The reality about buying property in Bali

Bali is awash with investment villas and is the destination of choice for planeloads of grey nomads from Australia and other countries.

Yet, while the living conditions are safe and the locals friendly, the apparently seductive investment benefits from villas on freehold or long lease arrangements require very careful review and due diligence.

The reality is that Bali presents complex property investment potentials in which there are serious downside risks. Any aspiring investor should factor these into their long-term financial planning.

Legal risk

The legal situation regarding ownership is complex.

Put simply, unless you are an Indonesian national, you can't own freehold land in Indonesia. There is a workaround in which you can have a contract with a nominated national who is the titleholder but there are obvious pitfalls in such an arrangement.

A less risky and increasingly popular solution to the prohibition on foreign land ownership is a long-term lease. This may initially be limited to 25 years but sometimes may be optioned to extend for much longer terms.

Lusia Wirayudha, who established Jo & Jo Realty in Bali's established tourist precinct Sanur, cited the example of the nearby Aleesha Villas, which has a lease term of 42 years and is transferable.

She is happy to counter the concerns some may have about leasing.

"It was something a lot of the expats and foreign investors were asking when they first came to Bali," she said.

"They couldn't understand why they couldn't buy freehold but now people realise there's money to be made without having to turn the land into a freehold contract anyway.

"It's also good for the property to be given back to the people after 25 years, so I don't think these measures are making a big deal anymore.

Grey nomads

A quick glance at the statistics highlights the potential market among older Australians looking for Bali property investments.

• The number of Australians over 65 will almost triple within the next 25 years to eight million.
• The number of age pensions paid to Aussie retirees living overseas increased by 30 per cent from 2007 to 2012.
• Australians can apply for a special retirement visa for Indonesia if they are financially self-sufficient.
• More than one million Australians visited Indonesia in 2013/14, according to the Australian Bureau of Statistics (an increase of 266 per cent compared to 2003/04 - an unusually large increase, possibly due to the reduction in tourists following the Bali bombings of 2002).

Some are buying leasehold now in attractive locations such as Seminyak to the north of the older Kuta and Legian tourist zones, even if it's not freehold, in order to generate good returns.

Hong Kong and China are similarly leasehold most of the time.

That's the situation if you choose to live in an investment villa yourself, but there are other taxes and complications that arise if you want to rent it out.

According to an Australian couple that built a house on land in Bali, the laws governing home-stay or longer-term lease have been ratcheted up by government, including the mandatory Izin Pondok Wisata (or tourist lodgings licence), under considerable pressure from the Balinese hotel lobby.

All property owners who lease out their investment premises must apply for this licence, which can only be obtained by an Indonesian national. Foreigners are required to form an agreement with an Indonesian person who acts as the nominee in obtaining the licence.

Some of the booking agencies, which include home-stay arrangements in their letting inventories, are now the focus of special government attention to confirm that such arrangements are in place.

Drawing up contracts for these forms of investment requires expert legal advice. Some sources have speculated that the laws concerning freehold or leasehold might be relaxed in the future.

However, Peter Johnson, an Australian expat and principal of Austrindo Law Office in Bali, said they saw no changes in the law regarding leases or the ability of foreigners to hold Hak Milik (freehold title) in Indonesia under the new president.

"Regarding the Pondok Wisata licence, this can only be held by an Indonesian citizen and is limited to a building of five rooms and we see no change in the law."

Financial risk

Once the the legal hurdles are cleared, another fundamental question is whether the purchase is a viable investment, as opposed to being a convenient long-term basis for enjoying one's own accommodation in Bali. Assuming that an important consideration is the protection of capital, the most daunting of financial risks in the long term has been the downward slide of the Indonesian rupiah against the Australian dollar.

Ten years ago you were getting Rp.6000 to the Australian dollar. This year the Indonesian currency has sunk to close to Rp.11,000 to the dollar. For an investor who put their life savings into a villa 10 years ago - whatever the capital appreciation that might have occurred in Bali there's obviously a lot of ground to make up to compensate for the currency erosion. 

Looking into the future and trying to forecast how the rupiah will fare against the dollar, given the current geo-political uncertainties, requires a crystal ball in both countries.

Many pundits in Australia think the Aussie dollar is overvalued as it stands. Similarly the effects of Indonesia's new president on the national economy are difficult to gauge, but neither should be overlooked in your risk analysis.

The problem is that various taxes and commissions chip away at what seem like the relatively high gross returns.

If it's not the capital gains so much as the returns on investment that you're concerned with, a close examination of the figures presents a far less rosy picture than the agents might have you believe.

The problem is that various taxes and commissions chip away at what seem like the relatively high gross returns of (say) six to eight per cent. Expatriate Raymond Rutherford, who lives in a Sanur villa he purchased some years ago, said, "with some booking agencies dictating fees as high as 20 per cent, taxation at 20 per cent, and management fees ranging from 20 to 25 per cent, I don't think an Indonesian villa is viable as a rental proposition."

Cultural risk

The cultural risks are the hardest to fully appreciate for visitors who first visit Bali and are beguiled by its benign climate and affable locals.

Longer term, your experiences will depend to a large degree on how well you're able to assimilate into a foreign culture should you wish to become an expat, or how well your long-term relationships will pan out from Australia to Indonesia should you want to manage a foreign property investment remotely.

The fast is that no matter how well you think you assimilate, however well you might learn Indonesian, you will still be identified as a foreigner and therefore should expect to be treated differently to a local.

You will be identified as a foreigner and therefore should expect to be treated differently.

Wirayudha, who is Indonesian herself, sees this in positive terms, arguing that Australia with its continental spread and small population is "a very lonely planet - you live a long way from your neighbour and it's very different when you're in Bali," she says.

"This is why when you come to Bali you find Indonesians warmer.

"We look forward to meeting people - you know the people selling food on the street and things like that, so when they come here they feel like they're welcome.

"You spend all your time in Australia having to scrub your own floors, cook your own food, but in Bali you can sit down and have a meal for just five dollars and get cooking and cleaning much cheaper than in Australia."

An expat owning property, who may be involved in a business or partnership, will also be competing with local interests and can therefore come up against the dark side of Bali's underworld.

At the time of writing, reports in The Sydney Morning Herald and The Age speak of hundreds of cases in which extortion attempts have been made by local "Preman" gangsters against western property owners.

As Michael Bachelard reports in The Dark Side of the Sun, one victim was forced to hand over US$120,000 against his better judgment to such a group who had threatened him with death if he didn't pay up.

You may also be sure that as a foreigner you'll be dealt with harshly if your permits and tax matters aren't completely above board.

The traps connected with property and visa rules require particular attention.

Raymond Rutherford says a situation that can occur is where an expat investor living in Bali on a special retirement visa ignores the requirement that any form of "work" is prohibited.

"People get into trouble because they have not followed the law," he says.

"Special visas are available for some selected countries and for a certain age group (for seniors) and under these visas you aren't allowed to work.

"One of my concerns has been that having two villas might be construed as 'work'."

If people offshore are doing this for an investment as a business, that's okay. But those people who come and outstay the 30 days (tourist visa limit) and invest in villas - then they can be in trouble - and taken to the airport."

Preferential treatment occurs equally in day-to-day living, with many expats warning of police taking sides in minor traffic incidents, whether or not the expat is driving or being driven. In a typical example a source mentioned his car being pulled over and the policeman demanding payment "for speeding" although he wasn't the driver.

Despite the apparent negativity of all these experiences, there are factors such as those referred to by Wirayudha that might cause you to see the benefits of an expat lifestyle.

Who knows what will happen to the dollar against the rupiah in the longer term but with Indonesia in a strong growth phase and Australia generally viewed as having an overvalued currency you might be lucky? Similarly, with the recent treaty established between Australia and Indonesia over security matters, the way in which expats are dealt with by Indonesian officials may become more relaxed.

Bronwen Castor, an Australian investor who has considerable experience of life in Bali, has some advice for Australians contemplating a venture into the Bali property market.

"Be sure of the motives behind such a scheme and if you're doing it purely for the money, invest your cash elsewhere," she said.

"You need to think carefully about this form of investment in the longer term."