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.