New Exploration of Real-World Assets: Analysis of Real Estate RWA Projects

The concept of Real World Assets (RWA) has a long history in the cryptocurrency market, dating back at least to 2018. The asset tokenization and Security Token Offerings (STO) of that time bear many similarities to today’s RWA concept. However, due to an incomplete regulatory framework and a lack of clear potential return advantages, these early attempts failed to develop into a mature market scale.

In 2022, as U.S. interest rates continued to rise, U.S. Treasury yields significantly surpassed the stablecoin lending rates in the crypto industry. As a result, tokenizing U.S. Treasuries as RWA assets has become increasingly attractive to the crypto sector. Some mature DeFi projects and traditional financial institutions have begun to explore the RWA space.

In the past two years, a small number of real estate RWA projects have emerged in the market. These projects aim to expand the real estate investment market in various ways, enrich real estate investment products, and lower the thresholds for real estate investment. This study will conduct case analyses of these projects, exploring the advantages and disadvantages of real estate RWA design and its potential market. Since these projects are primarily targeted at the North American real estate sector, the relevant policies, regulations, and market conditions discussed will mainly pertain to the North American real estate market.

Methods for Tokenizing the Real Estate Market

The real estate market is a vast field filled with investment opportunities. A study conducted in March 2023 showed that the value of the publicly listed real estate market in North America reached $1.3 trillion, while the global publicly listed real estate market is valued at $2.66 trillion.

The core demand of the tokenized real estate market is to achieve one or more of the following goals: to create more diverse and flexible real estate investment products, to attract a wider range of investors, and to enhance the liquidity and value of real estate assets. The main forms of these products usually have three manifestations:

1. Fragmented real estate ownership financing.
2. Specific Area Real Estate Market Index Product.
3. mortgage lending with real estate tokens.

In addition, the tokenization of real estate on the blockchain has the potential to enhance the transparency of real estate assets and the democratic governance of them.

If you are familiar with Real Estate Investment Trusts (REITs), it is a type of company that holds profitable real estate and manages or finances it. REITs provide investment opportunities similar to mutual funds, allowing ordinary investors to gain real estate investment income and total returns akin to dividends, and promote the growth of the local real estate market. REITs and real estate RWAs have many similarities in providing fragmented property investment opportunities; both effectively lower the investment threshold and enhance the liquidity of real estate assets. However, traditional REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operational model. Nevertheless, their scrutiny of assets, operations, and investment structures within a strict regulatory framework provides a reference framework for real estate RWA projects.

By observing the operation of real estate RWA projects over the past two years, we have gained a clearer understanding of their advantages and disadvantages.

Generally, real estate RWA projects have the aforementioned advantages and disadvantages. However, upon深入研究具体案例时, it is found that due to differences in management and product approaches, each project encounters different actual situations during the operational process.

Case Analysis

This chapter selects three real estate RWA projects for analysis. Each project employs a different approach to tokenize the real estate market and has a certain representativeness in its respective field. It is important to note that these projects are still in the early stages, and their products have not yet undergone long-term and extensive market validation and testing.

RealT

RealT was launched in 2019 and is one of the earliest real estate RWA projects, focusing on tokenizing U.S. residential real estate for retail investors through the Ethereum and Gnosis blockchains (primarily on Gnosis).

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The responsibilities of managing, maintaining, and collecting rent for these properties are entrusted to third-party management agencies. After deducting fees, the rent generated from these properties is distributed to the token holders. Although RealT is responsible for the tokenization process, they are legally separated from the companies holding the real estate assets. As stated on their website, if the company defaults, the token holders have the right to designate another company to manage the held property. However, it is worth noting that the agreement does not require RealT to participate in the investment of the property tokens they bring to market. Users holding property tokens can receive a portion of the rent from the property each month, with the amount needing to be reduced by approximately 2.5% for maintenance reserves and typically around 10% for management fees.

Taking a property in Montgomery as an example, the total value of the real estate tokens is $323,020, with each token priced at $52.10, and a total of 6,200 tokens issued. The property generates a monthly rental income of $2,600. After deducting a total of $622 in operating and management costs, the monthly net profit is $1,978, totaling $23,736 annually. Therefore, each token receives a distribution of $3.83, resulting in an annual profit margin of 7.35%.

For this property, RealT has provided 100% of the tokens to the market, which means that RealT does not need to co-invest with clients and maintains a nearly risk-free model for operation. The management agency receives 8% from the rent and takes the remaining portion from maintenance fees, while the investment platform only charges a 2% fee for tokenizing the property, selecting the management agency, and overseeing management. Through this approach, the RealT team can save a significant amount of management time and focus on finding qualified properties to tokenize in the market.

However, while decentralized ownership helps to spread risk among investors, it also introduces challenges. When an investor's stake is too small, the management costs of the company become too high and unsustainable. A report explains the conflict of interest between real estate token holders and RealT. RealT selects management agencies to manage the properties it owns; if RealT has a large ownership stake in the properties, they will work to reduce management costs because mismanagement will have a significant negative impact on them. However, if RealT's stake is too large, this will first reduce the liquidity of the tokens, and secondly, minority shareholders in the properties will not fulfill their supervisory responsibilities. All token holders expect major shareholders to oversee whether the employed management agency is efficient and diligent. On the other hand, if RealT's stake is very small, RealT may lack sufficient motivation to diligently select management agencies and actively participate in supervision, making it very difficult for numerous retail investors to effectively supervise the management agencies.

By looking at the latest sold-out ten real estate tokens on the RealT market and using relevant blockchain explorers to find out how many holders each property has. RealT divides properties into different amounts of tokens to ensure that the price of each token is around $50. Most properties are located in Detroit, and there are about 500 token holders, with two properties having more than 1,000 holders. Now, let's calculate the investment range of RealT investors based on the number of tokens held by each holder.

Approximately 90% of RealT investors invest less than $500, about 9% of investors invest between $500 and $2,000, and 1% of investors invest more than this amount. This indicates that RealT has successfully created a real estate investment market for retail investors to a certain extent and increased the liquidity of the housing market.

According to the transaction data queried from RealT's wallet address on its main operating network Gnosis, RealT has distributed approximately $6 million in rent. The platform fees fluctuate based on maintenance costs, insurance, and taxes, ranging from about 2.5% to 3% of the rent, which translates to platform revenue of about $150K to $180K over the past two years. However, since RealT is not mandated to participate in real estate investments, and if it chooses to participate, there are no specific restrictions or explanations regarding the level of participation, the profits that RealT gains from rental income remain unknown.

From the perspective of corporate structure, RealT established Real Token Inc. in Delaware as the core entity of the company. This entity does not own any real estate assets; it serves only as the operating entity for the RealT project. Additionally, RealT also established Real Token LLC in Delaware as the parent company of a series of real estate companies. Like Real Token Inc., Real Token LLC (LLC: Limited Liability Company) does not own any real estate assets; its primary purpose is to streamline legal procedures, allowing users to invest in all properties by signing a contract with only one company. Finally, RealT established a corresponding series of LLCs for each invested property. As a subsidiary of Real Token LLC, each series LLC owns a specific property and corresponding tokens. This structure is designed to ensure that financial or legal issues related to one property do not affect other properties or the operations of the parent company under RealT.

Parcl

Parcl is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl is used to market real estate-related synthetic assets through an AMM structure. Parcl has launched Parcl Labs Price Feed to create a specific regional real estate index based on its sales history. The duration of the historical record can vary depending on the trading frequency of the properties. After the index is created, investors have the opportunity to speculate on the price trends of properties, establishing bullish or bearish positions on the regional real estate prices.

This approach allows Parcl to avoid legal issues involved in actual real estate operations, as there are no real property transactions. You might also question whether it truly qualifies as a real estate RWA project, as it does not meet the standards mentioned above. However, it is a relatively popular RWA project, receiving investments from some well-known companies, and its uniqueness justifies its inclusion in discussions about the diversification of real estate RWA products.

Parcl's testnet launched on Solana in May 2022, and its TVL is currently $16 million. However, after more than a year of operation, Parcl seems to have not attracted much attention, with a daily trading volume of less than $10,000 and fewer than 50 daily active users.

Parcl's products are user-friendly and upgrade rapidly, with Parcl Labs price providers and index market designs being relatively mature. In terms of operations, the Parcl team actively rolls out Parcl Point, Real Estate Royale, and other user acquisition programs. Despite these advantages and the support of many well-known investment institutions, Parcl still maintains a relatively low market attention and market share, with a small user base and limited trading volume. This perhaps somewhat proves that the cryptocurrency market is not yet ready to embrace real estate index products.

Reinno

Some large cryptocurrency companies are also exploring products in the direction of Real-World Assets (RWA) in real estate. Some companies have announced that their central bank digital currency teams are attempting to support users in tokenizing real estate and using it for mortgages. There are also companies collaborating with partners to support real estate mortgage lending. RealT also offers the option of using tokenized real estate as loan collateral, but this service is limited to the real estate tokens they issue. Essentially, this service is more similar to a token lending product and does not significantly enhance the capital liquidity of individual real estate owners.

Reinno is a defunct project launched in 2020 and ceased operations in 2022. Although it did not leave much of a mark on the market, it introduced two noteworthy products related to real estate RWA.

The first product is a loan service based on tokenized real estate. When property owners need financing, they can submit property documents to Reinno. Upon approval, Reinno will create a special purpose vehicle (also known as SPV, a subsidiary created by the parent company) in Delaware.