Application of Real World Assets in Blockchain: Focusing on Real Estate Projects

The concept of real-world assets ( RWA ) has a long history in the cryptocurrency market, dating back at least to 2018. At that time, asset tokenization and security token offerings ( STO ) shared many similarities with today’s RWA concept. However, due to inadequate regulation and a lack of significant returns, these early attempts failed to form a mature market scale.

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

In the past two years, a small number of real estate RWA projects have emerged in the market. These projects aim to expand the real estate investment market in various ways, diversify real estate investment products, and lower investment thresholds. This article will conduct case analyses of these projects, exploring the advantages and disadvantages of real estate RWA and its potential market. Since these projects are mainly targeted at the North American real estate market, relevant policies, regulations, and market conditions will primarily pertain to the North American region.

Methods for Tokenizing Real Estate Market

The real estate market contains huge investment opportunities. A Statista study shows that in March 2023, the value of the North American listed real estate market reached $1.3 trillion, while the global listed real estate market was $2.66 trillion.

The core demand of the tokenized real estate market is to achieve one or more of the following goals: to create more diverse and flexible real estate investment products, to attract a broader group of investors, and to enhance the liquidity and value of real estate assets. These products mainly take three forms:

Fragmented real estate ownership financing ).

2. Specific Area Real Estate Market Index Product.

3. Real Estate Token for collateral 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 ) and Real World Assets (RWA) have many similarities in providing fragmented real estate investment opportunities, effectively lowering investment thresholds and enhancing 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 scrutiny of assets, operations, and investment structures within a stringent regulatory framework provides a reference framework for real estate RWA projects.

Through the operational observation of real estate RWA projects over the past two years, we have gained some clear insights into their advantages and disadvantages.

Generally, real estate RWA projects have the above advantages and disadvantages. However, upon a deeper examination of specific cases, it is found that due to differences in management and product approaches, each project encounters different actual situations during the operational process.

Case Analysis

This chapter selects three real estate RWA projects for analysis. Each project uses a different method to tokenize the real estate market and has a certain representativeness in its respective field. It is important to note that these projects are still in the early stages, 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, focusing on tokenizing U.S. residential real estate for retail investors primarily on the Gnosis Blockchain ( through Ethereum and Gnosis ).

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The management, maintenance, and rent collection responsibilities of these properties are entrusted to third-party management agencies. After deducting fees, the rent generated by these properties is distributed to their token holders. While RealT is responsible for the tokenization process, they are legally separated from the companies holding the real estate assets. As stated on their website, if the company defaults, token holders have the right to designate another company to manage the held property. However, it is worth noting that the agreement does not require RealT to participate in the investment of the property tokens they market. Users holding property tokens can receive monthly distributions from the rent of the property, with the amount needing to be reduced by 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 token is $323,020, with a price of $52.10 per token, and 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, totaling $23,736 annually. Therefore, each token receives a distribution of $3.83, resulting in an annual profit rate of 7.35%.

For this property, RealT has provided 100% of the tokens to the market, which means RealT does not need to co-invest with clients and maintains an almost risk-free model for operations. The management institution receives 8% from the rent and takes the remaining portion from the maintenance fees, while the investment platform only charges a 2% fee for tokenizing the property, selecting the management institution, and overseeing management. Through this method, the RealT team can save a significant amount of management time and focus on finding qualified properties to tokenize and bring to 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. Laurens Swinkels’ report explains the conflict of interest between real estate token holders and RealT. RealT chooses a management agency to manage the properties it owns; if RealT has a large ownership stake in the property, they will strive to reduce management costs, as poor management will have a more 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 will not fulfill their supervisory responsibilities. All token holders expect the major shareholders to supervise whether the employed management agency is efficient and diligent. On the other hand, if RealT’s stake is extremely small, RealT may lack sufficient motivation to diligently select management agencies and actively participate in supervision, making it very difficult for numerous retail investors to effectively supervise the management agency.

By examining the latest sold-out ten real estate tokens on the RealT market and using relevant blockchain explorers to find out how many holders each property has. As you can see in the chart, RealT disperses properties into different amounts of tokens to ensure that each token is priced around $50. Most properties are located in Detroit, and there are about 500 token holders, with two properties having over 1,000 holders. Now, let’s calculate the investment range of RealT investors by combining the number of tokens held by each holder.

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 some extent and increased the liquidity of 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 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 investments, and if it chooses to participate, there are no specific limits or descriptions on the level of participation, the profits RealT earns from rental income remain unknown.

From the perspective of company structure, RealT established Real Token Inc. in Delaware as the core entity of the company. This entity does not own any real estate assets; it serves solely as the operating entity of 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(LLC: Limited Liability Company) does not own any real estate assets; its main purpose is to simplify legal procedures, allowing users to invest in all properties by signing contracts with just one company. Finally, RealT established corresponding series 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 the financial or legal issues of one property do not affect the operations of other properties or 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 market real estate-related synthetic assets through an AMM architecture. Parcl has launched Parcl Labs Price Feed to create specific regional real estate indices based on its sales history. The duration of the historical record can vary depending on the transaction frequency of the properties. After the index is created, investors have the opportunity to speculate on the price trends of the properties, establishing bullish or bearish positions on the regional real estate prices.

This approach, due to the absence of real property transactions, allows Parcl to avoid legal issues involved in actual real estate operations. You might also 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 investment from many well-known companies, and its uniqueness makes it reasonable to include it in discussions about the diversification of real estate RWA products.

Parcl’s testnet was 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 not attracted much attention, with a daily trading volume of less than $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 design being relatively mature. In terms of operations, the Parcl team is actively launching Parcl Point, Real Estate Royale, and other user acquisition programs. Despite these advantages and support from many 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 proves to some extent 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 estate RWA. Some companies have announced that their central bank digital currency teams are attempting to support users in tokenizing properties and using them for mortgages. There are also companies partnering to support real estate mortgage lending. RealT also offers the option of using tokenized real estate as loan collateral, but this service is limited to 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 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 loans and borrow against, with the loan limit based on the token value.

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