Real Estate 2024 Comparisons

The fundamental basis for property law stems from Law No 5 of 1960 on Basic Agrarian Principles (“Agrarian Law”). The Agrarian Law is detailed and enforced through the following supplementary regulations, among others (together, “Land Regulations”):

• Government Regulation No 24 of 1997 on Land Registration;
• Government Regulation No 18 of 2021 on Management Rights, Land Rights, Apartment Units and Land Registration;
• Minister of Agrarian Affairs and Spatial Planning/National Land Agency (MOA) Regulation No 3 of 1997 on the Implementation Provisions of Government Regulation No 24 of 1997 on Land Registration, most recently amended by MOA Regulation No 16 of 2021; and
• MOA Regulation No 18 of 2021 on the Procedures for Determining Management Rights and Land Rights.

Other notable regulations include the following, all of which were most recently amended by Law No 6 of 2023 on the Enactment of the Government Regulation in Lieu of Law No 2 of 2022 on Job Creation (“Job Creation Law”):

• Law No 26 of 2007 on Spatial Planning (“Spatial Planning Law”);
• Law No 28 of 2002 on Building (“Building Law”);
• Law No 20 of 2011 on Apartments (“Apartment Law”); and
• Law No 1 of 2011 on Housing and Settlements.

Private or contractual agreements, excluding land-related aspects, are governed by the Indonesian Civil Code.

Based on publicly available information, the main trends in the real estate sector include the following.

• Industrial property investment in industrial estates and special economic zones (SEZs) is trending, driven by government tax and customs incentives and improved infrastructure, such as enhanced port access and toll roads. As the current government is prioritising the development of regions outside of Java and relocating the capital to Nusantara, East Kalimantan, property transactions in the new capital are on the rise.
• Commercial property transactions, such as office building acquisitions, remain stagnant, and there is a growing preference for lease arrangements for virtual offices and co-working spaces.
• Residential property ownership is on trend, especially with the current tax incentives for purchasing new homes or apartments under IDR5 billion (about USD320,000) as part of the government’s efforts to raise the economy post-pandemic.

Specifically for Jakarta, the development of mass transportation infrastructure, such as the Jakarta MRT phases 1 and 2, Jakarta LRT and Jakarta-Bandung high-speed train, has led to the expansion of residential neighbourhoods, hotels, apartments, malls and shopping centres.

Since the implementation of the Job Creation Law, the government has focused on digitising licensing procedures through the Online Single Submission (OSS) system, administered by the Ministry of Investment. This system integrates with other government institutions and provides a centralised spatial planning map accessible to the public. Efforts are also underway to centralise building-related licences through the Ministry of Public Housing's online platform.

Although digitalisation of land documents like titles and mortgage deeds is progressing, challenges such as overlapping claims and unregistered lands persist. Therefore, physical land certificates are still used for property transactions.

Property rights can be acquired in the following categories.

• Freehold Title (Hak Milik, or HM) – HM is the strongest and most extensive land title that can be owned by Indonesian citizens and certain Indonesian legal entities determined by the government. It grants an indefinite ownership right.
• Right to Build (Hak Guna Bangunan, or HGB) – HGB allows Indonesian citizens and legal entities, including foreign investment companies (commonly called PMA Companies), to build and construct on the land. Initially granted for a maximum of 30 years, it can be extended for another 20 years, and renewed for an additional 30 years.
• Right to Cultivate (Hak Guna Usaha, or HGU) – HGU is granted for the purpose of agriculture, fisheries or animal husbandry, and may be granted to Indonesian citizens and legal entities, including PMA Companies. Initially granted for a maximum of 35 years, it can be extended for another 25 years, and renewed for an additional 35 years.
• Right to Use (Hak Pakai, or HP) – HP permits the use of land by Indonesian citizens, legal entities, foreign investment companies, foreign citizens residing in Indonesia, foreign companies with representative offices in Indonesia, and representatives of foreign states or international organisations. Initially granted for a maximum of 30 years, it can be extended for another 20 years, and renewed for an additional 30 years. HP granted to government institutions or foreign representatives may be given without a specified term.
• Management Right (Hak Pengelolaan, or HPL) – HPL is granted based on an MOA decree to government institutions, state-owned enterprises (SOEs) and regional government enterprises, among others, typically for managing public facilities such as ports, SEZs and industrial estates developed or managed by the government or SOEs.
• Strata Title – strata title is granted to Indonesian nationals, Indonesian legal entities, foreign citizens holding a stay permit in Indonesia, foreign companies with representative offices in Indonesia, and representatives of foreign states or international organisations, for the ownership of apartment units.

HGB, HGU and HP can be granted on either state-owned land or HPL land. A typical arrangement for investors to operate in industrial estates or SEZs managed by government institutions or SOEs is by applying for HGB above HPL land.

In addition to registered land titles, there are types of unregistered/uncertified land (documents such as Letter C, Girik or Petok issued by village authorities) and other forms of customary (adat) law acknowledgement of ownership.

Transfer of land title is regulated under the Land Regulations.

Additional approval may be required for the transfer of certain land titles, as follows.

• Transfer of land titles in an industrial estate will require approval from the estate manager.
• Transfer of land titles above HPL will require approval from the holder of the HPL, which is typically regulated in a land utilisation/management agreement between the HPL title holder and the title holder above such HPL.

The transfer of land title is documented in a deed of land transfer or akta jual beli (AJB) drawn up before a land deed official, known as Pejabat Pembuat Akta Tanah (PPAT), which has jurisdiction over the land’s location. Full payment of the land price must be made upon executing the AJB at the latest. The official will assist in the registration of the title transfer to the local land office and in obtaining a land title certificate under the new title holder's name.

HGU, certain HM and HP designed for agriculture purposes require a land transfer licence to be obtained from the MOA before any transfer can take place.

Buyers typically request a limited due diligence process, including reviewing:

• the land title certificate;
• any encumbrance or mortgage documents;
• the payment of land and building tax or pajak bumi dan bangunan (PBB);
• spatial planning conformity documents; and
• the corporate documents of the parties.

For industrial estates, buyers often seek a thorough review of the estate regulations and environmental documents of the estate manager to ensure the business operations align with the estate's designation.

Buyers are advised to conduct land checks to obtain the land registration certificate from the local land office, confirming the status of encumbrances, disputes or confiscations, and to conduct court searches to obtain a court clearance certificate indicating the property is free from disputes.

Due diligence is crucial for potential buyers to identify property risks, verify ownership, assess the property's status and examine its historical background. By doing so, the buyer can be deemed as a “good faith buyer”, which is a form of legal defence if the transaction is disputed.

Common representations in a commercial property transaction are as follows:

• the seller is the sole and rightful title holder, and has full authority to transfer the property ownership;
• the seller has obtained the necessary approvals to sell the property, including corporate approval and obligations to third parties (such as notification or approval from lenders, estate managers or the HPL holder);
• the seller has obtained the requisite government licence, specifically for HGU, certain HM and HP designed for agriculture purposes; and
• the property is free from any encumbrance, mortgages, claims and/or disputes from any third party.

Common warranties in a commercial property transaction are as follows:

• the seller is not currently undergoing bankruptcy proceedings or suspension of debt repayment – this is particularly important post-pandemic;
• there are no joint ownership, physical occupation or any other claims from any third parties; and
• the property has no outstanding tax obligations.

Representations and warranties typically survive the closing of the transaction, with no limitation on the liability for breach of representations and warranties, unless expressly agreed otherwise. In the event of misrepresentation, the buyer typically has the right to initiate legal proceedings against the seller to seek remedy or compensation. Indemnity terms may also be included, which provide options for refundable payments, price adjustments or contract termination with compensation.

For corporate investors seeking real estate for business purposes, noteworthy areas of law include:

• company law and regulations, most notably Law No 40 of 2007 on Limited Liability Companies, as amended by the Job Creation Law (“Companies Law”) – investors typically opt to establish a PMA Company to facilitate real estate acquisition or to acquire shares in a domestic company;
• investment laws and regulations, particularly to identify sectors that are open to foreign investment or reserved for domestic players, and sectors that necessitate partnerships with local micro, small and medium enterprises;
• business licensing regulations, outlining the requirements for the location and ownership of property for specific business activities (for example, manufacturing companies and data centres must be located in an industrial estate);
• spatial planning laws and regulations, regulating spatial designation and utilisation from city/region to national level, with which all business activities must comply;
• building laws and regulations, which regulate the requirements for building construction and utilisation; and
• environmental laws and regulations, mandating licences for environmental management, such as waste management and emission standards.

Other notable areas of law applicable to corporate and individual investors include:

• housing and apartment laws and regulations, which are pertinent for corporate investors involved in developing housing, settlement areas and apartments, as well as for individual investors or expatriates seeking residence in Indonesia; and
• tax laws and regulations, which regulate the application of taxes in the sale and purchase of real estate.

Law No 32 of 2009 on Protection and Management of the Environment, as most recently amended by the Job Creation Law (“Environmental Law”), generally applies the “polluter pays” principle. Nonetheless, law enforcement authorities can investigate instances of pollution or contamination, particularly those arising from the handling of hazardous and toxic wastes, which may incur criminal sanctions.

Parties may regulate the extent of obligation of the seller and/or buyer concerning soil pollution, environmental contamination and usage restrictions (such as groundwater extraction or changes in property usage) in transaction documents, commonly in the sale and purchase agreement. This include indemnification for any violations related to pollution or environmental contamination, usage restrictions for subsequent property buyers and indemnification for environmental claims.

Spatial designations are governed by regional regulations at the city/region and provincial level. To ascertain a land’s spatial designation, a party must apply for a Spatial Planning Conformity (Kesesuaian Kegiatan Pemanfaatan Ruang, or KKPR) from the MOA through the OSS.

The KKPR is valid for three years and can be extended for two years. For businesses that have acquired land, the KKPR’s validity aligns with the tenure of the land.

For national strategic projects, a recommendation for a KKPR may be granted, even if the project location does not align with the existing spatial designation.

Indonesian law does not recognise governmental condemnation, expropriation or compulsory purchase of property. However, there are circumstances where property ownership can be relinquished, including:

• land acquisition by the government for public purposes, with compensation paid to title holders;
• property confiscation based on a criminal court decision (eg, in corruption cases);
• if the land ownership document is annulled by an administrative court decision;
• voluntary relinquishment by its owner;
• if the land title term expires and title is not renewed (the previous title holder has a priority right to apply for renewal within two years after expiration, subject to certain requirements, including continued utilisation of the land); and
• if the land is abandoned or destroyed.

Buyers are subject to 5% duty on the purchase price on acquiring land and buildings (Bea Perolehan Hak atas Tanah dan Bangunan, or BPHTB), whereas sellers are subject to 2.5% income tax, to be paid prior to the closing of the transaction. For property transactions with developers, 11% value-added tax (VAT) applies, which must be paid after signing the AJB. Until June 2024, an exemption applies for the purchase of new houses or apartment units priced under IDR5 billion (approximately USD320,000) under the post-pandemic incentives implemented by the Ministry of Finance.

Transfers of land plots in industrial estates or of apartment units in practice are usually subject to administrative transfer fees imposed by the estate manager.

Notary/PPAT fees for drawing up the deed of land/property transfer are capped at a maximum of 1% of the transaction price.

The transfer of shares in a property-owning company may incur income tax on any capital gains arising from the transaction.

Foreign individuals or entities having representative offices in Indonesia are limited to HP and strata titles.

Landed houses must meet the following criteria:

• classified as luxury houses with a specific minimum price per province (typically exceeding IDR5 billion or the equivalent of USD320,000 for Java and Bali islands);
• limited to one plot of land per person/family; and
• the land area must not exceed 2,000 square metres.

Apartment units have restrictions on minimum price, minimum size and maximum number of units, and they must be utilised for residential settlement, which varies depending on province (ie, over IDR3 billion or the equivalent of USD190,000 for Jakarta, and IDR2 billion or the equivalent of USD128,000 for the rest of Java and Bali islands).

Acquisitions of commercial property, including large property portfolios, are generally financed through loans obtained from financial institutions such as banks or other lenders. The process involves applying to the lender, undergoing a credit evaluation, negotiating credit terms, finalising the facility agreement, and receiving disbursement upon approval. For individuals, the most common type of loan is House Ownership Credit (Kredit Pemilikan Rumah), typically used for purchasing residential properties.

Another financing option is through real estate investment trusts (REITs), which are known as Dana Investasi Real Estate (DIRE) in Indonesia and are designed to collect funds to be invested mostly in property portfolios. A DIRE is conducted through a collective investment agreement between an investment manager and a custodian bank, with investors’ contributions managed to build a portfolio of properties or shares. Please see 5.3 REITs for further details on REITs.

A commercial real estate investor typically creates a mortgage security, granting the lender a security interest in the property being acquired or developed. This arrangement serves as collateral, allowing the lender to sell the property to recover the debt in case of default, through either public auction or private sale.

Mortgage security is incorporated in a mortgage certificate issued by the local land office, which holds executorial power similar to a court decision with permanent legal force, enabling the lender to enforce their rights in case of the debtor’s default.

There are no restrictions on granting mortgage security over real estate to foreign lenders, although the enforcement of the mortgage would still necessitate a public auction or private sale in Indonesia. Repayments to foreign lenders under security documents or loan agreements are likewise not subject to restrictions, except for the general limitation on foreign exchange controls, which include a restriction on payments outside of Indonesia using the Indonesian Rupiah, and the conversion of IDR beyond a specific nominal threshold requires an underlying document.

Mortgage security is granted by a mortgage deed drawn up by a PPAT in the location of the land. The PPAT is entitled to a service fee of up to 1% of the transaction amount specified in the deed for this service.

Registering the mortgage deed to obtain a mortgage certificate from the land office incurs non-tax state revenue (Penerimaan Negara Bukan Pajak, or PNBP) based on the mortgage value. Fees range from IDR50,000 for values up to IDR250 million to IDR50 million for values exceeding IDR1 trillion. These rates are correct at the time of writing and are subject to change from time to time by the government.

The execution of a mortgage right is carried out through a public auction based on the executorial title granted in the mortgage certificate, known as parate execution, or through a private sale, agreed upon by the mortgage holder and the debtor.

For parate execution, auction fees apply as set out by each State Assets and Auction Service Office (Kantor Pelayanan Kekayaan Negara dan Lelang, or KPKNL), which include registration fees, announcement fees, auctioneer fees and relevant PNBP.

There is no requirement under Indonesian law, such as financial assistance or corporate benefit rules, that restricts the imposition of security over properties.

Under Law No 4 of 1996 on Mortgages (“Mortgage Law”), a mortgage must be preceded by a loan agreement (or any document underlying the indebtedness) that obliges the debtor to provide the mortgage as security for repayment.

Some banks or creditors may have stricter rules. For working capital loans, companies often need to submit yearly financial reports and updates on loan usage. For real estate loans, proof of purchase may be required.

Based on the Mortgage Law, the execution of a mortgage involves the following mechanisms.

• Default by the debtor: mortgage execution typically begins when the debtor defaults.
• Notice of default: upon default, the mortgagee typically issues a notice of default to the debtor, providing them with an opportunity to remedy the default within a specified period.
• Enforcement options: if the default is not remedied, the mortgagee can execute the mortgage by way of a public auction based on the executorial title granted in the mortgage certificate, or through a private sale if mutually agreed as stipulated in the mortgage deed. Such a sale can only occur after one month from the date of written notification to the debtor and announcement in two regionally circulated newspapers, provided no objections are raised.
• Sale of the mortgaged property: proceeds from the sale are used to repay the outstanding loan amount, including any accrued interest, fees and execution expenses, with any surplus being given to the debtor. If the proceeds are insufficient to cover the debt, the mortgagee may pursue other legal avenues to recover the remaining balance.
• Registration of transfer: following the sale of the mortgaged property, the transfer of ownership of the land title is registered with the Land Office, and the mortgage is discharged.

There were no significant limitations regarding the lender's capacity to enforce the mortgage during the pandemic, aside from occasional closures of court services, which affected court proceeding schedules in general.

Existing secured debt may become subordinated to newly created debt. Multiple creditors can hold mortgages on one property, or a single creditor may hold multiple mortgages on the same property. In such cases, each mortgage is ranked based on its registration date at the Land Office, which determines its repayment priority.

Lenders are generally not liable under the Environmental Law for any pollution of the real estate not caused by the lenders; see 2.7 Soil Pollution or Environmental Contamination regarding the application of the Environmental Law.

Under Law No 37 of 2004 on Bankruptcy Proceedings and the Suspension of Debt Payment Obligations (“Bankruptcy Law”), if a borrower becomes insolvent, any lender holding security interests (including mortgages) has the authority to execute their rights within two months after the commencement of the state of insolvency.

If the two-month deadline has passed, the receiver is obliged to request a public auction of the collateral through the KPKNL, while ensuring the rights of the creditors who hold claims to the proceeds from the sale. In the event of an unsuccessful public auction, the supervisory judge may approve a private sale of the properties.

In any event, the receiver has the authority to release the collateral property by paying the respective creditor either the market value of the collateral property or the amount of debt secured by it, whichever is lower, at any given time.

In Indonesia, fees in the form of PNBP on mortgage or mezzanine loans are imposed at the time of the registration or recording of the mortgage deed or related documents with the Land Office. Please see 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security regarding mortgage registration fees.

Spatial planning policies are formulated through the Regional Spatial Plan (RTRW) and the Detailed Spatial Plan (RDTR). Governments enact regulations governing spatial planning and zoning, which are structured as follows:

• government regulation for RTRW at the national level;
• presidential regulation for National Strategic Areas;
• regional regulation or governor regulation for RTRW for each province; and
• regional regulation or regulations by regional heads for RDTR and RTRW for each city/regency.

The central government consistently integrates the RTRW and RDTR into the national land map, serving as a basis for the government in processing and issuing KKPR, which is a prerequisite for business licences.

Following the enactment of the Job Creation Law, government controls on building construction involve the application of a risk-based approach, imposing technical norms, standards, guidelines and criteria for the function, design, method of construction and refurbishment work for each type of building, depending on:

• building construction complexity, including simple, non-simple and special building, according to factors such as the number of floors and maximum area;
• building functions, encompassing residential, religious, business, social, cultural and special functions;
• building requirements, such as coefficients standards for different types of buildings and technical, architecture and structural designs;
• building licensing obligations for construction, utilisation, maintenance, inspection, preservation and demolition processes – major approvals include Building Construction Approval, which is required before commencing construction and is valid for two years, and a Certificate of Building Worthiness, which is required before building utilisation and is valid for five years;
• roles of the community, including building construction contractors and technical advisers; and
• sanctions for non-compliance, including warnings, suspension of licences and/or demolition orders.

The following authorities are responsible for regulating development and spatial designation.

• The Ministry of Investment, along with local or provincial One-Stop Integrated Licensing Agencies, manages KKPR confirmation issuance in areas with established RDTR, on behalf of the MOA. This involves aligning proposed business activities with the RDTR and issuing KKPR through the OSS system.
• The MOA, alongside local land offices, grants KKPR approval in areas without RDTR, subject to the proposed business activities aligning with RTRW regulations.
• Regional governments, including executive (Mayor/Regent) and legislative (Regional House of Representatives) branches, enact regulations for RTRW and RDTR. The Spatial Planning Department can provide written confirmation on spatial planning designations upon request.

Changes to spatial designations are significantly restricted, occurring only once every five years or in response to national strategic initiatives. These changes must be initiated by the regional government with the MOA, meaning they cannot be instigated solely by a single business entity but require regional government action.

When initiating new projects, the following procedures must be conducted:

• land entitlement, through the acquisition of land title or through lease or co-operation agreements with land title holders;
• KKPR, confirming that the intended land use aligns with spatial designations;
• environmental approval, detailing the project's environmental impacts, including potential environment harm and waste management;
• building documentation, comprising the Building Construction Approval, to be obtained prior to commencing construction, and the Certificate of Building Worthiness, to be applied for after the completion of the construction for its utilisation; and
• application for a business licence based on the relevant business scope – commercial operations can commence once the business licence is obtained.

For significant building refurbishments encompassing alterations in function, layers, area, appearance, specifications and dimensions of components, and retrofitting activities, the building owner must obtain a revised Building Construction Approval before commencing any construction activity.

Public engagement, involving residents and social organisations, is encouraged in determining spatial planning and overseeing building development. Input can be submitted to the central government (the MOA for spatial planning; Ministry of Public Works and Public Housing for building construction) and regional government.

Generally, under administrative law, an appeal may be initiated against a decision made by an authority, including licence or approval for development or designated land use (ie, KKPR).

Such appeal can be initiated if the decision is provided in writing, is issued to a specific party, and is considered final and definitive, imposing obligations on its receiver. Examples of such decisions include KKPR documents, Building Construction Approvals and decrees granting land titles.

The appeal process encompasses administrative remedies, such as submitting an application to the relevant government authority. The MOA can revoke KKPR due to procedural and/or administrative errors, including discrepancies in the applicant's data or physical location mismatches. Owners of adjacent land or objecting parties can submit an objection to title decrees to the local land office, which may initiate land remeasurement or boundary determination.

A lawsuit can be initiated with the Administrative Court, which holds jurisdiction to examine and adjudicate disputes pertaining to administrative decisions.

The procedural steps in administrative court cases are as follows.

• Filing a lawsuit: the applicant files a lawsuit within 90 days of receiving notification of an administrative decision.
• Dismissal review: following the filing, the court conducts a dismissal review to verify compliance with the criteria for the administrative lawsuit. The applicant has 14 days to contest any dismissal decision by the court.
• Preparatory examination: prior to the main hearing, the judge may undertake a preparatory examination to clarify the lawsuit. The applicant has 30 days to rectify any deficiencies in information in its lawsuit.
• Case examination: the court proceeds to examine the case, with a panel of three judges. The parties are given opportunities to present their arguments.
• Judgment: the court renders its judgment, which may involve rejecting, granting or deeming the lawsuit invalid.
• Appeals: if a party is dissatisfied with the judgment of the administrative court, they can appeal to the administrative appeals court. If dissatisfied with the decision of the appeals court, they may further appeal to the Supreme Court, whose ruling is final and binding.

It is necessary to apply for and obtain licences for all development projects, regardless of the owner or developer.

The prevailing laws and regulations do not provide any mechanism to enter into an agreement with local or governmental authorities to facilitate development projects. However, government regulations do offer incentives for specific investments, with the following examples.

• National Strategic Projects benefit from a streamlined permit processing, spatial planning adjustments via KKPR recommendations from the MOA, a specialised land acquisition process for public purposes, 0% BPHTB, financial aid, government guarantees and fast-tracked resolution of legal and social impacts. To qualify, projects must be evaluated and approved by the Co-ordinating Minister of Economic Affairs and the President, focusing on infrastructure investments exceeding IDR500 billion (approximately USD33 million), and typically executed by government institutions, state-owned enterprises or private sectors through PPPs.
• Investments in SEZs are eligible for streamlined business licence processing, simplified expatriate utilisation, fiscal benefits like tax holidays, 0% VAT, exemptions from import duties on specific goods, and deductions on local taxes.
• Investments in Indonesia’s new capital city, Nusantara, come with benefits including a corporate income tax rate of 0% for up to ten years, 0% import VAT, 0% tax on luxury goods, 0% import duties and 0% PBB for up to ten years.
• Investments in industrial estates are guaranteed KKPR confirmation/approval, along with simplified application processes for environmental and waste management approvals managed by the estate managers.

The enforcement of restrictions on development and designated land use involves several authorities, with various measures, as follows.

• The MOA, including land offices and regional offices, is the primary authority responsible for supervision, evaluation monitoring and reporting land designation usage, conducted through the following various measures:
1. verifying KKPR applications based on land documents (titles, leases, etc), proposed business scope, alignment with RDTR/RTRW, and proposed construction plans;
2. forming an inspectorate to supervise development and designated use, overseeing spatial utilisation, conducting inspections and ordering suspension of violations; and
3. public participation by reporting non-compliance in development and designated use to the MOA or regional government via documents, website, email or social media.
• Regional governments, including the Civil Service Police Unit, ensure public order by conducting patrols and security measures to address non-compliance with development and land use regulations, as per regional laws. Construction projects not aligning with spatial designations may face suspension or demolition.
• Law enforcement officials investigate claims, reports or complaints regarding violations of designated land use, which are punishable under the Spatial Planning Law. If a criminal offence is proven, an investigation will be processed to prosecution level, up to in-court criminal proceeding.

Investors typically hold properties by way of direct land title ownership. Local individual investors mostly prefer HM as it holds an unlimited term. PMA Companies typically holds HGB, whereas foreign investors are subject to ownership restrictions (see 2.1 Categories of Property Rights). Due to such restrictions, foreign investors usually prefer to establish a PMA Company to acquire land, or to subscribe for shares in an existing real estate company. Despite having foreign investment status, a PMA Company is considered an Indonesian entity, so is eligible to hold a HGB, HP, HGU and strata title.

The most common type of entity used to invest in real estate in Indonesia is a limited liability company, including PMA Companies, the constitutional documents of which are the articles of association (AOA), covering the following key aspects.

• Corporate details, including the company's name, legal domicile, any branch offices and the duration of its establishment, whether limited or unlimited.
• The business scope, delineating the areas of operation based on the classification of business activities.
• Capital structure – companies allocate their capital into shares. The entire capital is known as authorised capital, while the portion contributed by shareholders is the issued and paid-up capital.
• Corporate organs, which include:
1. the board of directors, comprising one or more directors responsible for day-to-day operations and authorised to act on behalf of the company;
2. the board of commissioners, consisting of one or more commissioners tasked with collective supervision and advisory roles over the board of directors; and
3. the general meeting of shareholders, comprising all shareholders, holding the highest authority in the company. The AOA typically govern the procedures for convening meetings of the directors, commissioners and shareholders, specifying quorums, meeting invitations and resolutions in lieu of physical meetings. The AOA may also impose restrictions on directors' actions by requiring corporate approvals from the board of commissioners or the general meeting of shareholders.

In terms of the tax benefits and costs of a company holding real estate assets, the company can record BPHTB for the acquisition of land and buildings owned and utilised by the company, and expenses incurred for the extension of land titles (such as HGB, HP or HGU), as deductible expenses from taxable income. Meanwhile, PBB remains the same in amount and application regardless of whether the real estate assets are held by a company or an individual.

A REIT is an instrument used to raise funds from investors to be invested in real estate assets, assets related to real estate and/or cash equivalents, as regulated by the Financial Services Authority (Otoritas Jasa Keuangan, or OJK) under OJK Regulation No 64/POJK.04/2017 for conventional DIRE and OJK Regulation No 30/POJK.04/2016 for Sharia-compliant DIRE. These vehicles are available to individual domestic investors and PMA Companies, subject to compliance with Indonesian investment regulations. However, the DIRE is not open to foreign individual/entity investors.

The advantages of investing in REITs include:

• dividend distribution: REITs are required to distribute profits to the unitholders on an annual basis in amounts of at least 90% of net profit after tax, providing investors with a stable income stream;
• tax benefits: REITs are not subject to corporate income tax, allowing for higher distributions to investors; and
• tangible assets: REITs invest in physical real estate, exposing investors to potential appreciation in property values over time.

To qualify as a REIT, the following requirements must be fulfilled.

• Investment structure: a REIT is established based on a DIRE, a collective investment contract (CIC), which is made by and between the relevant investment manager and custodian bank. The investment manager manages the portfolio, and the custodian bank oversees collective deposits. The investor will hold the participation unit of the CIC as ownership.
• Portfolio composition: a DIRE must invest at least 80% of its net asset value in real estate assets (either directly or indirectly through the acquisition of control in real estate companies). These assets must have been income-producing assets prior to their acquisition or, if the relevant lands and buildings are still in the construction stage, must generate income within six months after the acquisition. Meanwhile, the remaining value may be invested in other assets, such as securities in real estate-focused companies, money market instruments, Indonesian securities portfolios and/or other financial instruments, and/or in cash and cash equivalents. The investment manager must ensure that at least 51% of the relevant DIRE’s revenue is derived from real estate assets.
• Investment restrictions: REITs are prohibited from investing in vacant land or properties under development, except for certain activities like refurbishment, retrofitting and renovation.
• Asset restrictions: REITs are prohibited from lending or pledging their real estate assets for the benefit of third parties.
• Trading restrictions: REITs are prohibited from engaging in short selling or purchasing securities on margin.
• Debt issuance: REITs are prohibited from issuing debt securities but can borrow funds without issuing debt securities for the purpose of purchasing real estate assets, up to a maximum of 20% of the total value of the real estate assets to be purchased.

PMA Companies must have a minimum issued and paid-up capital of IDR10 billion upon establishment.

PMA Companies are also subject to minimum investment values (regulated in the Minister of Investment/Investment Coordinating Board Regulation No 4 of 2021 on Guidelines and Procedures for Risk-Based Business Licensing Services and Investment Facilities) of more than IDR10 billion, exclusive of land and buildings, for each business scope. Investment values can be in the form of shareholder capital, loans and/or other sources of funds.

PMA Companies are subject to the following governance requirements.

• Each company is required to obtain the relevant business licence based on a risk-based assessment of each business scope engaged. Before obtaining a business licence, companies must first meet the basic requirements of KKPR, environment approval and a building licence – ie, a building construction permit and a certificate of building worthiness.
• Investment reporting must be conducted quarterly through the OSS system administered by the Ministry of Investment, outlining the company’s realisation of investment in the particular quarter (ie, any purchase of machineries), use of manpower, production and distribution of goods/services, and export realisation (as applicable).
• Presidential Regulation No 13 of 2018 on Implementation of Know-Your-Beneficial-Owner Principle by Corporation for the purpose of Prevention and Eradication of Money Laundering and Terrorism Financing mandates the disclosure of PMA Companies' ultimate beneficiary owners (UBO) to the Ministry of Law and Human Rights.

Apart from taxes, Indonesian legislation does not mandate any annual entity maintenance fee payable to the government.

Regarding accounting compliance, the Companies Law mandates that directors of a company must submit an annual report, including financial statements, within six months after the end of the company’s financial year. These financial statements must adhere to standard accounting guidelines. Furthermore, the financial report must undergo auditing by a certified public accountant if the company:

• collects or manages public funds;
• issues debt acknowledgment letters to the public;
• is publicly listed or state-owned; or
• possesses assets and/or total business turnover of at least IDR50 billion.

The prevailing regulations acknowledge various arrangements, such as lease, lease to build and lease-to-own, which are applicable to real estate properties, including commercial leases for spaces, buildings, land and/or structures.

Other lease mechanisms recognised in Indonesia include utilisation of HPL land by a third party. In this case, the lessee enters into a utilisation agreement with the HPL holder, which allows the lessee to develop the land, to utilise the land, and to apply for land title over the HPL.

Build-Operate-Transfer (BOT) Schemes

BOT schemes entail the utilisation of state-owned assets such as land by another party to construct buildings and/or facilities, which are then operated by that other party for an agreed-upon period before being returned to the state along with the buildings and/or facilities. They are regulated by Government Regulation No 27 of 2014 on Management of State/Regional Assets, as most recently amended by Government Regulation No 28 of 2020 (“Asset Management Regulation”).

Leases of State/Local Government Assets

Such leases involve the utilisation of state/local government assets by another party for a certain period in exchange for a cash consideration. The lease term is five years and can be extended, pursuant to the Asset Management Regulation.

These mechanisms are not only for commercial purposes but are also for industrial, residential and other uses.

Besides the traditional lease, Indonesia also recognises lease-purchase, which is a mixed agreement that includes elements of both a sale and a lease. In a lease-purchase agreement, as long as the price has not been fully paid, ownership of the goods remains with the seller-lessor, even though the goods are in the possession of the buyer-lessee. Ownership only transfers after the buyer-lessee pays the final instalment to settle the price of the goods.

In Indonesia, regulations regarding leases are generally regulated under the Indonesian Civil Code. However, there is no limitation on the formulation of lease terms in agreements; lease terms are generally freely negotiable.

However, certain leases, such as those for state-owned goods or residential purposes, may be subject to more specific regulations. For example, Ministry of Finance Regulation No 115/PMK.06/2020 on the Utilisation of State-Owned Assets applies to leases of state-owned goods, imposing restrictions on lease term, price determination and payment methods. House leases for residential purposes must comply with Government Regulation No 14 of 2016 on Housing and Residential Area Management as most recently amended by Government Regulation No 12 of 2021 on Amendments to the Housing Management Regulation, which specifies the minimum requirements for a written lease agreement, including the rights and obligations of the parties, lease term, price and force majeure clauses.

Leases of central government or regional government assets must adhere to the Asset Management Regulation, its amendments and implementing regulations. This regulation stipulates various requirements, including the permissible duration of lease terms, essential provisions to be incorporated into lease agreements – such as the rights and responsibilities of each party – and the intended purpose of the lease.

The COVID-19 pandemic has not resulted in specific ongoing regulations regarding lease terms in Indonesia.

The terms of a lease of business properties are freely negotiated between the parties. The typical terms are as follows.

Length of Lease Term

Parties typically define the commencement, conclusion, any potential extensions and the procedure for extending the lease. Restrictions may vary based on the nature of the leased asset. For instance, for state or regional government properties, the standard lease term is commonly set at five years, with the possibility of extension.

Maintenance and Repair

The agreements would detail the services and maintenance covered by the lessor and the costs entailed. Operating costs, including equipment repair and maintenance, are usually the lessee's responsibility.

Frequency of Lease Payments

Parties typically regulate lease payments in the lease agreement. In a revenue-sharing model, for example, lease payments are usually agreed to be made quarterly, based on the audited financial report.

Pandemic Issues

Following the COVID-19 pandemic, some lease agreements stipulate a pandemic as a force majeure event.

The rent payable typically does not change throughout the lease term, with the possibility of cost adjustments at the start of a new period, based on the agreement of the parties.

Rent changes require mutual agreement, typically in writing. Once agreed upon, changes can occur only with written consent. It is common to cap rent increases at a certain rate, considering increases in the tax-assessed value of the property or inflation.

11% VAT is payable on rent for land and/or buildings. The VAT is collected and remitted by the taxable entrepreneur who rents out the land and/or buildings.

A deposit may be required upon lease commencement, in addition to lease payment. This deposit serves to secure the lessee's obligations and acts as the lessor's protection against damages, unpaid rent or breaches of lease terms. Lessees may also be obliged to pay a monthly service charge to the lessor, plus applicable VAT.

In the context of apartments, the Apartment Law obliges developers to separate apartments into individual units, common areas (such as rooves, stairs, elevators, pipelines, electrical networks, floors, walls and other parts that are integral to the apartment building), common objects (swimming pools, gardens, parking lots and other parts that are not in functional unity with the apartments) and common land.

Based on the Apartment Law, the management of an apartment building includes operational activities, maintenance and care of common areas, common objects and common land, which are managed by the Association of Owners and Occupants of Apartments (PPPSRS).

In carrying out the management, PPPSRS is entitled to receive and manage management fees, payable by the owners and occupants (lessees) in proportion to their ownership. Typically, management fees consist of operational costs, maintenance costs and repair costs. The operational and maintenance costs are charged to the occupants/lessees, while repair costs are charged to the owners.

The Apartment Law provides that utilities and telecommunications costs for properties with multiple lessees are shared proportionally by owners and occupants through management fees handled by the PPPSRS.

The lessor usually insures the building, while some agreements require lessees to insure items within the properties.

Lessees' ability to claim business interruption due to the pandemic depends on insurance policy terms. However, such claims are often denied, as pandemics are not usually considered valid reasons to defer obligations like lease payments.

Article 99 of the Apartment Law imposes restrictions on certain kinds of use, such as damaging or altering public infrastructure, endangering others or public interests, violating regulations, changing the agreed upon function or use of the apartment building, or diverting public infrastructure and common facilities for the development or management of the apartment building.

In addition, lessors may specify restrictions in the lease agreements, such as limiting the use of properties in a manner consistent with the permitted zoning and the lessee’s business licences.

Generally, according to Article 1554 of the Indonesian Civil Code, the party leasing out the property is not allowed to alter the form or arrangement of the leased property during the lease term. However, parties to a lease agreement may agree otherwise. Typically, lessees are required to obtain prior approval from the lessor for such alteration. In the context of a lease of space (in a building), structural alteration by a lessee is not allowed.

Furthermore, if modifications are desired, besides needing the lessor's consent, they must also comply with the existing Building Construction Permit of the relevant building.

There are no specific regulations that apply to leases of categories of properties, such as residential, industrial, offices, and retail or hotels.

Leases of land or property in Indonesia are primarily governed by the Indonesian Civil Code, with additional regulations such as the Apartment Law. These laws outline the rights and responsibilities of lessors and lessees. The Apartment Law categorises apartments into four types:

• public apartments;
• special apartments;
• state apartments; and
• commercial apartments.

These regulations impact leases by providing specific guidelines for different types of real estate, ensuring clarity and fairness in lease agreements. However, there are no specific asset class distinctions related to COVID-19 legislation in these laws.

Under the Bankruptcy Law, if a lessee is declared bankrupt, the receiver or the party renting out the property temporarily can terminate the lease agreement, provided that prior notice is given within a certain period, according to local customs. According to Article 38 of the Bankruptcy Law, a period of three months is considered sufficient. This ground for termination can be stipulated under a lease agreement.

It is typical for lessors to request a security deposit from lessees, often equivalent to three months' rent and service charges, as a form of protection against potential lease violations.

Based on Article 1573 of the Indonesian Civil Code, if a lessee continues to occupy the property after the lease term has expired without being challenged by the lessor, a new lease will automatically begin. This principle, known as a silent agreement, is recognised in Indonesian law, where what is customarily agreed upon is considered part of the existing agreement, even if not explicitly stated.

To ensure that a lessee vacates on the agreed date, the lease agreement must specify the deadline for vacating and authorise actions by the lessor, such as imposing fines or cutting off access if the lessee fails to do so. It is also advisable to incorporate clauses allowing fines deducted from the security deposit or retaining the deposit until the lessee vacates.

The ability of a lessee to assign its leasehold interest in the lease or to sublease all or a portion of the leased properties depends on the terms of the lease agreement. Under the Indonesian Civil Code, subleasing is prohibited unless the lessor’s consent is obtained. Therefore, some lease agreements may permit assignment or subleasing, while others may restrict or prohibit it.

Typically, the lessor/owner would also require notification from the lessee on the change of control in the case of the assignment of a leasehold interest.

Under the Indonesian Civil Code, written leases end automatically when the lease term expires. For oral leases, termination occurs when one party notifies the other, following the necessary notice period as per local custom. In addition, if the leased property is completely destroyed during the lease term due to an unforeseen event, the agreement is automatically terminated by law.

Early termination grounds are typically outlined in the lease agreement, including due to expiration, mutual agreement (without any events of default), force majeure, a default event and/or other grounds as agreed by the parties (such as change of control, bankruptcy, cessation of business, the stopping of payment of debts, and the appointment of a receiver over its properties).

A lease is not required to comply with registration requirements or specific execution formalities, as it is based on a contractual arrangement between the lessor and the lessee. However, it can be registered with the land office for administrative purposes, although this is not mandatory. This registration records the lease on the land certificate, clarifying the status of the land as a leased object for both parties involved in the lease and/or any third-party stakeholders.

If a lessee defaults before the end of the lease term, the lessor can only evict them based on a court decision seeking the lessee’s immediate vacation from the properties. To obtain this decision, the lessor must first issue a warning letter to the lessee. If the lessee ignores the warning letter, the lessor can then file a civil lawsuit in court to request the eviction decision. Generally, the court will take months to issue a decision for eviction, or longer if the dispute is taken to a higher court.

Neither the government nor any other third party can terminate a lease. A lease can only be terminated by its own terms, by mutual agreement of the parties, or if declared void by a court decision.

In cases of breach of an agreement, the non-defaulting party may seek compensation for losses and/or damages resulting from the breach. Such compensation can be sought by way of filing a lawsuit against the defaulting party. Indonesian courts recognise material losses (ie, actual losses caused by such breach) and punitive damages (non-material, typically for potential losses or damage to reputation).

If stipulated in the lease agreement, a penalty may be imposed. Security deposits are typically non-refundable, and are instead fully retained by the lessor.

Conversely, if the lease fee has been paid upfront by the lessee, the remaining lease fee may not be refunded to the lessor. Although not legally mandated, lessors commonly request a security deposit for the lease, typically amounting to three months' lease and service charges.

Based on Law No 2 of 2017 on Construction, as most recently amended by the Job Creation Law (“Construction Law”), and Government Regulation No 22 of 2020 on Implementing Regulation of Construction Law, as most recently amended by Government Regulation No 14 of 2021 on Amendment to Government Regulation No 22 of 2020 (“Construction Service Regulation”), payment structures for construction projects include:

• advance/upfront payment;
• payment based on time progress (typically monthly);
• payment based on project milestone (progress payment); and
• turnkey/payment upon completion of works (lump-sum).

In integrated engineering-procurement-construction-commissioning (EPCC) agreements, payment arrangements for the procurement of tools and equipment can be structured as unit price payments, wherein the project owner pays for each unit of tools or equipment procured.

In certain instances, the project owner may choose a provisional sum arrangement, allocating a predetermined amount for tools and equipment procurement in the agreement. This sum provides flexibility for potential variations in costs or unforeseen expenses during the project's execution.

The different methods used for assigning responsibility for the design and construction of a project are referred to as the delivery system under the Construction Service Regulation, and include:

• design-bid-build (DBB), in which a contractor will make an agreement with the project owner to provide a specific type of construction service; and
• design-build (DB), in which the contractor will make an agreement with the project owner to provide multiple construction services.

Under DBB, typically one contractor will handle the design work, while another contractor takes on the construction phase. Each contractor will be responsible for the specific tasks based on its agreement with the project owner. Conversely, in the DB method, both the design and construction works are carried out by a single contractor.

Warranties are common to manage construction risk on a project, specifically guarantees issued by a financial institution.

Depending on the nature of the project, the contractor may furnish various types of warranties to the project owner. The Construction Service Regulation and Presidential Regulation No 16 of 2018 on Government Goods/Services Procurement recognises the following types of guarantees:

• Bid Bond – a type of guarantee aimed to assure the project owner of the bidder's seriousness regarding their bid and their financial capability to execute the project if awarded;
• Advance Payment Bond – to ensure the repayment of any advance payments made by the project owner before the commencement of work on a construction project;
• Performance Bond – to provide assurance to project owners that they will be adequately protected in the event of contractor default, non-performance or failure to achieve the determined quality or performance standards; and
• Warranty Bond – guarantees the maintenance of the construction during the specified maintenance period.

There is no legal limitation to such warranties, which are typically governed by the agreement between the contractor and the project owner.

Construction agreements commonly include penalties in the form of fines for contractors who fail to meet specified milestones or deadlines. These fines are typically calculated daily, with the amount usually set at a fraction of the agreement’s value, often 1/1000.

Project owners often seek additional security measures, especially when contractors require project financing for project execution. Typically, project owners will demand that contractors provide guarantees, commonly in the form of performance bonds or third-party sureties. If the contractor lacks sufficient assets to secure the project in the event of performance default, the project owner may insist on a corporate guarantee from the contractor’s parent company.

In practice, contractors will not be given any form of land title and may not place any lien or encumbrance on the project, since ownership of the land and building remains with the project owner.

However, in cases of non-payment, the construction company may notify the local land office of a dispute and request to block the land title. Subsequently, the land office may block any attempts by the project owner to transfer property ownership or alter the land title, which will be in effect for 30 calendar days unless a court order/decision is obtained.

Buildings are legally required to obtain a Certificate of Building Worthiness (Sertifikat Laik Fungsi, or SLF), which is applied for after the completion of the construction and prior to the building utilisation. An SLF is issued by the regional government, except for complex and hi-tech buildings that are reserved to be issued by the Ministry of Public Works and Public Housings.

VAT is imposed on the buyer of new property at a rate of 11%. Conversely, Corporate Income Tax (CIT) is imposed on the seller for both new and second-hand property at a rate of 2.5%.

As of 2022, VAT exemptions may apply to the sale of landed retail houses and apartments. Similarly, CIT exemptions may apply to transactions involving the sale and purchase of land and buildings with government entities, state-owned enterprises with special assignments from the government, or regional government-owned enterprises with special assignments from the regional government.

To mitigate tax liabilities, buyers frequently opt to acquire land located within SEZs. Based on Government Regulation No 40 of 2021 on Special Economic Zones, a SEZ offers exemptions from CIT and VAT for the sale and purchase of land and/or buildings.

PBB is imposed on property owners. If the property is leased, the lease agreement may stipulate that the lessee bears or compensates the lessor for any PBB incurred by the lessor. These taxes are paid to the municipal government. In addition, depending on each municipal government, a municipal retribution may be collected for occupying business premises.

Companies operating in an SEZ may receive incentives in the form of tax deductions for PBB and other municipal taxes, as well as retribution. The deduction ranges from 50% up to 100%.

The Agrarian Law prohibits foreign entities from directly owning land in the country. Consequently, foreign individuals or companies are unable to hold land titles in Indonesia. However, a potential avenue for foreign entities is to establish a company within Indonesia to hold properties and generate income through rental activities. It is important to note that income derived from such rental activities would be categorised as dividends rather than traditional rental income, and therefore dividend tax rates will apply.

A company can derive advantages from owning property by leveraging depreciation expenses to lower its taxable income. Depreciation can be calculated annually on properties, allowing companies to deduct this expense from their gross revenue, thereby potentially decreasing their tax liability. The depreciation period for permanent buildings is 20 years, with an annual depreciation rate of 5%. Meanwhile, non-permanent buildings have a depreciation period of ten years, with an annual depreciation rate of 10%.