Owning property on a leasehold title is a rather unfamiliar proposal to most would-be Bali investors, to say the least.
No wonder! The way leasehold works here is neither common in other parts of the world, nor is it popular in other parts of Indonesia.
Nevertheless, most properties offered for sale in Bali are sold with leasehold titles.
If you want to find out why and how it could make perfect sense for you to invest in leasehold property, then you need to read on.
In this article, I will explain in detail how a leasehold title works, what you need to observe when buying a leasehold and what happens to your villa, once the lease term comes to an end.
Meaning Of A Leasehold Title or ‘Hak Sewa’
A leasehold title bestows the right from the Lessor (or land owner) to the Lessee to use, build on, enjoy and even sub-lease a property for a defined period of time. At the end of the lease term, the Lessee loses his rights to the property and any buildings erected, unless the term is extended.
In contrast, a freehold title has no time limit or expiry date.
During the last 30 years with foreign tourism growing steadily, leasehold property has become very popular in Bali. There are two simple reasons for this trend:
- Foreigners are allowed to buy property leasehold titles without any restriction
- Many Balinese land owners are reluctant to sell their ancestral land; they prefer to lease it while still remaining the legal owners of the underlying freehold title.
Sounds like a perfect symbiosis? In many cases it is. But let’s dig a bit deeper.
A typical leasehold in Bali comes with an initial term of 25-30 years. The Lessee pays the Lessor a sum of money and obtains the right to build on the land a villa to his ‘gusto’, use it, and perhaps sell it again - in form of a sublease - before the end of the term.
We have seen lease terms that are substantially longer that the above mentioned 25-30 years - sometimes up to 99 years. There is no law or regulation that limits the length of a lease term. It is negotiated and agreed upon between the parties. However, many Bali based notaries will refuse to write lease agreements that are longer than 30 years, citing the spirit of the Indonesian law that prohibits foreigners owning land.
To our knowledge, there has been no ruling by an Indonesian court challenging leasehold terms that are longer than 30 years.
Perhaps more important is the issue of the extension of a lease term and how such a right or option is worded in the agreement and more so, how enforceable it will be in the future.
In the past, clever developers came up with all sorts of extension clauses and price mechanisms to secure an additional term after the expiry of the initial one. Some linked the price of the extension to gold or to inflation. Sometimes this worked out but quite often it didn’t!
The whole topic of how to properly structure a lease extension is quite tricky and complicated and we strongly suggest that you contact one of our Bali based real estate agent experts to obtain a qualified opinion before you sign your agreement.
Pros And Cons Of A Leasehold In Bali
There are clearly more pros than cons for investing in a leasehold property in Bali. Here are five good reasons for a foreigner to buy leasehold:
- It’s easy peasy: you only need a valid passport to appear in front of a notary and sign that lease agreement to become the proud owner of a Bali property.
- It’s cheaper: the rule of thumb is that a 100 years leasehold is equivalent in value to freehold. So if you buy a 25 year lease, you will end up paying only 25% for the land compared to its freehold value – that’s 75% less on the land! And since land is quickly becoming the most expensive part of a property, this could turn out to save you a lot of cash.
- More choice: nowadays, there are more leasehold properties on offer than freehold.
- Lower risk: lower investment = lower risk.
- Similar asset appreciation as freehold: the price of leasehold titles appreciates in tandem with the increase of freehold titles. So, even if you have run down your lease from 30 – 20 years, the land may now be worth more than what it was when you bought it 10 years ago.
The only enemy of a leasehold title is time. As your leasehold term gets below the psychological level of 20 years, the value of your property starts to diminish more rapidly. So it is a good idea to keep your term above the 20 year cap if you have the intention to sell the property at some stage.
Besides the ticking clock of time, there aren’t really any negative aspects for foreigners buying a leasehold property in Bali. The legal basis is rock solid and your rights won’t be challenged in court, even if the Lessor decides to sell the underlying freehold title.
However, if you are an Indonesian citizen and therefore qualify to buy freehold or so called ‘Hak Milik’ titles, you may look at leasehold slightly differently as you would like your children to be able to inherit your Bali property.
But even Indonesians are starting to see the benefits of investing in commercial leasehold titles, if the freehold is not available or simply too expensive. After all, it really boils down to calculating the return on investment and amortization of an asset. And for that matter, leasehold may well turn out to be as good or even better an investment than freehold.
Types of Leasehold Properties in Bali?
Buying a villa on leasehold title
If you are in the market of buying property, you will be presented with various leasehold options when searching Bali property options. You will be offered off-plan properties, new villas that just got finished as well as resales. Off-plan and brand new villas will typically come with a lease term of at least 25 years, whereas resales may have less than 20 years left of the original term.
Check ourt our guide on buying off plan properties for extra information about the process.
Before you buy, you are well advised to carefully review the extension clause in the proposed lease or sublease agreement.
If the villa you are buying comes with a remaining term of less than 20 years and you are considering selling the villa in the not too distant future, it is essential that you top up your lease term. Your best chance to succeed is to extend the lease right now, when signing to buy the villa. That will motivate the vendor to assist you in negotiating a fair price from the landlord.
If you can’t find a villa or property that suits your dreams and requirements, then and then only consider building your own four walls and lease a suitable piece of land for that purpose.
In doing so, you need to be extra careful and make sure that you will be able to build what you have in mind on said land. Is the current zoning allowing you to build a residence or a commercial property or is it a green zone that doesn’t allow any building on the land? Check this using a notary or come and ask us, as we have access to the official zoning maps of the government.
Most apartments for sale in Bali are based on leasehold to make it easy for foreigners to buy them. Browse our list of leasehold apartment for sale in Bali.
Cost Of Buying A Leasehold Property In Bali
If you wondering how much the price of property in Bali is, you should know that the price of land is typically expressed per "are". An "are" measures 100 m2, which is equivalent to 0.0247 acres. Leasehold land prices are normally quoted in Rupiah per are per year.
In the most expensive areas of Canggu, this could easily amount to a price of IDR 40 million per are per year or USD 2.600 at current exchange rates. Now, multiply this by the size of the land that you need and by the number of years.
Here is an example: let’s say you are leasing 5 are for 25 years at IDR 40 million per are per year. This will result in a price of IDR 5 billion which corresponds to USD 330.000. Not exactly cheap, right?
Whilst this price represents the upper scale of leasehold prices in Bali, you can find much better bargains a bit further away from the centre of Canggu, where prices drop dramatically and are less than half!
Best Areas To Buy A Leasehold Property In Bali
Bali’s best known location has seen land prices going through the roof in the last 5 years. But there are still good opportunities to find attractive leasehold properties here inn Canggu.
The advantage of Canggu lies in its dense infrastructure of trendy cafes, restaurants, shops and co-working spaces. This attracts tourists and digital nomads and new residents alike and creates the buzz – and traffic – this village is known for.
Should you ever decide to rent out your villa, Canggu will be an easy location to quickly find a suitable tenant as demand exceeds supply.
The Bukit, or Bali’s barren southern peninsula has been dubbed a second Canggu. It’s a hotspot for surfers and digital nomads alike and has seen a lot of growth recently. Here the choice of empty land is still vast and prices are half of those in Canggu.
The infrastructure is catching up fast and there are a few clubs that belong to Bali’s top ten.
Bali’s center for art and culture is another attractive location to find good leasehold properties.
You may not want to be in Ubud village itself as it is getting pretty crowded. But the villages around Ubud offer all that you may be missing in the South of Bali: rainforests, rice fields, waterfalls, rivers and more.
The further away you move from Ubud, the lower the land prices.
What does a leasehold property mean in Bali?
Leasehold property in Bali refers to property that is owned and paid for in advance for a specific term. Leasehold can be just for empty land or land with a villa erected on it, an apartment, a shop or a restaurant.
How long is a leasehold agreement in Bali?
The average leasehold term in Bali is around 25 years. But you can find much longer and shorter leases as well.
Can foreigners buy leasehold property in Bali?
Yes, foreigners can buy a leasehold property in Bali without any restriction. You only need a valid passport and a tourist visa and of course, the necessary cash to conclude the transaction. It is as simple as that.
The concept of leasehold in Bali is unique and it takes some time to understand its pros and cons.
It is a proven title that is open for foreigners to buy. It offers full legal protection for the Lessee even in case the landlord decides to dispose of the freehold rights of this land.
Nowadays, with growing demand for Bali property, leasehold has become the dominant title on offer.
An important aspect of a leasehold title is its extension. Pay attention to how the extension clause is worded before you buy and get proper legal advice from an expert.
Want to know more? Check out our guide on buying property in Bali.