Investors are showing increased interest in designated ‘opportunity zones’ in the United States.
The 8,700 zones were created as part of the 2017 Tax Cuts and Jobs Act to help distressed areas by deferring capital gains tax on regeneration projects.
Although it’s a new area of real estate investment, a survey by market analysts Preqin has found strong interest from investors with 51% saying they were considering investing in opportunity zone funds in 2019 with a further 12% thinking of doing so long term.
While there are tax advantages for US investors, there are also risks.
“Investors should beware a rush into this nascent industry: for tax incentives to be worthwhile, the underlying investments still need to perform well,” said Tom Carr, Preqin head of real estate. “OZFs by their nature are focusing on assets in distressed areas, giving them a relatively high risk/return profile. If we do see a flood of capital into OZFs, they may face the same or even worse pressures of high valuations and competition for assets.”
At least four out of five investors are looking at OZFs in all regions of the US, but the largest proportions are targeting the West and Southwest (94% each).
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