Exploration of the Real Estate Industry and the RWA Market

The concept of real-world assets ( RWA ) has not only emerged recently in the cryptocurrency market; it has existed at least since 2018, when asset tokenization and security token offerings ( STO ) had similarities to today's RWA concept. However, due to the immature regulatory framework at that time and the lack of significant advantages in potential returns, these early attempts failed to develop a mature market sector.

In 2022, as the United States continued to raise interest rates, the yield on U.S. Treasury bonds significantly exceeded the lending rates of stablecoins in the crypto market. As a result, tokenizing U.S. Treasuries into RWAs became increasingly attractive to the crypto industry. Consequently, well-known DeFi projects such as MakerDAO, Compound, and Aave, along with some traditional financial institutions and governments, began to explore RWAs.

In the past two years, several real estate RWA projects have emerged in the market. They aim to diversify the real estate investment market in multiple ways, enrich real estate investment products, and lower the threshold for real estate investors. This study explores the advantages and disadvantages of the design of real estate RWA and its potential market through case analysis. Since these projects mainly target North American real estate assets and investors, discussions on relevant policies, regulations, and market conditions will primarily focus on 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. A study by Statista in March 2023 showed that the North American publicly listed real estate market is valued at $1.3 trillion, while the global publicly listed real estate market is valued at $2.66 trillion.

The core objective of the tokenization of the real estate market is to achieve one or more of the following goals: to create more diversified and flexible real estate investment products, attract a broader range of investors, and increase the liquidity and value of real estate assets. These products primarily take three forms:

1. Real estate ownership division financing.

2. Specific Area Real Estate Market Index Product.

3. tokenized real estate as collateral.

Moreover, the integration of tokenization and blockchain enhances the transparency and democratic governance of real estate assets.

If you are familiar with Real Estate Investment Trusts ( REIT ), you will know that it is a company that owns, operates, or finances income-producing real estate. REITs provide ordinary investors with investment opportunities similar to mutual funds, allowing investors the chance to earn dividend-based income and total returns, and contribute to the growth of the local real estate market. REITs and real estate RWAs have similarities in providing diversified real estate investment opportunities, effectively lowering the investment threshold and increasing 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 stringent asset review and investment structure within a strict regulatory framework provide a solid blueprint for real estate RWA projects.

In the past two years of operating real estate RWA projects, we have gained a clearer understanding of their advantages and disadvantages.

Typical real estate RWA projects possess the above attributes. After delving into specific cases, I found that due to differences in management and product approaches, each project encounters different situations in actual operations.

Case Study

In this chapter, I have chosen three real estate RWA projects for analysis. Each project employs different methods to tokenize the real estate market and is the most popular in its respective field. It is worth noting that these are still early projects, 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 on the market, focusing on making U.S. residential real estate available for investment primarily on the Gnosis blockchain via Ethereum and Gnosis (.

RealT acquires residential properties and tokenizes entities that hold property contracts in accordance with U.S. regulations. The management, maintenance, and rent collection responsibilities for these properties are delegated to third-party management firms. After deducting expenses, the rent generated from specific properties is distributed to their token holders. Although RealT oversees the tokenization process, they are legally separate from the companies that hold real estate assets. According to their website, if a company defaults, token holders retain the option to appoint another company to manage the company holding the property contracts. It is worth noting that they are not required to co-invest in the properties they bring to market. Property token holders can receive a portion of the rental income from the property each month, excluding about 2.5% for maintenance reserves and management fees, which are typically around 10% of the value.

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

For this property, RealT provides 100% tokenization, which means RealT does not need to co-invest with clients and maintains a nearly risk-free operating model. The management agency charges 8% of the rent and the remaining maintenance fees, while the investment platform only charges 2% for property tokenization, selecting management agencies, and overseeing management. Through this method, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them for the market.

However, while the division of ownership facilitates risk sharing among investors, it also brings challenges. Problems arise when the financial interests of investors are so small that the management costs of the company become unfeasible. A report explains the conflict of interest between real estate token holders and RealT. RealT selects a management entity to manage its owned properties; if RealT has a significant ownership stake in the property, it can reduce agency costs; therefore, inefficient management will negatively impact them. However, if RealT's stake is too large, it could negatively affect the liquidity of the tokens, and small shareholders may also become free riders. These owners may expect that the major shareholders can oversee whether the hired management entity is financially viable. On the other hand, if RealT's stake is very small, RealT may lack sufficient motivation to adequately select a management entity or participate in the oversight process, and many investors may find it difficult to effectively take on the responsibility of overseeing the management entity.

I checked the latest ten tokens sold on the RealT marketplace and used the relevant blockchain explorer to look up the number of holders for each property.

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As shown in the chart, RealT divides properties into different numbers of tokens, so the price of each token is approximately $50. Most properties are located in Detroit, with about 500 token holders, of which two properties have holders exceeding 1,000. Now, combine this with the number of tokens held by each holder to understand the investment range of RealT investors.

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

According to the transaction data from the RealT wallet ) Gnosis wallet address: 0xE7D97868265078bd5022Bc2622C94dFc1Ef1D402(, RealT has paid approximately 6 million dollars in total rent. Platform fees fluctuate based on maintenance costs, insurance, and taxes, amounting to about 2.5%-3% of the rent, which translates to platform revenue of around 150,000 to 180,000 dollars over the past two years. However, since RealT does not need to participate in real estate investments, and if it chooses to invest, there are no specified restrictions or guidelines regarding the extent of its participation, the income RealT receives from rental income has not yet been disclosed.

From the perspective of company structure, RealT established Real Token Inc. in Delaware as the central entity of the company. This entity does not own any real estate assets; it merely serves as the operating entity for the RealT project. Additionally, RealT 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 main purpose is to simplify legal procedures, allowing users to invest in all properties by entering into a contract with a company. Finally, RealT establishes a corresponding Series LLC for each invested property. As a subsidiary of Real Token LLC, each Series LLC owns a specific property and the corresponding tokens. This structure is designed to ensure that financial or legal issues of one property do not affect the operations of other properties or the parent company under RealT.

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) Parcl

The Parcl protocol is a DeFi investment platform that allows users to trade price fluctuations in real estate markets around the world. Parcl is used to obtain perpetual exposure to synthetic assets using the AMM architecture. Parcl introduces the Parcl Labs Price Feed, which creates indices for real estate in specific areas based on sales history. The duration of the sales history can vary depending on the frequency of property transactions. Once the index is created, investors have the opportunity to speculate on real estate values, allowing them to go long or short on real estate prices.

This approach allows Parcl to avoid legal issues, as there is no involvement of actual real estate in the platform's operations. Some may question whether it is truly a real estate RWA project, as it does not meet the aforementioned criteria. However, it is a relatively popular RWA project that has received investments from several industry giants, including Coinbase, Solana Ventures, and DragonFly. Including discussions on the diversification possibilities of real estate RWAs is reasonable.

Parcl's testnet was launched on Solana in May 2022, with a current TVL of $16 million. After more than a year of operation, Parcl does not seem to have attracted much attention, with daily trading volume of less than $10,000 and fewer than 50 daily active users.

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Parcl's products are simplified and developed quickly. Parcl Labs Price Feed and index markets are well-designed and easy to use.

In terms of operations, the Parcl team actively launched 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-key market image, with a small user base and limited trading volume. Perhaps the market is not yet ready to accept real estate index products.

) Reinno

Large cryptocurrency companies like Ripple and MakerDAO are also exploring the possibility of allowing users to tokenize real estate as collateral for loans. Ripple announced in July that their central bank digital currency team is working in this direction. MakerDAO has integrated with RobinLand to support real estate mortgages. RealT offers the option of using tokenized real estate as collateral for loans, although this service is limited to the tokens they issue. Essentially, this service is more akin to a token lending product and does not substantially increase the capital liquidity of real estate owners.

Reinno is an abandoned project that was launched in 2020 and ceased operations in 2022. Although it did not leave much of an imprint 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 for the transaction in Delaware. Then, Reinno will create a smart contract for the real estate tokens, which owners can use as collateral for the loan. The loan limit will be based on