To boost the real estate investment trust (REIT) market in Indonesia, the Financial Services Authority (Otoritas Jasa Keuangan or "OJK") has issued OJK Regulation No. 19/POJK.04/2016 on Guidelines for Investment Managers and Custodian Banks that Manage Real Estate Investment Funds in the Form of a Collective Investment Contract ("OJK Rule No. 19/2016"). While OJK Rule No. 19/2016 has been in force since 4th April 2016, it was only published on OJK's website in mid-April 2016.

OJK Rule No. 19/2016 is complemented by (i) the enactment of Minister of Finance Regulation No. 200/PMK.03/2015 on the Tax Treatment of Taxpayers and Taxable Entrepreneurs That Use a Certain Collective Investment Contracts Scheme for the Finance Sector ("MOF Regulation No. 200") on 10th November 2015 and (ii) the 11th Economic Policy Package ("11th Package"), which was announced by the Indonesian Coordinating Ministry of Economy on 29th March 2016. MOF Regulation No. 200 eliminates double taxation on REITs, making REITs a more feasible investment because of the tax costs reduction. For further elaboration on MOF Regulation No. 200, please see here. The 11th Package further outlines several policy changes, including lowering the tax rate on the sale of property under a REITs scheme. However, the 11th Package is silent on whether the new central government regulations to be issued as a result of the 11th Package, when issued, will replace MOF Regulation No 200.

The previous Rule No. IX.M.1 under Decision of the Chairman of the Capital Market and Financial Institution Supervisory Agency (Badan Pengawas Pasar Modal dan Lembaga Keuangan or "Bapepam-LK") No. Kep-425/BL/2007 ("Rule IX.M.1") has been effectively replaced since OJK Rule No. 19/2016 came into effect. There are no significant changes between OJK Rule No. 19/2016 and Rule IX.M.1.

We set out below a summary of the changes in the new regulation.

Separation of assets

Rule IX.M.1 merely provides that Investment Managers and Custodian Banks must separate the assets of REITs from their own assets. However, OJK Rule No. 19/2016 specifically includes a clause stipulating that the assets of REITs are not part of the assets belonging to the Investment Manager and Custodian Bank. This addition eliminates any asset ownership uncertainty. 

Debt securities prohibition

While the prohibition to borrow funds by way of issuing debt securities remains the same, OJK Rule No. 19/2016 now sets the maximum percentage value of borrowing funds other than by way of debt securities at 45% of the real estate total asset value which will be purchased (from previously 20%).

Consequently, REITs now have more leniency in borrowing funds compared with the previous regime.

Sanctions

Rule IX.M.1 only provides that Bapepam-LK may impose sanctions on any persons that violate any provisions in the regulation without stipulating the details of the sanctions. OJK Rule No. 19/2016 details the administrative sanctions which OJK can impose on parties that violate (including parties that cause the violation of) the rule and emphasises that these administrative sanctions can be imposed without any particular order:

1. written warning
2. fines
3. limitation of business activities
4. suspension of business activities
5. revocation of business license
6. cancellation of approvals
7. cancellation of registrations

In addition to the above sanctions, OJK Rule No. 19/2016 provides that OJK may also impose "additional administrative sanctions" and/or carry out "certain actions" against violators of OJK Rule No. 19/2016, without further detailing what these "additional administrative sanctions" and "certain actions" are.

Further implementing regulations

There have been no changes in the types of assets that REITs may invest in, i.e. real estate assets (land and buildings over the land, but excluding certain real estate assets, e.g. properties that are under development), assets to real estate (securities of real estate companies that are listed on the Indonesia Stock Exchange and/or issued by real estate companies), and/or cash and cash equivalent. However, we note OJK Rule No. 19/2016 provides that further implementing regulations in the form of OJK Circular Letters will be issued in the future to regulate investments by REITs in these assets.

We will continue to monitor for any developments and provide updates as necessary.

Issues that require further clarity

As usual, it remains to be seen how OJK Rule No. 19/2016 will be implemented in practice. But for now, there are some issues that may require further clarity, including the following:

• As with Rule IX.M.1, OJK Rule No. 19/2016 provides that REITs may use a special purpose company (in the form of an Indonesian limited liability company) ("SPC"), which is established solely for investing in real estate assets. If an SPC is used, the relevant REIT must own at least 99.9% of the issued shares of the SPC. As with Rule IX.M.1, the issue with this provision is that under Law No. 40 of 2007 on Limited Liability Companies (“Company Law”), only individuals and legal entities can hold shares in an Indonesian limited liability company. Considering that a REIT is only a contract, it may not be possible for a REIT to be registered as a shareholder of an SPC under the Company Law. If the Ministry of Law and Human Rights were to allow it, a possible solution is for the investment manager of the REITs to hold the shares of the SPC on behalf of the REITs.
• As with Rule IX.M.1, OJK Rule No. 19/2016 provides that REITs can invest directly in real estate assets (without using an SPC). As with Rule IX.M.1, the issue with this provision is that under Law No. 5 of 1960 on Basic Agrarian Provisions (“Agrarian Law”), only Indonesian individuals and certain legal entities are allowed to hold land titles in Indonesia. Considering that a REIT is only a contract, direct investments by REITs in real estate assets may not be possible under the Agrarian Law. Assuming the Ministry of Agrarian Affairs/National Land Agency were to allow it, a possible alternative (aside from using an SPC) is for the investment manager of the REITs to hold the real estate assets on behalf of the REITs.

Conclusion

As highlighted above, there are no significant changes between OJK Rule No. 19/2016 and Rule IX.M.1. Considering that the purpose of enacting OJK Rule No. 19/2016 is to boost the REIT market in Indonesia, the fact that there are no significant changes between OJK Rule No. 19/2016 and Rule IX.M.1 may be an indication that OJK may be looking to amend other REIT-related regulations that may be outdated.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 22nd April 2016

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Related Topics

Indonesian Regulatory Framework for Real Estate Investment Funds

Minister of Finance Eliminates Double Taxation on Real Estate Investment Trusts

Foreign Investment in Indonesian Real Estate

Useful Documents

OJK Regulation No. 19/POJK.04/2016 (Indonesian)