Real Estate RWA: The Collision of Blockchain and Bricks

Real world assets ( RWA ) are not a new concept in the cryptocurrency market; they have existed since 2018, when asset tokenization and Security Token Offerings ( STO ) had many similarities with today's RWA. However, due to inadequate regulation and a lack of significant return advantages, these early attempts failed to mature.

In 2022, with the increase in US interest rates, the yield on US Treasury bonds significantly exceeded the borrowing rates of crypto stablecoins. Tokenizing US Treasury bonds as RWA assets is becoming increasingly attractive to the crypto industry. Mature DeFi projects and traditional financial institutions are beginning to explore RWA.

In the past two years, some real estate RWA projects have emerged in the market. They aim to expand the real estate investment market, diversify investment products, and lower investment thresholds. This article will analyze the design advantages and disadvantages of these projects and their potential market. The discussion will mainly involve the policies, regulations, and market conditions of the North American real estate market.

Tokenized Real Estate Market Methods

The real estate market presents huge opportunities. A Statista study in March 2023 showed that the market value of publicly listed real estate in North America is $1.3 trillion, and globally it is $2.66 trillion.

The core demand of the tokenized real estate market is: to create more diversified and flexible investment products, attract a broader range of investors, and enhance asset liquidity and value. The main forms of expression are:

1. Fragmented Property Ownership Financing
2. Specific Area Real Estate Index Product
3. Real Estate Token Collateral Loan

In addition, the tokenization of real estate on the blockchain is expected to enhance asset transparency and governance democracy.

Real Estate Investment Trusts ( REIT ) are similar to Real World Assets (RWA) in providing fragmented investment opportunities, reducing investment thresholds and enhancing liquidity. However, REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operational model. Nevertheless, the asset review, operations, and investment structure under its strict regulatory framework provide a reference framework for Real World Asset (RWA) projects.

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

Advantages:

• Lower the investment threshold
• Improve asset liquidity
• Diversified Investment Portfolio
• Simplify the real estate investment process

Disadvantages:

• Regulatory Uncertainty
• Legal risks
• High operating costs
• Manage Complexity

Specific projects encounter different situations in actual operations due to varying management and product approaches.

Case Analysis

The following selects three representative RWA projects in real estate for analysis. These projects use different methods to tokenize the real estate market and are representative in their respective fields. It should be noted that they are still in the early stages and the products have not undergone long-term extensive market validation and testing.

RealT

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

RealT purchases residential properties and legally tokenizes the held properties. Property management, maintenance, and rent collection are entrusted to third-party institutions. After deducting fees, the rental income is distributed to the token holders. RealT is responsible for the tokenization process but is legally separated from the company that holds the property assets. As stated on its website, if the company defaults, token holders have the right to appoint another company to manage the property. It is important to note that the agreement does not require RealT to participate in the investment of the property tokens it markets. Users who hold property tokens can receive a monthly share of the rental income for the property, after deducting approximately 2.5% for maintenance reserves and an average of about 10% for management fees.

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Taking a property in Montgomery as an example, the total value of the property tokens is 323,020 USD, with each token priced at 52.10 USD, and a total of 6,200 tokens issued. The monthly rental income for the property is 2,600 USD. After deducting a total of 622 USD in operating and management expenses, the monthly net profit is 1,978 USD, totaling 23,736 USD per year. Each token receives a distribution of 3.83 USD, resulting in an annual profit rate of 7.35%.

For this property, RealT offers 100% tokens to the market, meaning that RealT does not need to co-invest with clients, maintaining an almost risk-free operating model. The management agency takes 8% from the rent and the remainder from maintenance fees, while the investment platform only charges a 2% fee for tokenizing the property, selecting the management agency, and supervising management. This approach allows the RealT team to save a significant amount of management time, focusing on finding qualified properties and tokenizing them for listing.

However, while decentralized ownership helps to disperse investor risk, it also brings challenges. When investors hold too small a share, the management costs of the company may become too high and unsustainable. RealT chooses to have a management agency manage properties; if RealT has a large ownership stake in a property, they will strive to reduce management costs, as poor management will significantly impact them. However, if RealT's ownership stake is too large, it will reduce the liquidity of the tokens, and small shareholders will not fulfill their supervisory responsibilities. All token holders expect the major shareholders to supervise whether the management agency is efficient and diligent. On the other hand, if RealT holds a very small stake, they may lack sufficient motivation to select management agencies and actively supervise, making effective supervision of management agencies difficult for numerous retail investors.

Check the latest sold-out ten real estate tokens in the RealT market, and find out the number of holders for each property using the Blockchain browser. RealT divides properties into different numbers of tokens, ensuring that each token is priced at around $50. Most properties are located in Detroit, with about 500 token holders, and two properties have more than 1,000 holders. Calculate the investment range of RealT investors by combining the number of tokens held by each holder.

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

According to the transaction data of the main operational network wallet address of RealT on Gnosis, RealT has distributed approximately $6 million in rental income. The platform fees fluctuate based on maintenance costs, insurance, and taxes, approximately 2.5%-3% of the rent, which amounts to about $150K to $180K in platform revenue over the past two years. However, since RealT is not mandated to participate in real estate investment, and there are no specific restrictions or explanations for the level of participation, the profits obtained from rental income remain unknown.

From a corporate structure perspective, RealT established Real Token Inc. in Delaware as the core entity, which does not own real estate assets and serves only as the project operating entity. In addition, RealT also established Real Token LLC as the parent company of the real estate company. Similar to Real Token Inc., Real Token LLC does not own property assets; its main purpose is to simplify legal procedures, allowing users to invest in all properties by signing a contract with just one company. Finally, RealT establishes a corresponding series of LLCs for each investment 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 parent company operations under RealT.

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) Parcl

Parcl is a DeFi investment platform that allows users to trade on the price fluctuations of the global real estate market. Parcl utilizes an AMM architecture to bring real estate-related synthetic assets to market. Parcl launched Parcl Labs Price Feed, which creates a specific regional real estate index based on sales history. The duration of the historical data can vary depending on the frequency of property transactions. After the index is created, investors can speculate on real estate price trends and establish bullish or bearish positions.

This approach, as it does not involve actual real estate transactions, allows Parcl to avoid legal issues in the operation of actual real estate. Some may question whether it truly qualifies as a real estate RWA project, as it does not meet the aforementioned standards. However, it is a relatively popular RWA project, receiving investments from well-known companies such as Coinbase, Solana Ventures, and DragonFly, and due to its uniqueness, it is worth including in discussions on the diversification of real estate RWA products.

The Parcl testnet launched on Solana in May 2022, with a current TVL of 16 million dollars. However, after more than a year of operation, Parcl seems to have not garnered much attention, with a daily trading volume of less than 10,000 dollars and fewer than 50 active users per day.

Parcl products are user-friendly and upgrade rapidly, and the price providers and index market design of Parcl Labs are relatively mature. On the operational side, the Parcl team actively launches user acquisition programs such as Parcl Point and Real Estate Royale. Despite these advantages and the support of many well-known investment institutions, Parcl still maintains a relatively low market attention and share, with a small user base and limited trading volume. This may indicate that the cryptocurrency market is not yet ready to embrace real estate index products.

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) Reinno

Large cryptocurrency companies such as Ripple and MakerDAO are also exploring products in the direction of real-world assets (RWA) in real estate. In July, Ripple announced that its central bank digital currency team is trying to support users in tokenizing real estate and obtaining mortgages. MakerDAO is also collaborating with Robinland to support real estate mortgage lending. RealT also offers the option of using tokenized real estate as loan collateral, but only for the real estate tokens they issue. Essentially, this service is more similar to token lending products and does not significantly enhance the capital liquidity of individual property owners.

Reinno is a 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 real estate RWA-related products.

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 ###SPV( in Delaware for them. Then, Reinno will create a smart contract for the tokenization of the property, allowing owners to deposit the tokens as collateral for loans, with the loan limit based on the value of the tokens.

The second product is mortgage financing, where users can tokenize the ownership of the property after purchasing it with a bank mortgage. The funds obtained are used to repay the bank mortgage, and then the client repays the loan to the agreement at a fixed interest rate.

Reinno's operation remains a centralized offline model, where customers typically need to visit the office to submit property documents. This method has obvious risks. First, if a borrower chooses to default and stop repaying the loan, Reinno, as a tokenized service provider rather than a lender, finds 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. There is a lack of direct loan contracts between borrowers and lenders, especially in the context of fragmented property token financing, and there is no comprehensive legal framework to protect these lenders. Reinno has not provided detailed measures to mitigate such default risks. Second, if a property owner borrows money and then decides to sell the house or stops repaying the mortgage to the bank after completing mortgage financing on Reinno, this act of transferring the property title cannot be effectively prevented by Reinno, leading to a "double spending" of the property's value by the lender. These obvious risks could be one of the reasons for the project's cessation of operations, and future real estate RWA will require a more mature legal framework to address these issues.

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Conclusion

Real estate RWA is a relatively emerging concept, with no established clear market size or leading projects yet. Currently, operating projects in this field are relatively small in terms of market size and user base. This area requires strict compliance operations and a mature legal framework for regulation. Some projects adopt a risk isolation company structure or choose real estate-related financial products as investment targets to reduce operational risks. However, to fully realize the maximum potential of real estate RWA—buying, selling properties, and mortgage loans—legislative progress and operational compliance are indispensable.

In terms of legislation, the real estate RWA has not yet established a clear and consistent framework. Various regulatory agencies in the United States have differing classifications for tokens.