Exploring Tokenization of Physical Assets: Real Estate RWA Market Research

Introduction

The concept of tokenization of physical assets ( RWA ) is not a new thing in the cryptocurrency market; as early as 2018, asset tokenization and Security Token Offerings ( STO ) emerged, which were similar to today’s RWA concept. However, due to the immature regulatory framework and the lack of significant advantages in potential returns, these early attempts failed to develop into a mature market segment.

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. Therefore, tokenizing U.S. Treasury bonds into RWA became increasingly attractive to the crypto industry. As a result, some well-known DeFi projects, as well as traditional financial institutions and even some governments, began to explore RWA.

In the past two years, multiple real estate RWA projects have emerged in the market. They aim to expand the real estate investment market in various ways, diversify real estate investment products, and lower the entry barriers for real estate investors. This study conducts a case analysis of such projects to analyze the advantages and disadvantages of the design of real estate RWA and its potential market. Since these projects primarily target North American real estate assets and investors, the related policies, regulations, and market conditions discussed will mainly pertain to the North American real estate market.

Methods of Tokenization in the Real Estate Market

The real estate market is a vast field filled with investment opportunities. Research data from March 2023 shows that the North American listed real estate market is worth up to $1.3 trillion. Meanwhile, the global 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 diverse and flexible real estate investment products, attract a broader range of investors, and increase the liquidity and value of real estate assets. These products mainly take three forms:

1. Real estate ownership decentralization for financing.

2. Specific Area Real Estate Market Index Product.

3. Real estate tokenization as collateral.

In addition, tokenization and blockchain integration enhance the transparency and democratic governance of real estate assets.

If you are familiar with Real Estate Investment Trusts ( REIT ), which are companies that own, operate, or finance income-producing real estate, you will find that REITs and real estate RWAs have similarities in providing certain property 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 rigorous asset review and investment structure under a strict regulatory framework provide a solid blueprint for real estate RWA projects.

In the past two years of project operations regarding real estate RWA, we have gained a clearer understanding of its advantages and disadvantages.

Typically, real estate RWA projects have the above attributes. After深入研究具体案例, 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 adopts a different method of tokenization of the real estate market and is among the most popular in its field. It is worth noting that these are still early projects, and their products have not 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 in the market, dedicated to providing investment in U.S. residential real estate primarily on Gnosis through the Ethereum and Gnosis blockchains (.

RealT acquires residential properties and tokenizes the ownership contracts of these properties through entities according to U.S. regulations. The responsibilities for the management, maintenance, and rent collection of these properties are delegated to third-party management organizations. After deducting fees, the rent generated from specific properties is distributed to their token holders. While RealT oversees the tokenization process, they are legally separate from the companies that hold the real estate assets. According to their website, if the company defaults, token holders retain the option to appoint another company to manage the company holding the ownership contracts of the properties. It is worth noting that they do not require co-investment in the properties they market. Property token holders can receive a share of the property rental income monthly, excluding approximately 2.5% for maintenance reserves and management fees, which are typically around 10% of the value.

Taking this property in Montgomery as an example, the total value of the real estate tokenization is $323,020, with each Token priced at $52.10, 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 expenses, the monthly net profit is $1,978, resulting in an annual income of $23,736. Therefore, each Token receives a distribution of $3.83, with an annualized return of 7.35%.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-c1c5e1d087322a31c0503638bef22e30.webp(

For this property, RealT offers 100% Token, which means RealT does not need to co-invest with clients, maintaining an almost risk-free operating model. The management agency charges 8% of the rental and maintenance fee’s remainder, 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, despite the partial ownership facilitating risk-sharing among investors, it also brings challenges. Problems arise when the financial interest of investors is too small for the management costs of the company to become viable. Lawrence Swinkels’ report explains the conflict of interest between real estate token holders and RealT. RealT chooses management agencies to manage the properties it owns; if RealT has a large ownership stake in the property, it can reduce agency costs; therefore, inefficient management can have a negative impact on them. However, if RealT’s share is too large, it may negatively affect the liquidity of the tokens, and minority shareholders may also become free riders. These owners may expect large shareholders to oversee whether the hired management agencies are financially viable. On the other hand, if RealT’s share is very small, RealT may lack sufficient motivation to choose management agencies or participate in the oversight process, and many investors also find it difficult to effectively supervise the management agencies.

I checked the latest ten tokens sold out on the RealT market and used the relevant blockchain explorer to find the number of holders for each property.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-98de8e550c8f155cd34513c6f18133cf.webp(

As shown in the chart, RealT divides properties into different quantities of Tokens, with each Token priced at around $50. Most properties are located in Detroit, with about 500 Token holders, and the number of holders for two properties exceeds 1,000. Now, combining this with the number of Tokens held by each holder allows us to understand the investment scope of RealT investors.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-51f60a9aeef26de0b7ff4137c0ddf278.webp(

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 targeting small investors to some extent, increasing the liquidity of the real estate market.

According to the transaction data from the RealT wallet ) Gnosis wallet address: 0xE7D97868265078bd5022Bc2622C94dFc1Ef1D402(, RealT has paid approximately $6 million in total rent. The platform fees fluctuate based on maintenance costs, insurance, and taxes, amounting to about 2.5%-3% of the rent, which corresponds to approximately $150,000 to $180,000 in platform revenue over the past two years. However, since RealT does not mandate participation in real estate investments, and if chosen, there are no specific restrictions or guidelines on the level of participation, the income that RealT receives from rental income has not yet been disclosed.

From the perspective of corporate 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 only serves as the operating entity for the RealT project. Additionally, RealT formed 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 simplify legal processes, allowing users to participate in investments in all properties by entering into contracts with one company. Finally, RealT establishes a corresponding series of LLCs for each invested property. As a subsidiary of Real Token LLC, each series LLC owns specific properties and corresponding Tokens. This structure is designed to ensure that financial or legal issues related to one property do not affect the operation of other properties or the parent company under RealT.

‣Parcl

The Parcl protocol is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl is used to gain perpetual exposure to synthetic assets, utilizing an AMM architecture. Parcl introduces Parcl Labs price feeds, which create indices for real estate in specific regions based on sales history. The sales history duration can vary based on the frequency of property transactions. After the indices are created, investors have the opportunity to speculate on property values, enabling them to take long and short positions on real estate prices.

This approach allows Parcl to avoid legal issues, as there is no actual real estate involved 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 investment from some well-known industry investment institutions. Including it in the discussion is reasonable, as it can showcase the diverse possibilities of real estate RWA.

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

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-2d5e54fcb98d7f6a6b8be8bdd09d5971.webp(

Parcl’s products are simplified and developed quickly. Parcl Labs’ price feeds 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 for 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 is collaborating with RobinLand to support loans backed by real estate. RealT offers the option to use tokenized real estate as collateral for loans, but this service is limited to the tokens they issue. Essentially, this service is more akin to token lending products and does not significantly increase the capital liquidity of real estate owners.

Reinno is an abandoned 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. Once approved, Reinno will create a special purpose vehicle ) in Delaware for the transaction, also known as SPV, which is a subsidiary created by the parent company to isolate financial risk. Its legal status as an independent company ensures that its obligations are protected even in the event of the parent company’s bankruptcy. Therefore, special purpose companies are sometimes referred to as bankruptcy-remote entities. In the United States, SPVs are generally the same as LLCs (. Then, Reinno will create smart contracts for the real estate tokens.