The British government is facing a $40 million tussle with the governor of Jakarta over plans to sell the site of the former U.K. embassy, which occupies a premium plot in the heart of the Indonesian capital.
British diplomats moved to new, bigger premises in the city in June and the Foreign and Commonwealth Office had hoped for a windfall from the old embassy, which U.K. officials believe is worth about $40 million to developers.
(Read more: Protest planned at Australian embassy in Jakarta)
But the plan risks being derailed by Joko Widodo, the Jakarta governor and a front-runner for the Indonesian presidency, who wants to turn the site into a public park.
"The Jakarta government has us over a barrel because it controls the permitting for construction," said one U.K. official in Jakarta. "If they let it be known they won't allow an office tower or apartment building to be built there, we won't be able to sell it for a good price."
The 4,500 square-meter plot occupies a prime location alongside Jakarta's top hotels, shopping malls and offices at the Hotel Indonesia traffic circle. The planned sale is part of a broader FCO program to offload £240 million of U.K. properties around the world by 2015 to help cope with budget cuts and fund the opening of new missions in emerging markets.
Basuki Tjahaja Purnama, Jakarta's deputy governor, said the city government would conduct an independent appraisal to assess the market value of the former embassy plot.
"We want to build a park there, so people will have an open green space," he said, while declining to say how much the government was willing to pay.
The Jakarta administration's ability to pay a big sum has been hampered by the collapse of the rupiah, which in 2013 has fallen from 9,800 to the dollar to almost 12,000.
Given the political sensitivities involved, some in the FCO believe it would be best to negotiate a sale directly with the Jakarta governor, who is leading opinion polls ahead of next year's presidential election.
But Treasury rules would usually require the FCO to run an open tender process. "If there is an auction, there will definitely be a lot of interest in the plot from the leading Indonesian tycoons, who can afford to pay more than the Jakarta government," said one investment banker in Jakarta. "But the question is: will the Jakarta governor allow them to build a big office tower or hotel?"
David Cheadle, managing director of the Indonesia office of property brokers Cushman & Wakefield, said that such a well-located plot could be "extremely valuable" given that land prices have risen by an average of 30 percent a year over the past three years.
In May, Pacific Century Premium Developments, a Hong Kong property group, paid $184 million for a parcel of land in central Jakarta that is just over double the size of the former U.K. embassy.
But Mr Cheadle warned it was hard to extrapolate directly from this given the uncertainty over planning consent and lack of clear pricing information in a country with no land registry.
(Read more: Indonesia's rate hike best for the medium term)
The FCO said it intended to dispose of its former Jakarta embassy "in due course" and vowed to "get the best deal for the taxpayer".