Bali Property: Bear, Bull, or Beggars Market?
In response to questions regarding the state of Bali’s real estate market, an informal survey of notaries in Bali suggests very few property deals are being consummated in the current business climate.
As a preface, it is recommended that anyone, particularly foreign nationals, considering a real estate transaction in Indonesia secure the services of a qualified and well-regard Notary and Lawyer beforehand.
While there are manifold reasons why notaries in Bali report a dearth of property transactions involving either Indonesian or foreign nationals, clearly chief among the reasons for this is the unprecedented economic recession during the continuing Pandemic.
Other factors to be considered in analyzing the state of the local property market are:
- It is still plainly against Indonesian law for foreigners to acquire freehold title on land. Those who argue that this is “all about to change” may be delusional and are not paying attention to the fact that the Constitutional Court has repeatedly and consistently ruled that foreigners owning land in Indonesia is forbidden under the National Constitution (UUD 45).
- Past legal “constructions” seeking to “workaround” prohibitions for land ownership by foreigners using nominees, faux irreversible loan agreements, and other devices are discovering that these “deals” may not stand up to legal scrutiny. This is particularly the case in an atmosphere in which the government is on the alert for efforts to evade tax or detect laundered money.
- Those who have used “irrevocable loan guarantees” involving a “local nominee” could face the risk of being quizzed by Indonesian financial authorities and requested to prove that the payment of funds to the nominee at the center of the subject “loan” actually took place. In a litiginous confrontation, a question that could be posed before the Courts is if a loan agreement involving a “local nominee” can be enforced if the money “lent” was not disbursed?
- Numerous legal cases in Indonesia have seen the Courts question if a “nominee relationship” has any standing under Indonesian jurisprudence.
- The unprecedented and growing number of bad loans at Indonesian banks could precipitate a “door knock” on the home of a “foreign property owners” (a legal oxymoron in Indonesia) from banks advising that a “nominee” had used their property as collateral on a now defaulted loan. The befuddled “foreign owner” could have, in fact, been unaware that “his” home had been used as collateral. Is this unethical? Illegal? Wrong? Yes, but it would prove more than a little ironic for foreigners to seek legal redress in such a circumstance, claiming they were short-changed in a transaction that they originally used to contravene Indonesian law.
- The widespread use of a “local nominee” for foreigners”purchasing” property in Indonesia has been made increasingly problematic by the fact that all buyers and sellers of land must now have an official tax registration number (NPWP). By extension, this means a “local nominee” would need to demonstrate an earnings history sufficient to facilitate the purchase in question. As in jurisdictions abroad, a humble driver, gardener, or houseboy suddenly purchasing property far beyond his financial means could be deemed prima facie evidence of money laundering or tax evasion.
- Foreign “property owners” who have taken the step of personally holding the original property title for the land they occupy to prevent misuse of the land as collateral by the nominee should understand the legal limitations of this precautionary step. If the nominee became personally bankrupt, the land and the title could still be seized by the Courts. What’s more, the Indonesian “nominee” remains the legal owner of any freehold title in his or her name. If the “beneficiary” (i.e., the foreign occupant of the land) were formally asked to return the original title, the foreigner would be committing a criminal offense should he or she refuse to return it to the owner of record.
- Many of the elaborate “local nominee” constructions for property purchase include a document(s) describe as an “irrevocable powers of attorney” executed to arguably protect the foreign beneficiary in the event of the death of the nominee. Subject to tests before the Courts, powers of attorney (POA) in Indonesia generally do not survive the individual granting the power, meaning all POAs expires at the time of the death of the grantee.
- Even a legitimate property transaction, where an Indonesian is purchasing a property from another Indonesian, now requires both parties to have “clean” tax records. Also, the source of the funds used in the transaction must have a demonstrable legitimate genesis.
- Accordingly, new regulations are now in place compelling notaries to verify the source of funds used in property transactions. This is in addition to mandatory tax clearances required before a closing in which both seller and purchaser must demonstrate their source of funds and the actual transaction value.
- Although not officially declared as such, Indonesia finds itself in a global economic depression. While there are “bear” and “bull” or “buyer” and “seller” markets – arguably the most fitting name for Bali’s current property market is a “beggars market.” A market where the few with the wherewithal to purchase property patiently wait to see just how low the market can go. Sadly, the Bali property market is akin to a roller coaster on a steep, downward trajectory. Hang on!
- One thing that differentiates the current slump in Bali property from past upheavals is those past downturns were due to local or regional causations, such as terrorist attacks, local political uncertainty, volcanic eruptions, and localized virus threats. In those instances, new markets with money (e.g., Russia, Australia, and Jakarta) would typically emerge to scoop up Bali property bargains. However, in this global economic downturn, few or no markets have “buyers” who have the funds or fortitude to shop for property anywhere, let alone Bali, until the Pandemic ends and world economies begin to rebuild.
Sadly, a dismal and dark emerging sales outlets for Bali property may be found in taking over defaulted loans from Indonesian banks or via purchases made at government auctions for a property with unpaid taxes.
But, be warned, the Indonesian legal system can prevent “new” owners of properties acquired from banks or the tax office from taking lawful possession as disgruntled former owners file legal appeals.
And, in any case, purchasing default loans or bidding at tax auctions remains an exclusive hunting ground reserved for Indonesian citizens.