Real Estate Physical Assets: New Opportunities and Challenges in the RWA Market

Physical assets ( RWA ) are not a new concept in the cryptocurrency market, having emerged as early as 2018. The asset tokenization and security token offering ( STO ) of that time share many similarities with today's RWA concept. However, due to inadequate regulation and a lack of significant yield advantages, 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. Therefore, tokenizing US Treasury bonds as RWA assets has become increasingly attractive to the cryptocurrency 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 in the market. They aim to expand the real estate investment market, diversify investment products, and lower entry barriers. This article will conduct case analyses of these projects, exploring the advantages and disadvantages of real estate RWA design and the potential market. Since these projects primarily target North American real estate, the discussion will mainly involve relevant policies, regulations, and conditions in the North American market.

Methods of Tokenizing the Real Estate Market

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

The core appeal of the tokenized real estate market is to achieve one or more of the following goals: to create more diversified 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 are typically manifested in three main forms:

1. Fragmented real estate ownership financing.

2. Specific Area Real Estate Market Index Product.

3. Mortgage lending with real estate tokens.

In addition, the tokenization of real estate on the blockchain also has the potential to enhance the transparency and democratic governance of real estate assets.

Real Estate Investment Trusts ( REIT ) is a type of company that holds profitable real estate and manages or finances it. REITs provide investment opportunities similar to mutual funds, allowing ordinary investors to gain returns from real estate investments and promote the development of the local real estate market. REITs and Real Estate RWAs share many similarities in providing fragmented property investment opportunities, effectively lowering the investment threshold and enhancing the liquidity of real estate assets. However, traditional REITs typically do not offer investors management opportunities or ownership, maintaining a centralized operating model. Nevertheless, their strict regulatory framework for asset scrutiny, operations, and investment structure provides a reference framework for real estate RWA projects.

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

Generally, real estate RWA projects have the above advantages and disadvantages. However, when studying specific cases in depth, it is found that due to differences in management and product approaches, each project encounters different actual situations in operation.

Case Analysis

This chapter selects three real estate RWA projects for analysis. Each project uses different methods to tokenize the real estate market and is representative in its respective field. It should be noted that these projects are still in the early stages, and their 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 real estate in the United States for retail investors primarily on Gnosis via the Ethereum and Gnosis blockchains (.

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The responsibilities for management, maintenance, and rent collection of these properties are delegated to third-party management agencies. After deducting fees, the rental income generated by the properties is distributed to the token holders. While RealT is responsible for the tokenization process, it is legally separated from the company holding the real estate assets. As stated on its website, if the company defaults, the token holders have the right to appoint another company to manage the held property. However, the agreement does not mandate RealT's involvement in the investment of the property tokens they bring to market. Users holding property tokens can receive a share of the rental income from the property each month, with the amount distributed needing to be reduced by approximately 2.5% for maintenance reserves and typically around 10% for management fees.

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Taking a property in Montgomery as an example, the total value of the real estate tokens is $323,020, with each token priced at $52.10, a total of 6,200 tokens issued. The property generates $2,600 in rental income per month. 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 offers 100% tokens to the market, which means RealT does not need to co-invest with clients, maintaining an almost risk-free model operation. The management institution receives 8% from the rent and takes the remainder from maintenance fees, while the investment platform only charges a 2% fee for tokenizing the property, selecting the management institution, and supervising management. Through this method, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them in the market.

However, while decentralized ownership helps 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. A report explains the conflict of interest between real estate token holders and RealT. RealT chooses to manage its owned properties through a management institution; if RealT has a significant ownership stake in a property, they will strive to reduce management costs, as poor management will have a significant negative impact on them. However, if RealT holds too large a stake, it will first reduce the liquidity of the tokens, and secondly, small shareholders of the property will not fulfill their supervisory responsibilities. All token holders expect major shareholders to oversee whether the hired management institution is efficient and diligent. On the other hand, if RealT's stake is extremely small, RealT may lack sufficient motivation to diligently select management institutions and actively participate in supervision, making effective supervision of management institutions very difficult for many retail investors.

Check the latest ten real estate tokens sold out on the RealT market and use the relevant blockchain explorer to find out how many holders each property has. As shown in the chart, RealT divides 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 more than 1,000 holders. Now, combine the number of tokens held by each holder to calculate the investment range of RealT investors.

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About 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 has increased liquidity in 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 dollars in rent. The platform fee fluctuates based on maintenance costs, insurance, and taxes, ranging from about 2.5% to 3% of the rent, which translates to around 150K to 180K dollars 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 guidelines regarding the extent of participation, the profits RealT derives from rental income remain unknown.

From a corporate structure perspective, RealT has 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 for the RealT project. Additionally, RealT has 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 main purpose is to simplify legal procedures, allowing users to invest in all properties by signing a contract with just one company. Finally, RealT has established a corresponding series of LLCs for each invested property. As subsidiaries of Real Token LLC, each series LLC owns a specific property and corresponding tokens. This structure is designed to ensure that financial or legal issues related to one property do not affect other properties or the parent company's operations under RealT.

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) Parcl

Parcl is a DeFi investment platform that allows users to trade the price movements of the global real estate market. Parcl is used to bring real estate-related synthetic assets to market through an AMM architecture. Parcl has launched Parcl Labs Price Feed to create a specific area real estate index based on its sales history. The duration of the historical record can vary based on the trading frequency of the properties. After the index is created, investors have the opportunity to speculate on the price trends of properties, establishing bullish or bearish positions on the regional real estate prices.

This approach avoids the legal issues associated with actual real estate operations because there is no real property transaction involved, allowing Parcl to steer clear of these complications. You might also question whether it truly qualifies as a real estate RWA project, as it does not meet the standards mentioned above. However, it is a relatively popular RWA project that has received investments 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 over a year of operation, Parcl seems to have not garnered 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 pricing 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 the support of many well-known investment institutions, Parcl still maintains a relatively low level of market attention and market share, with a small user base and limited trading volume. This perhaps partially proves that the cryptocurrency market is not yet ready to embrace real estate index products.

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) Reinno

Some large cryptocurrency companies are also exploring products in the direction of Real World Assets (RWA) in real estate. Some companies have announced that their central bank digital currency teams are trying to support users in tokenizing properties and using them for mortgages. Another company is also collaborating with partners to support property mortgage lending. RealT also offers the option of using tokenized real estate as collateral for loans, but this service is limited to the real estate tokens they issue. Essentially, this service is more similar to a token lending product and does not significantly enhance the capital liquidity of individual real estate owners.

Reinno is a defunct project that was 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. Upon approval, Reinno will create a special purpose vehicle in Delaware for them. Then, Reinno will create a smart contract for the real estate tokens, allowing owners to deposit the tokens as collateral for loans, with the loan limit based on the token value.

The second product is mortgage financing. After users purchase real estate with a bank mortgage, they can tokenize the property ownership for financing. The funds obtained are used to repay the bank mortgage, after which the customer repays the loan to the protocol at a fixed interest rate.

The operation of Reinno is still a middle