By Rémy Jacobson, Co-Founder at RealT
Promising or penurious?
Opportunity Zones (OZs), as the name suggests, are areas expected to experience huge growth and offer significant potential for real estate investment, as certified by the US Department of the Treasury who also predict that $100 billion capital investment will come from OZs in 2019. Considered promising locations for private investment, OZs are typically characterized by capital gains tax incentives, low income census, and economic distress. Beneficial to both investors and residents alike, there are currently qualified OZs in all 50 states.
A recent study by Zillow found that home sale prices in OZs have skyrocketed in the last year, with some neighborhoods seeing surges of as much as 20%. So why aren’t investors capitalizing on these investment opportunities? More recent research on sentiment around private equity in OZs revealed that a significant proportion of investors are wary of dipping their toe in the water.
Bluster around regions promoted as guaranteed locations for dramatic growth has damaged the reputation of OZs in the eyes of investors, now wary of the inherent risks of investing in areas that may lack viability and perceived social impact. Regulatory uncertainty for investing in such distressed neighborhoods also scares off the majority of investors. The current status quo is ambiguous and concrete guidelines from the IRS and Treasury Department have been slow to emerge. While some investors will miss the boat, hoping for a swankier one to come along or deterred by regulatory hurdles, development in these zones can accelerate rapidly once they succeed in attracting capital investment.
Opportunity Zone: Exhibit A
Take Detroit, MI as an example. Despite efforts to revitalize the Detroit economy over recent years, little progress was made in stimulating private investment. The launch of the federal OZ program made a significant difference in encouraging developers to consider allocated regions for residential, commercial and business development. Increasing the appeal of Detroit for equity investment is now expected to enhance the central urban area, larger neighborhood-based projects, and industrial development.
Fiat Chrysler recently invested $4.5B in Michigan plants, creating thousands of jobs in Detroit while Forbes announced that Detroit will host its 30 Under 30 Summit for the next three consecutive years. These two major organizations are among some of the corporations who have recognized the opportunity in the city of Detroit and are working to revitalize the infrastructure, fuel economic growth and spur job creation.
With the influx of investment into the state, the real estate market is set to benefit and house prices expected to rise, as has happened in OZs around the country. From Brooklyn, NY to rural Wyoming, there are vast opportunities for investors. However, the first wave of ventures into OZs is targeting areas with “Smart Growth Potential” based on walkability, job density, housing diversity and distance to central business districts such as Portland, Oregon and Oakland, California.
Real Estate Dilemma
Traditional real estate investment is inherently restrictive in terms of minimum investment, archaic regulation and chronic illiquidity and is not helped by the OZ program.
Aside from regulatory uncertainty, means of investing in OZs are limited to Opportunity Zone Funds (OZFs). For the real estate sector, this requires investment in construction of new buildings and renovating existing, abandoned buildings. While the initial set of OZs was designated exactly a year ago, the nascence of the program means that the majority of investments are untested and the OZFs, still evolving and in the absence of competition, can demand high fees.
While some OZFs require a minimum investment of $25,000, typically the threshold is much higher. This minimum amount eliminates a huge pool of potential investors from participating in the opportunity and reduces the amount of capital going into these distressed areas.
The Tokenization Approach
The benefits of asset tokenization most clearly apply to asset classes that are typically considered illiquid and can benefit from improved transparency, efficiencies, and lower minimum investments. The real estate market is primed for tokenization and OZs could offer a great opportunity for prosperity. Enabling fractional ownership in real estate, tokenization also enables investors to start small and incrementally increase their investment. Rather than requiring very large investments, or tying up money for extended periods of time, tokenization permits investment in whatever asset is of interest and allow tokens to be traded at the investor’s discretion.
So instead of sitting back and watching the big banks, real estate firms and wealth advisors dominate, it’s now time to take back control of your investment autonomy with real estate tokenization.