Research on Real Estate Projects in Real-World Assets

The concept of real-world assets ( RWA ) is not new in the cryptocurrency market; it first emerged in 2018. At that time, asset tokenization and security token offerings had many similarities to today's RWA. However, due to an incomplete regulatory framework and a lack of significant potential returns, these early attempts failed to develop a mature market size.

In 2022, as US interest rates rose, the yield on US Treasury bonds significantly surpassed the stablecoin lending rates in the crypto industry. As a result, tokenizing US Treasury bonds as RWA assets has become increasingly attractive to the crypto industry. Some mature DeFi projects, as well as traditional financial institutions like Goldman Sachs and JPMorgan Chase, have begun exploring RWA.

In the past two years, a small number of real estate RWA projects have emerged in the market. They aim to expand the real estate investment market, diversify real estate investment products, and lower the barriers to real estate investment. This study will conduct a case analysis 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 discussion will mainly involve relevant policies, regulations, and market conditions of the North American real estate market.

Methods for Tokenizing the Real Estate Market

The real estate market is a vast field full of investment opportunities. Research from March 2023 shows that the North American listed real estate market is valued at $1.3 trillion, while the global listed real estate market is $2.66 trillion.

The core goals of the tokenized real estate market include: creating more diversified and flexible real estate investment products, attracting a broader group of investors, and enhancing the liquidity and value of real estate assets. These products mainly take three forms:

Fragmented real estate ownership financing 1)

2. Specific Area Real Estate Market Index Product

3. real estate tokens for mortgage lending

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 these assets.

Real Estate Investment Trusts ( REIT ) have many similarities with Real World Assets (RWA) 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 operating model. Nevertheless, their rigorous examination of assets, operations, and investment structures within a strict regulatory framework provides a reference framework for real estate RWA projects.

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

Advantages:

• Lower the investment threshold
• Improve liquidity in real estate
• Simplify investment procedures
• Provide diversified investment options

Disadvantages:

• Unclear legal regulation
• Lack of mature operational experience
• The market size is limited
• Insufficient investor protection mechanisms

In-depth research into specific cases reveals that due to differences in management and product methods, each project faces different situations in actual operations.

Case Analysis

This chapter selects three representative Real World Asset (RWA) projects for analysis. It should be noted that these projects are still in the early stages, and their products have not yet undergone long-term and extensive market validation.

RealT

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

RealT purchases residential properties and tokenizes the owned properties in accordance with U.S. regulations. The responsibilities for managing, maintaining, and collecting rent for these properties are delegated to third-party management agencies. After deducting fees, the rental income generated from the properties is distributed to the token holders. RealT is responsible for the tokenization process but is legally separated from the company holding the real estate assets. As stated on its website, if the company defaults, the token holders have the right to designate another company to manage the owned property. Users holding property tokens can receive a monthly share of the rent from the property, with the amount distributed needing to subtract 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 $2,600 in rental income per month. After deducting a total of $622 in operating and management expenses, 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 an almost risk-free model for operation. The management agency takes 8% from the rent and receives the remaining portion from maintenance fees, while the investment platform charges a 2% fee for tokenizing the property, selecting the management agency, and supervising the management. Through this approach, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them for 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 can become unsustainable. Research has explained the conflict of interest between real estate token holders and RealT. RealT chooses management entities to manage the properties it owns; if RealT has a large ownership stake in the properties, they will strive to reduce management costs, as poor management will have a significant negative impact on them. However, if RealT's ownership stake is too large, this will first reduce the liquidity of the tokens, and secondly, the small shareholders of the properties will not fulfill their supervisory responsibilities. All token holders expect major shareholders to oversee whether the hired management entities are efficient and diligent. On the other hand, if RealT's stake is extremely small, RealT may lack sufficient motivation to diligently select management entities and actively participate in supervision, making effective supervision of management entities very difficult for numerous retail investors.

By looking at the ten most recently sold out 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 numbers of tokens to ensure that each token is priced around $50. Most properties are located in Detroit, and there are approximately 500 token holders, with two properties having more than 1,000 holders.

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 has increased liquidity in 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 rental income. The platform fees fluctuate based on maintenance costs, insurance, and taxes, averaging between 2.5% to 3% of the rental income, which amounts to around $150K to $180K in platform revenue over the past two years. However, since RealT is not required to participate in real estate investments, and if it chooses to participate, there are no specific restrictions or guidelines on the level of participation, the profits RealT earns from rental income remain unknown.

From a corporate structure perspective, RealT established Real Token Inc. in Delaware as the core entity of the company. This entity does not own any real estate assets; it merely serves as the operational 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 does not own any real estate assets; its primary purpose is to streamline legal processes, allowing users to invest in all properties by signing a contract with just one company. Finally, RealT established a corresponding series of LLCs for each invested property. As subsidiaries of Real Token LLC, each series LLC owns specific properties and corresponding tokens. This structure is designed to ensure that financial or legal issues of 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 bring real estate-related synthetic assets to market through an AMM architecture. 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 based 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 method avoids getting involved in the legal issues of actual real estate operations because there is no real estate transaction. You might also question whether it really counts as a real estate RWA project, as it does not meet the standards mentioned above. However, it is a relatively popular RWA project that has received investments from many well-known companies, and it is reasonable to include it in discussions about the diversification of real estate RWA products due to its uniqueness.

Parcl's testnet launched on Solana in May 2022, and its TVL currently stands at $16 million. However, after more than a year of operation, Parcl seems to have garnered little attention, with daily trading volume below $10,000 and fewer than 50 daily active users.

Parcl's products are easy to use and upgrade quickly, with Parcl Labs price providers and index market designs being relatively mature. On the operational side, the Parcl team is actively launching Parcl Point, Real Estate Royale, and other user acquisition programs. Despite these advantages and the support of numerous 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) for real estate. Some companies are attempting to support users in tokenizing their properties and using them for mortgage loans. Other companies are collaborating with partners to support property mortgage lending.

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

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 company for them in Delaware. Then, Reinno will create a smart contract for the real estate tokens, which owners can deposit as collateral for the loan and borrow against, with the loan limit based on the value of the tokens.

The second product is mortgage financing. After users purchase real estate with a bank mortgage, they can tokenize the property ownership for financing. The funds obtained are used to repay the bank mortgage, and then the client repays the loan to the protocol at a fixed interest rate.

Reinno's operations are still a centralized and offline model, where customers typically need to visit the office and submit property documents. There are some obvious risks associated with an approach like Reinno's. First, if a borrower chooses to default on the loan, Reinno, as a tokenization service provider rather than a lender, will find it difficult to sue the borrower. Reinno does not actually own the mortgaged property; the loan is essentially provided by users who choose to fund on Reinno. Due to the lack of a direct loan contract between the borrower and the lender, especially in the context of fragmented real estate token financing, there is no comprehensive legal framework to protect these lenders.