Comparing Bali's Leasehold and Freehold Properties: Making Informed Investment Decisions

We are very pleased to see that we are receiving more inquiries about investing in Bali, which has been a sought-after destination for tourists and expatriates seeking the perfect blend of natural beauty, cultural richness, and modern amenities in recent years. With its thriving real estate market, Bali offers a unique opportunity for investors to own a piece of paradise. While both freehold and leasehold properties are available, many investors are asking our opinion on whether leasehold properties present compelling advantages over their freehold counterparts.

In this article, we will offer guidance and insights for those considering investments in both freehold and leasehold properties in Bali.

Regulations and Accessibility

In some countries, including the Bali region in Indonesia, historical regulations regarding foreign land and property ownership have posed challenges for non-citizens, limiting their access to freehold assets.

Land ownership under the title "freehold" or "Sertifikat Hak Milik (SHM)" is exclusive to Indonesian citizens. However, there are approaches available to foreigners interested in land acquisition. One common approach involves establishing a local PT PMA Company (Perseroan Terbatas Penanaman Modal Asing) with 100% foreign ownership. This company can then acquire land with an HGB title (Right to Build) on behalf of its foreign owners. It's important to note that the assets belong to the business unit rather than the individual owner. Alternatively, foreigners can purchase land with an HAK PAKAI title (Right to Use) at a minimum price of IDR 5 billion, with a maximum size of 2000 m2; larger sizes would require a license from the minister. However, it's important to note that only one property can be constructed on this land.

Regarding property purchases, in September of this month, the Indonesian government decided to relax property ownership regulations as part of a broader strategy to attract foreign direct investment (FDI). Firstly, foreigners can now acquire property in the country without requiring a specific visa permit; their passport is sufficient for the transaction. Secondly, foreigners can now purchase freehold property with a Strata title at a minimum price of IDR 2 billion. Previously, foreigners could only obtain the Right of Use for apartment units, which had an expiration time.

Investors must then consider whether the initial higher costs, or barriers and complications associated with setting up a company for owning a freehold land or property are justified by the potential long-term security and return on investment. In contrast, purchasing a leasehold property is relatively straightforward and simpler, with lower upfront costs and an easier exit strategy. Leasehold properties are often easier to transfer or sell with higher liquidity in the real estate market compared to their freehold counterparts.

Affordability in Prime Locations 

One of the most significant advantages of investing in a Bali leasehold property is its affordability compared to freehold properties. Freehold properties in prime locations can come with hefty price tags, making them inaccessible to many investors. Leasehold properties, on the other hand, offer a more cost-effective entry into Bali's real estate market, allowing a broader range of investors to participate.

Bali's traditional property investment areas, such as Seminyak, Ubud, and Canggu, are often already saturated with freehold properties. However, developers and property owners in these areas are increasingly offering leasehold options, allowing investors to secure prime locations at a fraction of the cost. This enables investors to enjoy the same benefits of a sought-after location without the exorbitant price.

In emerging areas like Uluwatu, where freehold villas in prime locations such as cliff fronts or close to beaches command substantial prices, investing in long lease villas can provide a lower entry point for saving upfront capital while enjoying similar rental income. Furthermore, purchasing a villa in these emerging locations can be a significant advantage because the property value is likely to increase sharply in a shorter period of time compared to the more saturated traditional market.

Leasehold properties typically come with long lease terms, often extending to several decades. This extended tenure provides investors with a stable, long-term investment that allows for property appreciation and potential resale opportunities. Moreover, many leasehold agreements offer the option to extend the lease, giving investors additional security and flexibility. However, investors should be aware of the potential risks associated with renewing leases upon expiration.

Maintenance Costs

For investors, another appealing aspect of Bali's leasehold properties is their potential for reduced maintenance expenses when compared to freehold properties. Typically, property management and maintenance responsibilities are assumed by the landowner, which makes leasehold properties particularly enticing to investors in search of a hassle-free investment experience.

With leasehold properties, you can enjoy the convenience of having the landowner handle maintenance and repairs on your behalf. There's no need to concern yourself with unexpected expenses or the hassle of fixing things personally. What's more, many lease agreements stipulate that the landowner must maintain the property to a specified standard, providing you with peace of mind that your investment will be well-maintained and in excellent condition.

Return on Investment (ROI) and Diversification

With Bali's robust tourism industry and increasing popularity as a destination for digital nomads, leasehold properties can offer substantial rental income potential. The high demand for short-term vacation rentals and long-term accommodations ensures a steady stream of income for investors. In contrast, freehold properties may require a more significant upfront investment, making it challenging to achieve a significant return on investment.

Due to the smaller upfront capital required, investing in leasehold properties in Bali can be an excellent way to diversify your real estate portfolio. By spreading your investments across different leasehold properties, you can reduce risk and increase the potential for steady cash flow from multiple sources.

Lower Entry and Exit Costs

Acquiring a leasehold property in Bali typically involves lower transaction costs than purchasing a freehold property. Furthermore, when it's time to sell, leasehold properties can be more appealing to buyers because of their lower initial investment, potentially leading to quicker and more profitable sales. However, investors should be mindful of the lease term of the property, as shorter leases may be less attractive to potential investors.

In conclusion, Bali's thriving real estate market presents a compelling opportunity for investors looking to combine natural beauty, cultural richness, and modern amenities. As this article has highlighted, the choice between freehold and leasehold properties in Bali is influenced by various factors, including regulations, accessibility, affordability, long-term stability, maintenance convenience, return on investment potential, and cost considerations. With the recent easing of property ownership rules for foreigners and the allure of diverse investment options, Bali's real estate landscape beckons as a promising destination for those seeking both a piece of paradise and a sound financial investment. Whether it's the affordability in prime locations, the extended tenure of leasehold properties, the potential for reduced maintenance costs, or the prospects of diversification and lower entry and exit costs, Bali's real estate market offers investors a spectrum of opportunities to explore and capitalize upon. Ultimately, the choice between freehold and leasehold properties should align with an investor's unique goals, preferences, and risk tolerance, as both avenues offer their own advantages and considerations in this vibrant Indonesian market. As always, it is advisable to consult with a qualified real estate expert and legal advisor to navigate the intricacies of Bali's property market and make informed investment decisions.