassies)
Right to Manage – Hak Pengelolaan (“HPL”)
An HPL is granted for operating an industrial or housing estate. It is granted by a government decision (penetapan pemerintah) allowing the holder to use a plot of land for its own purposes Examples include land used for a port or airport.
Determined on a case-by-case basis
- Indonesian government institutions or agencies including regional government institutions
- State-owned companies and regional government-owned companies
- Companies wholly owned by the government
- Government authorities (e.g., port authority)
Right to Cultivate – Hak Guna Usaha (“HGU”)
An HGU is granted for the purpose of agriculture, fisheries or animal husbandry. An HGU can be granted over state land.
Maximum 35 years and extendable for 25 years. Multiple renewals and extensions permitted.
- Indonesian citizens
- Indonesian legal entities, including PMA companies
Strata Title – Hak Milik atas Satuan Rumah Susun (“HMSRS”)
An HMSRS grants its holder right of ownership over (a) individual units and (b) common areas (ie common parts, common objects and common land).
An HMSRS can be granted over (i) HM; (ii) HGB/HP over state land; (iii) HGB/HP over HPL; (iv) utilisation of state/local land or utilisation of donated land (pendayagunaan tanah wakaf).
The term of the HMSRS title follows the term of the underlying land title, except for the utilization of state/local land or utilization of donated land, which will be valid for 60 years.
- Indonesian citizens
- Indonesian legal entities
- PMA companies, subject to certain requirements below
- Foreign citizens residing in Indonesia, subject to certain requirements.
Right to Use Strata Title – Hak Pakai atas Satuan Rumah Susun (“HPSRS”)
An HPSRS is a title derived from conversion of HMSRS for resident foreigners who purchase apartment units in Indonesia.
For new apartment units: Maximum 30 years, and can be extended for 20 years and renewed for 30 years.
For second-hand apartment units: valid for the remaining term of the HMSRS and can then be extended for 20 years and renewed for 30 years.
Foreign citizens residing in Indonesia, subject to certain requirements.
A resident foreigner may purchase a new or previously owned apartment unit with HMSRS title built on land with an HGB or HPL title, and the HMSRS title will automatically convert to an HPSRS title. If the foreigner later sells the apartment unit to an Indonesian citizen, the HPSRS title will automatically revert to its original HMSRS title.
Is ownership of real estate and the buildings on it separate?
In the absence of any specific arrangement, a land owner will be deemed the owner of any buildings constructed on the land. However, Indonesian law recognises the horizontal separation principle (asas pemisahan horizontal) which allows the land and the buildings on it to be owned separately. For example, a person leases vacant land and under the lease agreement they are granted the right to own any buildings they construct on the land during the lease period.
What are common ownership structures for ownership of commercial real estate?
The most common ownership structure for ownership of commercial real estate is for the real estate (under HGB or HMSRS title) to be owned by an Indonesian company (including a PMA company owned by a foreign investor) that holds a business licence to engage in commercial activity (e.g., manufacturing).
Unincorporated joint venture structures are also quite common. Under such structures two parties will set up a joint operation in relation to a commercial real estate development where typically one party will contribute the land and the other party will contribute cash or expertise to the joint operation. The parties will then operate the commercial real estate together and share the economic benefits in relation to the commercial real estate.
In certain regions, such as the island of Bali, it is not uncommon for foreigners to enter into a financed shareholder ownership structure to get around the restrictions on real estate ownership by foreigners. This structure is normally implemented by way of a secured loan (to purchase the land) arrangement under which a nominee Indonesian individual will hold the land (normally, in practice, in exchange for a fee). It is important to note that under this secured loan arrangement, the foreigner has no legal or beneficial ownership over the land, only contractual rights against the nominee Indonesian individual. Such structures come with risks.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
Land Due Diligence
A land due diligence will normally involve at least the following:
(a) reviewing the land certificate and the latest deed of land transfer;
(b) checking the authenticity of the land certificate with the local land office;
(c) confirming that the land is free from any lien or dispute registered at the local land office, by obtaining a Statement Letter of Land Registration (Surat Keterangan Pendaftaran Tanah) from the local land office; and
(d) confirming that the land owner is not subject to any legal proceedings at the district court, by obtaining a statement letter from the district court.
Building Permits and Planning Requirements
For existing buildings, it is important to review the relevant building permits such as building construction licence, certificate of worthiness and operational permits (e.g., licences relating to the use of generators, elevators, etc.). It is also important to check whether the zoning and use are consistent with the intended project. (Please see question 16 for more on the zoning aspects.)
What legal issues (if any) cannot be covered by usual legal due diligence?
The following legal issues can complicate real estate due diligence in Indonesia:
- Unregistered land where evidence of ownership is lacking and which may therefore be subject to unforeseen claims.
- In certain areas, privately held land may overlap with concession areas granted by the Indonesian government for mining, forestry and plantation activities.
- As there is no centralised or electronic land registry in Indonesia, land title searches require involvement of third parties such as local land deed officials/notaries, and cooperation from land owners.
- The licencing process for land development in Indonesia is complex, and regulations vary from one region to another. There are various licences that developers need to obtain prior to and during the development phase.
- Some Indonesian regulations relating to land and real estate are unclear and may also conflict with other regulations. For example, regulatory uncertainty exists in relation to strata title assets due to the absence of implementing regulations. This vacuum is typically dealt with by government policy, which may not be applied consistently. Enforcement by regulators is generally uneven due to a lack of resources, and may at times be driven by political factors.
What is the usual process for transfer of commercial real estate?
To ensure that the relevant zoning and uses are in line with the intended use of the real estate being acquired, depending on the location of the real estate, certain permits (e.g., location permits) must be obtained by the buyer before the deed of transfer or AJB (as defined below) can be executed and the real estate acquired. If the buyer intends to develop or redevelop the real estate, the regional government mya require the buyer to fulfil certain development obligations, such as providing public facilities.
Acquisition of registered land
The legal steps to acquire land depend on whether it is already under a registered title. The key document in a transfer of registered land title is a Deed of Sale and Purchase of Land (Akta Jual Beli Tanah – “AJB”). An AJB is a document of conveyance and needs to be signed by the proposed buyer and seller of the land title to effect legal title transfer. An AJB is entered into between the parties in notarial deed form before a local land deed official (“PPAT”) – a public official whose authority includes preparing land transfer documents.
After the AJB signing, the PPAT then processes the registration of the new land owner with the local Land Office. This registration process is purely administrative and the risk of completion of registration not taking place is very low. Under Indonesian law, once the AJB is signed, the buyer becomes the legal owner of the registered land title, even though registration is not yet formally complete. Upon completion of the registration process, an updated land title certificate is issued under the name of the new owner. This process may take 2-3 months in practice, but may take longer, depending on the location (i.e., the registration process may take longer in rural areas than in urban areas).
It is common practice in Indonesian land sale transactions for the proposed buyer and seller to enter into a Conditional Sale and Purchase Agreement over Land (Perjanjian Pengikatan Jual Beli atas Tanah – “PPJB”) in addition to the AJB. A PPJB is not mandatory under Indonesian law, and can be made privately or in a notarial deed before a PPAT. Unlike an AJB, a PPJB only grants contractual rights – it does not in itself transfer legal title to registered land. In order for a transfer of legal title over a registered land title to be effected, the parties must still enter into an AJB.
Acquisition of unregistered land
Ownership of unregistered land is typically evidenced by a land tax payment made by the owner of the land. The tax is referred to as “Girik”, so this type of unregistered land is commonly referred to as “Girik Land”.
The proposed buyer will enter into a contractual arrangement with the existing owner of the Girik Land pursuant to which the buyer will pay a sum of money in exchange for the land owner signing a “relinquishment statement” in favour of the new buyer. This “relinquishment statement” equips the buyer to become the registered land owner by making an application to obtain certificated land title to the Land Office. The period from submission of the complete application to the Land Office until issuance of a registered land certificate (e.g., HGB) usually lasts 6-8 months. The declared compensation payment to the party granted a “relinquishment statement” is typically determined based on (and cannot be lower than) the “tax object sale value” of the land (nilai jual objek pajak – “NJOP”).
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Yes – it is common for transfer of real estate ownership to occur indirectly as a consequence of a share transfer in a company. In this case, there will be no change to the registered owners of the real estate in the land certificate. In the event of a share acquisition transaction, due diligence will need to be conducted on the company owning the real estate as well as on the real estate itself.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
The Indonesian Civil Code provides that a lease arrangement will not automatically terminate due to a sale of the underlying property, unless provided otherwise in the lease agreement. As such, the lessee has the right to continue as a tenant even if the owner of the property has changed. The Indonesian Civil Code is, however, silent as to whether the benefit of leases and income would automatically transfer to the new owner when the sale happens. On one reading, the fact that the new owner is obliged under the law to honour the rights of the lessee until the lease expires would imply that the new owner should be entitled to receive any remaining benefits from the lease. To avoid uncertainty, the treatment of any existing leases (including their remaining benefits) would typically be specifically regulated in the sale and purchase agreement between the seller and the buyer.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
In addition to the land titles referred to in question 4 (including the HMSRS title, which grants its holder ownership over the individual unit and common areas), it is possible for a real estate owner to grant rights in relation to the real estate to third parties by entering into a contractual arrangement (e.g., a joint operation agreement under which the land owner agrees to share economic rights in relation to the real estate) or by providing a mortgage (hak tanggungan). (Please see question 19.)
The concept of rights, interests or burden which can be created or attached over the land and can be protected by registration (i.e., an easement as understood under common law) is not recognised under Indonesian law.
Are split legal and beneficial ownership of real estate (i.e. trust structures) recognised
No. A trust structure, as understood under common law-based legal systems, is not formally recognised under Indonesia’s civil law system.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
Land and Building Tax
Land and Building Tax (Pajak Bumi Bangunan – “PBB”) is a property tax chargeable on all land and buildings. An individual or entity that holds the right to a parcel of land and/or takes benefit therefrom, and/or owns, controls or takes benefit from a building, can be regarded as a PBB taxpayer for that land and/or buildings.
PBB must be paid to the local government on an annual basis in an amount of up to 0.3% of the NJOP, depending on the regional regulation.
Tax on Land Transfer
In general, in a sale of property, the buyer must pay tax on the acquisition of land and buildings (Bea Perolehan Hak Atas Tanah dan Bangunan –“BPHTB”), while the seller must pay transfer tax (Pajak Penghasilan Atas Penghasilan Dari Pengalihan Hak Atas Tanah – “PPh”), using the following formulae:
(a) for the seller (PPh): 2.5% x sale value or NJOP (whichever is higher); and
(b) for the buyer (BPHTB): 5% x (sale value or Tax Object Acquisition Value (Nilai Perolehan Objek Pajak or “NPOP”, whichever is higher) – Non-Taxable Sale Value (Nilai Jual Objek Pajak Tidak Kena Pajak or “NJOPTKP”).
The NJOPTKP is effectively a non-taxable portion, which is a fixed value set for each area by the tax office. Note that the application of tax may differ in certain circumstances, including in relation to inheritance.
Fees for Land Deed officials
Aside from taxes, a fee is typically payable to the PPAT in a real estate transfer. This fee is negotiable and is usually a certain percentage of the purchase price or transaction value.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
Generally, the terms and conditions of a lease agreement under Indonesian law can be freely negotiated between the parties. The typical provisions of leases for commercial premises are as follows:
a) Period of lease. Parties typically regulate the lease commencement, expiry and any extension terms of the lease agreement.
b) Rent payment and adjustment. The formulae for the rent are typically determined in accordance with the area and size. Rent adjustments are often determined periodically.
c) Service or maintenance charge. Agreements typically set out the coverage of the service and maintenance to be carried out by the lessor, and the service and maintenance fee to be paid by the lessee.
d) Insurance. Insurance over the building is typically borne by the lessor, although some lease agreements require that items within the leased premises be insured by the lessee. The agreement may also prohibit the lessee to conduct activities that could increase insurance premiums for the lessor.
e) Alteration to property. Lease agreements commonly specify the types of alterations or modifications that the lessee can make to the property.
f) Defects. Lease agreements often regulate what constitutes a defect to be assumed by the lessor, the lessor’s liability period, and the amount the lessee may claim.
g) Assignment and sub-lease. Clauses typically provide that any assignment or subletting of the lease would require approval from the lessor or, at a minimum, notification to the lessor by the lessee.
h) Surrender of property/yield-up. Clauses governing the surrender or yield-up of the leased property upon termination of the lease are almost always included.
How are use, planning and zoning restrictions on real estate regulated?
Usage, planning and zoning are regulated at national and various regional levels. Generally, spatial planning is determined by the Government of Indonesia through a “general spatial plan” and a “detailed spatial plan”. A “general spatial plan” takes the form of a Regional Spatial Layout (Rencana Tata Ruang Wilayah – “RTRW”) () and is determined at national, provincial and regional/ city level. An RTRW covers a period of 20 years and is reassessed every five years. A”) “detailed spatial plan” typically takes the form of, among others, a Detailed Spatial Layout (Rencana Detail Tata Ruang – “RDTR”) determined at a regional/city level and which typically includes a map setting out the zoning and permissible function for each area in the region.
Usage, planning and zoning requirements in relation to a specific project will be confirmed through specific licences issued by the regional government – a the Location Permit or similar licence, and a City Planning Statement Letter (Keterangan Rencana Kota or “KRK”) or similar licence. In a real estate due diligence, such a review of licences is critical to ascertaining that the property complies with the local usage and zoning requirements.
Who can be liable for environmental contamination on real estate?
Indonesia’s Environmental Law adopts the “polluter pays” principle, under which each individual or company that causes environmental damage is responsible for their actions. In general, every person responsible for business or activities that cause environmental pollution or destruction, and that inflicts losses on other parties or the environment, must pay compensation or take certain remedial action. Remedies may include installing or improving waste treatment units, restoring the original environmental function, and eliminating the causes of the environmental pollution or damage.
The Environmental Law also sets out a strict liability regime, such that every person that uses, produces or manages hazardous and toxic materials (known by its Indonesian acronym, “B3”) or that causes a serious threat to the environment is strictly liable for the losses suffered, without any requirement to prove wrongdoing.
Is expropriation of real estate possible?
Yes. If a registered land title such as HGB expires, the land title will cease to exist and the title holder will lose ownership rights over the land. In most cases, the land in question will be converted to state‐owned land. Any buildings constructed on the land must be demolished so that the land can be returned to the government in a vacant condition.
In addition, any plot of land that is not utilised in line with the purpose for which land ownership was granted (e.g., if manufacturing activities are undertaken on land under a HGB certificate) may be declared “abandoned land”, which may be acquired by the state. Before declaring the land “abandoned”, the Ministry of Agrarian and Spatial Affairs (being the ministry charged with oversight of land, spatial planning and utilisation in Indonesia) through regional land agencies must undergo several procedural stages, including issuing warning letters to the land title holders. The land area being declared abandoned may be the entire area coveerd by the land title or just a part of it, depending on the assessment by the relevant authorities of the level of land utilisation and abandonment during the government’s identification and due diligence stages.
Is it possible to create mortgages over real estate and how are these protected and enforced?
Yes, it is possible to create mortgages over real estate assets in Indonesia. A mortgage (hak tanggungan) may be granted over registered certificated land and must be registered by the Land Deed Official at the local Land Office. Upon registration of the mortgage, the creditor will have preferred status with respect to the property subject to the mortgage. If buildings or other fixtures such as plants or machinery are affixed to the land and the owner of the land grants a mortgage, the mortgage can cover both the land and the plants and machinery affixed to the land, so no separate security over the latter is necessary.
Mortgages have executorial force, meaning that this instrument is equivalent to a final and binding court decision. In an enforcement scenario, this means that the beneficiary of the security has the authority to sell the secured collateral by public auction and to collect the proceeds from the sale to settle outstanding debts owed by the debtor or security provider.
In theory, the holder of a security interest should be able to do this without going to court. In practice, that is rarely achievable, since the debtor is likely to resist or dispute the entitlement to enforce, and third parties would not want to become involved in those circumstances.
Are there material costs associated with the creation of mortgages over real estate?
Fees under Regulation 128/2015
Government Regulation No. 128 of 2015 (“Regulation 128/2015”) provides the non-taxation fees applicable at the Land Office in relation to mortgage registration costs. Under Regulation 128/2015, mortgage registration fees at the Land Office are determined based on the value of the mortgage, as set out in the accompanying table. For this purpose we have assumed an exchange rate of 1 USD = Rp14,000.
Land Office fee per mortgage certificate
up to 250 million Rupiah (USD17,857)
above 250 million Rupiah (USD17,857) up to 1 billion Rupiah (USD71,428)
above 1 billion Rupiah (USD71,420) up to 10 billion Rupiah (USD714,285)
above 10 billion Rupiah (USD714,280) up to 1 trillion Rupiah (USD7,142,857)
above 1 trillion Rupiah (USD7,142,857)
Note, however, that on top of the above land registration fees payable to the Land Office, there are also fees payable to the Land Deed Official which would typically include fees for the preparation of a deed of mortgage and registration of the deed so that the mortgage certificate can be issued over this security.
(Please see the next section.)
Fees for Land Deed Officials
The fees for Land Deed Officials (PPAT) in creation of mortgages are negotiable. Typically, the PPAT will charge 0.1% of the mortgage value. So if the mortgage value is USD500,000, the PPAT’s fee may be USD500. If the mortgage value is very high (e.g., hundreds of millions of dollars), the parties may typically be able to negotiate the fees down to around half the normal fee, but this depends on the negotiations with the notary on a case-by-case basis.
Is it possible to create a trust structure for mortgage security over real estate?
As noted in question 13, a trust structure is not recognised under Indonesian law.
It is common, however, for lenders to appoint a “security agent” or “collateral agent” to manage the mortgage in place of a trust structure. The security agent in this instance will be responsible for administering all security documents related to the financing transaction and is given authority to act on behalf of the lenders with respect to the security interest obtained by the lenders from the borrower. The appointment, authorities, rights and obligations of a security agent are commonly set out in a security agency agreement made between the security agent, lender and borrower.
What is the main legislation relating to commercial real estate ownership?
The main law governing land titles in Indonesia is Law No. 5 of 1960 on Basic Regulations on Agrarian Affairs (“Agrarian Law”). The Agrarian Law established the various types of registered land title discussed in question 4. Other relevant laws include Law No. 20 of 2011 regarding Apartment Units, which covers Strata or HMSRS titles, and Ministry of Agrarian and Spatial Affairs Regulation No. 29 of 2016, which covers Right to Use Strata or HPSRS titles.
Various rules governing land mortgages, buildings and other real estate matters are also set out in both national and regional legislation.