Local property is for all

Local property is for all

By Martin R. Jenkins

JAKARTA (JP): As Indonesia is a nation born out of a 350-year
independence struggle against Dutch colonialism, it is perhaps
understandable that foreign companies and individuals are barred
from owning either Indonesian land or property.

Opposition to the foreign ownership of land or property in
Indonesia is governed by the nation's Basic Agrarian Law, enacted
in 1960, when enmity for the "imperialist West" was still at a
high.

At present, however, such restrictions on foreign ownership of
land and property have far-reaching consequences for the
Indonesian land and property market, and for the health of the
economy in general.

The above law rules that there are currently two categories of
land rights: adat land (customary land), which is unregistered;
and certified land, which is registered at the local land office.
There are five principle types of land rights for certified land.

The first is hak milik, which is equivalent to freehold title
in common law jurisdictions. This title, however, can only be
held by an Indonesian citizen, and not by a corporate entity,
whether local or foreign. In terms of land mass, only about 1
percent to 3 percent of land in Indonesia has hak milik title.

The other four types of land rights are the right to build
(HGB), the right to rent, the right to use and the right of
exploitation. Although foreign companies can obtain these rights,
they are excessively restrictive as the property must be directly
used for the approved project and the rights must be renewed
after a certain number of years.

These types of land rights also impede spatial land planning,
because if use of the property ceases, changes, or passes to a
company or foreigner, then the title may be handed over to the
state.

By far the most damaging effect of prohibiting the foreign
ownership of land or property is that it represents a significant
obstacle to foreign direct investment (FDI), thereby hindering
capital inflows, with the result that economic opportunities are
lost.

Without land ownership on which their factory is built, a
foreign investor faces greater risks in relation to the host
government's future policies. Foreign investors are also unable
to use the land as collateral for raising funds on the domestic
market.

Although Indonesia was successful in attracting FDI prior to
the economic crisis, this is no longer the case. Furthermore,
with increasing globalization and intense competition for FDI
from countries such as China, Indonesia will find it even more
difficult to attract FDI unless such obstacles are removed.

Given the nation's poor financial health, with huge foreign
debts and a crippled banking sector, FDI is key to promoting
economic growth.

Permitting foreigners to own property in Indonesia would also
breathe new life into the decimated property sector, which has
not recovered significantly since the economic crisis broke out
in 1997. The liquidity of the property market would improve and,
most importantly, property values would rise, better reflecting
their fundamental values.

Would it not be to the benefit of Indonesia if a foreign
businessman who spends a lot of time here could purchase a
condominium or residential property, for example?

Through the purchase of such a property, a significant amount
of money would either flow into or stay in the country, the
government would receive property taxes on a regular basis from
the foreign owner, and also, importantly, the foreign owner would
share in the risk of the property market nosediving sometime in
the future.

While it is easy for opponents to the foreign ownership of
land and property in Indonesia to stoke up nationalist sentiment
by warning of the "potential dangers" of letting foreigners own
Indonesian land or property, it should be realized that such
fears are unfounded.

Some nationalists within Indonesia might assert that foreign
ownership of land would be tantamount to the loss of sovereignty
and control. But this has not deterred other nationalist
countries such as Malaysia and India from relaxing their
restrictions on foreign ownership of land and property. The
simple fact is that land is immobile. Even though the ownership
of the land may change, no one can physically take it away.

There are even those who express fear that the foreigners,
especially those from the rich industrialized West, would "buy
up" Indonesia given their huge spending power.

It should be appreciated, however, that other legal mechanisms
such as foreign exchange controls, limitations on the amount of
land or property that can be owned by a single party, appropriate
investment approval policies and land tax can have the same
effect as outlawing the foreigner ownership of land and property.

Foreign companies could be restricted to owning a certain
amount of land, for example, while foreign individuals could face
restrictions regarding the number and types of property they
could own.

The law also smacks of double standards given that large
numbers of Indonesian politicians and businessmen own properties
overseas, especially in Australia, Singapore and the United
States.

Quite frankly, why should Indonesians be allowed to own
properties in those countries, if citizens of those countries
cannot own properties in Indonesia?

At the end of the day, it is actually in the nation's best
interests to see its assets owned in a way which means that they
are used in the most productive and efficient manner possible.

The writer is a consultant with a securities firm in Jakarta.