What Are The Dangers Of Foreign Ownership Of Property In Indonesia?

Last year (19/5/2015), when he was still a Coordinating Economic Minister, Sofyan Djalil said that the government would be ready to allow the foreigners to own high-end apartments. The apartments, however, cannot only be owned but must be occupied by the buyers. Meanwhile, Sigit Priadi Pramudito (Director General of Taxation) added that there will be a limitation on the selling prices to categorize the luxury apartment that can be owned by foreigners.

The price range will be set by referring to Finance Minister Regulation No. 90/PMK.03/2015 that regulates the tax for luxury items. Finance Ministry obliges the sellers of 6 luxury items to collect 5% income tax (PPh) of the item’s price. Specifically for apartment, it is categorized as a luxury item if the selling price is more than 5 billion rupiah or the size is more than 150 square meter. The policy allowing foreign ownership aims to boost the economic growth especially in property sector.

In the meantime, in the following month (24/6/2015) Finance Minister Bambang Brodjonegoro reconfirm government’s plan to allow foreigners to own luxury apartments. It is believed that this plan will support the growth of property sector. In fact, there have been many properties owned by foreigners but using the local’s name.

Nonetheless, property purchasing by the foreigners needs to be supported by appropriate regulations. As a plan, the apartments that can be purchased are only those that cost equal to and more than 5 billion rupiah. For the taxation regulation, there will be a luxury tax being imposed. In addition, foreigners can only purchase apartments, not a landed house.

Should Indonesian Government allow foreigners to own properties in Indonesia, it will highly likely create a bubble in property market. With only 5 billion rupiah minimum limit of the selling price, there is strong possibility that many foreigners will enter the property market in Indonesia. Such limit is very low and might create a sharp increase in property’s price. By allowing foreigner to enter domestic property market, the market will not be merely domestic market but it will become a global market or at least regional market.

Therefore, there will be price competition in which according to the law of one price, the price of property in Indonesia will adjust itself to regional price. China, Malaysia, Vietnam and Singapore have experienced the bubble in their property market in which there is around 20% fall in the apartment market. Thus, I suggest Indonesian Government to stay focus on building houses for middle-lower income Indonesians.

The government should not be recklessly decide which properties that can be owned by foreigners. There must be clear and fair limit and regulation assuring the price of land will not hike without control that eventually will create great disadvantages for local people. The absence of these things only suggests that we are not ready to open our property market for foreigners.

The ownership of luxury apartments by foreigners will be regulated by the revision of Government’s Regulation (PP) No. 41/1996 on Property Right of Use for Foreigners. According to the regulation, it is planned that a 10% luxury tax will be imposed to the property ranging from 5 billion rupiah to 7, 5 billion rupiah, 15% luxury tax for the price of 7.5 billion rupiah up to 10 billion rupiah, and 20% for those above 10 billion rupiah. This categorization will be set after the regulation on Luxury tax is issued. The opposition of this regulation might see this as a liberal or pro-foreigner policy.

In general, 1960 Basic Agrarian Law (UUPA) article 41 and 42 together with PP no. 40/1996 on Building Rights on Land (HGB), Cultivation Right on Land (HGU), and Right of Use (HP) for land have regulated the use of land for foreigners and Foreign Legal Entity (BHA) that have representatives in Indonesia.

According to the regulation, both foreigners and BHA that have representatives in Indonesia can only have the Right of Use for land. Therefore, they cannot own land and buildings with SHM (Certificate of Ownership/Sertifikat Hak Milik). The foreigners can have a home, which can be a landed house or a flat, built on the land with Right of Use. That Right of Use is valid for 25 years. It cannot be extended but can be renewed for up to 20 years as long as the foreigners still stay in Indonesia.

Nevertheless, the policy to allow foreigners owning a property in Indonesia requires close and strict monitoring from the government. There is a possibility that the property is misused for illegal activities such as gambling, prostitution, storing illegal stuffs, making drugs, also as a safe house for espionage activities. Therefore, there must be a system that can monitor all activities in the property. One way is by asking a regular report from the foreigners regarding the use of their land or property.

In addition, the regulation should also protect our people’s interest. In line with 1960 Basic Agrarian Law, earth, water, and air including all resources they contain, at the highest level, are controlled by the government representing people of Indonesia. Thus, the ownership of the foreigners is not an absolute ownership. If such ownership is considered harmful for the Indonesians, government can unilaterally take back the land or property by providing certain amount of compensation. The policy to allow foreigners to own property in Indonesia must also consider Indonesia’s position in the International Forum. Should there be any dispute in the future, Indonesian Government must be able to assert our sovereignty.

*) The author is a researcher at Galesong Institute and LSISI Jakarta.