Although foreign investment in United States commercial real estate doubled in the 1st half of 2010 compared with 2009, activity is still sluggish, thanks to the slow economy and a lack of trophy properties offered for sale.  Currently, the United Kingdom is the hottest international destination for investment, according to Jones Lang LaSalle research.  So far this year, $7 billion of foreign money has been invested in British properties, compared with just $4.3 billion in U.S. real estate.

“The rise in cross-border transaction volume also shows a real estate return in the major markets, and an encouraging 176 percent increase year over year in the United States, which  had the greatest fall in cross-border investment during the downturn,” said Steve Collins, managing director, Americas, for Jones Lang LaSalle’s International Capital Group.  “Demand is especially robust for well-leased, core-style product in gateway markets such as New York and Washington, D.C., whereas demand remains much weaker for the non-gateway cities markets.”

Another obstacle to foreign ownership of American real estate is the 1986 Foreign Investment in Real Estate Property Tax Act (FIRPTA), which gives the government the ability to tax gains earned when an overseas company sells a property.  Opponents say that law blocks the flow of foreign capital into the United States; an attempt to overhaul FIRPTA this summer failed in Congress.  Representative Joseph Crowley (D-NY) has introduced legislation that will increase the percentage of foreign ownership in publicly traded REITs from five to 10 percent before proceeds are taxed under FIRPTA.  Although the legislation passed the House by a wide margin, the Senate has not yet acted on it.

“It’s certainly not what we hoped for.  It’s really just a start,” said Jim Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE), “It may encourage a little foreign investment, but it’s only going to impact foreign investors who are already investing in REITs, allow them to take a bigger piece of a company.  But there are a lot of countries in the Middle East and Germany that don’t invest in REITs.  They’re direct investors and the new law won’t have any impact on them.”