Condominium conundrum: Reform and clarification on foreign ownership remain pressing needs

Many countries in Asia have historically had weak property rights, outright restrictions on foreign ownership, or both. However, most have a strong bias toward property investment, and often view the health of the real estate market as an indicator of overall economic well-being. The result is a patchwork of regulations from Jakarta to Beijing that allows for a semblance of fractional ownership and foreign participation. The countries want property markets to be strong, so they allow for non-local participation. However, they do not want to lose control of their property markets, so they come up with workaround solutions that allow for purchases without absolute ownership. In recent years these nations have sought to attract more foreign buyers, and have been adjusting their rules to make ownership more interesting to non-locals. This is especially true with respect to condominiums.

MUDDY WATERS: Malaysia allows foreigners to buy any property worth more than $155,000. Singapore allows for more or less unrestricted foreign ownership. Thailand limits foreigners to buying condominium units that make up less than 49% of a building. In the Philippines the limit is 40% of a building.

In Indonesia the situation is far less clear, in terms of both foreign ownership and property rights in general. The country lacks the common law foundation of Singapore and Malaysia and the long track record with foreign property investors and renters of Thailand. For a number of years Indonesia has been working towards a solution that will establish a better legal underpinning for foreign investors in real estate, so that they have better titles and the ability to more easily mortgage them and a longer period of ownership of the property.

DEMAND: The demand is certainly there. Foreign investors and corporate managers who live or spend time in Indonesia have great interest in buying, and their numbers are rising as the economy and opportunities grow. Financial investors purely interested in speculating are also getting interested in Jakarta. Developers would also like to see the laws and regulations clarified and reformed to boost the market. They see the presence of foreigners closing the price gap between Jakarta and the rest of the region. According to a September 2012 Jones Lang LaSalle report, condominium prices in Jakarta were the lowest in the region, at one-fifth of those in Singapore.

Foreign demand comes at a time when the authorities are trying to cool what is being perceived by some to be a property bubble. The new loan-to-value ratios dampened the market to an extent, as some became unqualified to buy. Foreign investors are seen as a potential balance to any slip in purchases by locals unable to produce down payments. As of the second quarter of 2012, the average price of a leased apartment was up 14.6% year-on-year, according to a Bank Indonesia survey, and this is partly attributed to demand from foreign residents. According to Indonesia Property Watch, around 45,000 expatriates currently live in high-end Jakarta apartments. These are seen as potential condominium purchasers should the law change.

BY THE BOOK: The legal and regulatory aspects of condominium ownership need some work before foreigners are allowed to buy in the same way they can in other countries in the region.

The main statutes traditionally underpinning condominium ownership are Law No. 16 of 1985, or the Condominium Law, and Government Regulation 14 of 1988. The Condominium Law says that owners of units within a building have an ownership share of the land on which the building is constructed and shared ownership of the common equipment, such as the electrical system, foundations and common facilities, such as the landscaped and parking areas. It is a fairly standard condominium structure.

However, the system is complicated by the fact that ownership of these strata titles is limited to those who are qualified to own the underlying property asset. For non-Indonesians, this would in most cases be a hak pakai title, or right to use. This was confirmed in Government Regulation 41/1996, which clarified the principle and said that it applied to foreigners who are resident in Indonesia. Under the regulation, the owner may maintain control of a unit for 70 years (the initial 25-year period plus two renewals, one of 25 years and one of 20), but must sell the title within one year of leaving the country. However, a strata title has never been issued to a foreigner under the 1996 law.

LAND OWNERSHIP: The main issue with the regulation is that most condominium projects are not built on land which can be owned by foreigners, thus most apartments cannot strictly be owned by non-Indonesians. Solutions do exist, one of which is a convertible lease agreement. Under this arrangement, the development company, the management company or a trusted friend holds the title and agrees to transfer it to the foreign party should the law change. However, the agreement with the intermediary is not legally binding, and ultimately the contract will only be valid if the counterparty chooses to respect it. Indonesia is still in need of a more robust legal framework if a significant number of buyers are to be attracted to the market. NEW LAW?: Law No. 20 of 2011, the new Condominium Law, did clarify some issues on the subject of condominiums in terms of definitions, process and structure. However, it does not deal with the central issue that continues to hold the market back, which is that foreigners lack strong guarantees. In the spring of 2012 the government was discussing the possibility of allowing foreigners to gain a building ownership certificate that could potentially give them 120 years of control over the land. While the regulation was much discussed and it was generally assumed that it would be passed, by early 2013 there were no signs that it had been enacted.

Foreign ownership may remain an unresolved issue for the country and non-Indonesians could continue to find themselves without competitive terms for property titles. Firstly, the rationale behind reform and opening of the condominium market is becoming weaker by the day. Prices have been and may still be too strong. The main reason for allowing foreigners in is to help the property market, which at this point does not need help. While having more buyers could help with efficiency and price discovery, the market does not need to be propped up.

CURBING SPECULATION: Indeed, Bank Indonesia has been trying to cool the market, and the growing trend around the region is to make investment more difficult for foreigners, rather than easier.

In Singapore the government has been working to discourage foreigners from buying by implementing stamp duty of 10% up to January 13, 2013, and 15% thereafter. Hong Kong now has two stamp duties designed to curb speculation: 15% charged to all non-residents and corporations buying residential property and an additional duty of 10-20% on properties owned for less than three years. The countries of the region are quickly going from encouraging foreign money to working to keep hot money away, and real estate may become the latest victim of that trend. In this environment, and given the fact that Indonesia is fighting a battle against speculation, it makes little sense to change the law.

More to the point, property rights in Indonesia are weak for everyone. While they are respected and titles have legal protection, the land is ultimately owned by all the people. The 1945 constitution and subsequent legislation make that clear.

No matter the length of the lease or the regulation under which it was written, it is still only virtual ownership as long as the constitution and the Agrarian Law remain. Expectations of anything approaching common law freehold are unrealistic. Even on the island of Batam, where foreign ownership is allowed under Decree 068/KPTS/KA/III/1999, advisers continue to warn investors that, ultimately, it is legally still Indonesia’s land.

Foreign investors have long worked within the limitations and grey areas of the existing laws, accepting watered down ownership or using nominees to hold the title. They have accepted the risk and taken relatively weak titles, knowing that their rights could be challenged at any time. It is a reasonable strategy for those who can accept the dangers, and one that they may have to continue employing.