Real Estate Real World Assets ( RWA ) Project Research

Real-world assets are not a new concept in the cryptocurrency market; they emerged as early as 2018. The asset tokenization and security token issuance at that time had many similarities with today's RWA concept. However, due to inadequate regulation and a lack of clear return advantages, these early attempts failed to mature.

In 2022, as U.S. interest rates increased, the yield on government bonds significantly exceeded the lending rates of stablecoins in the crypto industry. Therefore, tokenizing U.S. government bonds as RWA assets has become more attractive to the crypto industry. Some mature DeFi projects and traditional financial institutions have begun to explore RWA.

In the past two years, a small number of real estate RWA projects have emerged, aiming to expand the real estate investment market, diversify investment products, and lower the investment threshold. This study will conduct a case analysis of these projects, exploring the advantages and disadvantages of real estate RWA design and the potential market. The discussions are mainly related to the North American real estate market.

Methods for Tokenizing the Real Estate Market

The real estate market contains immense investment opportunities. Data from March 2023 shows that the market value of publicly listed real estate in North America reached $1.3 trillion, while the global publicly listed real estate market is valued at $2.66 trillion.

The core demands of the tokenized real estate market include: creating more diversified and flexible investment products, attracting a broader range of investors, and increasing asset liquidity and value. The main forms of manifestation include:

1. Fractional ownership financing of real estate
2. Specific Area Real Estate Index Product
3. Real Estate Token Mortgage Lending

Tokenization of real estate on the blockchain may also enhance asset transparency and governance democracy.

Real Estate Investment Trusts ( REIT ) are similar to Real World Assets (RWA) in providing fragmented investment opportunities, lowering investment barriers, and enhancing asset liquidity. However, traditional REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operational model. Nevertheless, the asset review, operation, and investment structure of REITs provide a reference framework for real estate RWA projects.

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

Advantages:

• Lower the investment threshold
• Enhance asset liquidity
• Enhance asset value and yield
• Simplify cross-border investment
• Enhance transparency

Disadvantages:

• Regulatory ambiguity
• Legal Risks
• High operating costs
• Technical Risk
• Liquidity Risk

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

Case Analysis

This chapter selects three representative real estate RWA projects for analysis. It should be noted that these projects are still in the early stages, and the products have not yet undergone long-term broad market validation.

RealT

RealT was launched in 2019 and is one of the earlier real estate RWA projects, focusing on tokenizing U.S. residential properties for retail investors through Ethereum and Gnosis chains.

RealT purchases real estate and tokenizes it in accordance with the law. Property management, maintenance, and rent collection are entrusted to third-party institutions. After deducting expenses, rent is distributed to token holders. RealT is responsible for the tokenization process but is legally insulated from the company holding the real estate assets. If the company defaults, token holders can appoint another company to manage the property. It is worth noting that the agreement does not mandate RealT to invest in the real estate tokens it launches. Users holding tokens can receive monthly rent distributions, subject to a deduction of approximately 2.5% for maintenance reserves and a 10% management fee.

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

RealT provides 100% tokens to the market without requiring co-investment from clients, maintaining an almost risk-free model. The management institution takes 8% from the rent and the remaining part from maintenance fees, while the investment platform only charges a 2% fee for tokenization, selecting management institutions, and supervision. This allows the RealT team to focus on finding qualified properties and tokenizing them for listing.

However, while decentralized ownership helps to mitigate risks, it also brings challenges. When investors hold a very small share, the management costs of the company may become unsustainable. There may be conflicts of interest between RealT and the token holders. If RealT holds a large share of the property, it will strive to reduce management costs; however, having too much stake can decrease token liquidity, and minority shareholders may not fulfill their supervisory responsibilities. On the other hand, if RealT holds a very small stake, it may lack the motivation to select and supervise the management agency, making it difficult for retail investors to effectively supervise.

Analyzing the latest sold-out ten real estate tokens from RealT, it is found that most properties are located in Detroit, with about 500 token holders, and two properties have more than 1,000 holders. 90% of investors invested less than $500, 9% invested between $500 and $2,000, and 1% invested more than this amount. This indicates that RealT has successfully created a real estate investment market for retail investors to some extent, increasing the liquidity of the housing market.

According to the transaction data of wallet addresses on Gnosis where RealT mainly operates, approximately $6 million in rent has been distributed. The platform fee is about 2.5%-3% of the rent, with an average income of around $150K to $180K over the past two years. However, since RealT is not mandated to participate in real estate investment, the profits it derives from rental income are unknown.

From the company structure perspective, RealT established Real Token Inc. in Delaware as the core operating entity, which does not own real estate assets. Real Token LLC, as the parent company of the real estate company, also does not own assets, primarily to simplify legal procedures. Each investment property establishes a corresponding series LLC, owning specific properties and tokens. This structure ensures that issues with a single property do not affect other properties or the parent company's operations.

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 structure to make real estate-related synthetic assets available to the market. Parcl has launched specific regional real estate indices based on sales history. Investors can speculate on the trends of housing prices.

This approach avoids the legal issues associated with actual real estate transactions. Although it does not fully comply with RWA standards, Parcl has received investments from many well-known companies, making it worth noting when discussing the diversification of real estate RWA products.

The Parcl testnet was 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 garnered little attention, with a daily trading volume of less than 10,000 dollars and fewer than 50 daily active users.

The Parcl product is user-friendly and upgraded quickly, with a relatively mature design for price providers and index markets. In terms of operations, the Parcl team actively launches various user acquisition programs. Despite these advantages and support from well-known investment institutions, Parcl still maintains a relatively low level of 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.

Reinno

Some large cryptocurrency companies are also exploring real estate RWA products. Ripple announced attempts to support users in tokenizing properties and securing mortgages. MakerDAO is collaborating with Robinland to support property-backed lending. RealT also offers the option to use its issued property tokens as loan collateral.

Reinno was 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 is a loan service based on tokenized real estate. Property owners submit documents to Reinno, and upon approval, a special purpose vehicle company is created in Delaware. Reinno creates smart contracts for the tokenized property, and owners can use the tokens as collateral for loans.

The second method is mortgage financing, where users purchase real estate using bank mortgages and can tokenize the ownership for financing. The funds obtained are used to repay the bank mortgage, and the client then repays this loan to the protocol at a fixed interest rate.

Reinno adopts a centralized offline model, where customers need to submit property documents. This method carries significant risks:

1. If the borrower defaults, Reinno, as a tokenized service provider rather than a lender, finds it difficult to sue the borrower.
2. The lack of a direct contract between the lending and borrowing parties, especially in the context of fragmented property token financing, results in an absence of a comprehensive legal framework to protect lenders.
3. If the property owner sells the house or stops repaying the bank after borrowing, it may lead to the transfer of ownership, making it difficult for Reinno to prevent this "double spending" behavior.

These risks could be one of the reasons for the project ceasing operations. In the future, the real estate RWA needs a more mature legal framework to address these issues.

Conclusion

Real Estate RWA is a relatively emerging concept, and a clear market size or leading projects have not yet been established. Currently, the scale of operating projects and user base is relatively small. This field requires strict compliance operations and a mature legal framework for regulation. Some projects adopt risk-isolated corporate structures or choose real estate-related financial products as investment targets to reduce operational risks. However, legislative progress and operational compliance are indispensable to fully realize the potential of Real Estate RWA.

In terms of legislation, there is currently no clear and unified framework for real estate RWA. Different agencies in the United States have differing classifications of tokens, lacking international regulatory references. This leads to unclear rules and a chaotic process, threatening potential investors and jeopardizing the long-term viability of property tokenization.

Despite the chaotic regulatory situation, many well-known financial and cryptocurrency companies are still trying real estate RWA, with a small number of projects having initially proven the feasibility of the products. As an important sector in financial investment, it is believed that with the improvement of the relevant legal framework, real estate RWA will usher in rapid development.