Bali Property: Leasehold vs Freehold
If you are a foreign property investor, whether you choose to buy a leasehold or freehold property will depend on your particular needs. Freehold properties on Bali Island are still the most requested and purchased properties by foreigners, despite the necessity to use an Indonesian entity (nominee) as a titleholder for the land certificate, it is announced as completely illegal by Indonesian law & land regulations to purchase property in Indonesia by foreigners.
When choosing whether to buy land freehold or leasehold, you should be aware of the ramifications of each with regards to the potential value of the investment.
Purchasing land freehold allows you to enjoy over time, land value appreciation, which has been fairly dramatic in Bali in past years. With freehold, any appreciation in the value of the property, either through improvements you have made to it, or through the rise in land prices, you gain the benefit of any increase in value.
Leasehold, on the other hand, means that after a certain period of time, the property and whatever improvements the leaseholder may have made, revert to the owner.
In very simple terms, as time passes, your investment in leasehold property depreciates in value, because as the term of the lease gets shorter, the lease is less attractive to a buyer, should you want to sell the remainder of your lease.
The terms and conditions of any extension to a lease, are usually built into the original agreement. Most lease agreements have some sort of extension option, although you should be careful to fully understand the means by which the extension may be activated. Sometimes the extension can only be activated by mutual agreement, which means that the time at which extension discussions can begin, it must also be agreed upon mutually by the landowner and the leaseholder. This can lead to problems if the landowner does not agree to give an extension at the time the leaseholder requires it.
Leasehold still has some advantages (and in some areas these days such as Seminyak, freehold is difficult to obtain), the main advantage being that it is a more affordable option.
For example, if there were two identical villas side by side, one leasehold over a 40 year period and the other freehold, the leasehold villa would generally be about 2/3rds of the price of the freehold option.
If you decide to buy leasehold, the drafting of any leasehold agreement should be carried out with the assistance of a third party legal advisor, since guaranteeing renewals and limiting rent increases is the key to a cost-effective leasehold structure.[fbcomments]