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Opportunity zone funds becoming 'an emerging trend' in US property market

The newly introduced opportunity zone fund market is starting to gain traction among property investors in the U.S., with such funds identified as an "emerging trend" in the real estate sector, according to the latest data from Preqin.

Some 8,700 opportunity zones, or distressed areas in which capital gains tax on regeneration projects can be deferred, were created with the federal tax overhaul in 2017.

A Preqin survey showed that 51% of respondents were contemplating investing in opportunity zone funds in 2019, while a further 12% are interested in the longer term. As of the end of 2018, only 8% of the investors surveyed invested in the funds.

According to the survey results, 78% are primarily looking to focus on opportunistic and value-added real estate strategies, while 49% are looking to target core strategies. Additionally, 94% of the respondents are eyeing the West and Southwest regions, while 81% are targeting diversified property investments, as well as residential, industrial and office assets.

At present, there are 62 opportunity zone funds in the market that are eyeing approximately $15.9 billion in investor commitments. Almost 70% of the funds are managed by emerging managers, while the rest are handled by established managers. The vehicles are looking to invest 41% of their capital nationally, with a significant proportion injected into the West, Northeast and Southeast regions.

"Due to the uncertainty surrounding unfinished regulations, as well as the risks associated with investing in distressed regions, the survey found that LPs are wary of investing in opportunity zones, with 92% of surveyed investors not currently invested in [opportunity zone funds]," Preqin said, noting that the results are based on a January survey of 51 real estate institutional investors.