Real Estate RWA Project Research: How Blockchain is Changing Real Estate Investment

Real-world assets ( RWA ) are not a new concept in the cryptocurrency market; similar concepts emerged as early as 2018. However, it wasn't until 2022, when the yield on U.S. Treasury bonds surpassed the lending rates of stablecoins, that the tokenization of U.S. Treasury bonds as RWA assets truly gained attention. In recent years, several real estate RWA projects have also started to emerge, attempting to expand the real estate investment market through diversified products and lowered entry barriers. This article will conduct a case analysis of these projects, exploring the advantages and disadvantages of real estate RWA and its potential market.

Methods for Tokenizing the Real Estate Market

The real estate market is vast and full of investment opportunities. According to statistics, the market value of publicly listed real estate in North America reached $1.3 trillion in March 2023, while the global publicly listed real estate market reached $2.66 trillion.

The tokenized real estate market is mainly realized through the following ways:

1. Fragmented Property Ownership Financing
2. Specific Area Real Estate Market Index Product
3. Real Estate Token Mortgage Lending

In addition, tokenization may enhance the transparency of real estate assets and the democratic nature of governance.

Real estate RWA and Real Estate Investment Trust ( REIT ) have similarities in reducing investment thresholds and enhancing liquidity. However, REITs typically do not provide investors with management opportunities or ownership, and still maintain a centralized operation model. Nevertheless, the regulatory framework and operational model of REITs can still provide references for real estate RWA projects.

By observing the operation of real estate RWA projects over the past two years, we can summarize their advantages and disadvantages:

Advantages:

• Lower the investment threshold
• Improve the liquidity of real estate
• Simplify the investment process
• Provide more diversified real estate investment products

Disadvantages:

• The legal framework is incomplete.
• Lack of mature regulation
• The mechanism for protecting investors' rights and interests is insufficient.
• There are challenges in property management and maintenance.

Case Analysis

RealT

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

RealT purchases residential properties and tokenizes them, entrusting management and rent collection to a third party. After deducting fees, rental income is distributed to token holders. RealT is responsible for the tokenization process, but is legally independent from the company holding the property.

Taking a property as an example, the total value of the property is $323,000, with each token valued at $52.1, a total of 6,200 tokens issued. The monthly rental income is $2,600, and after deducting operating and management fees, the net profit is $1,978. Each token receives a distribution of $3.83, with an annual profit margin of 7.35%.

RealT usually provides 100% of the tokens to the market without co-investing with clients. The management agency charges 8% from the rent, and RealT only charges a 2% tokenization and supervision fee. This model allows RealT to focus on finding qualified properties and tokenizing them.

However, decentralized ownership also brings challenges. When investors hold a small proportion of shares, it may lead to excessively high management costs. There may also be conflicts of interest between RealT and the property token holders. If RealT holds too large a proportion of shares, it may affect the liquidity of the tokens; if the proportion is extremely small, there may be a lack of motivation for supervisory management agencies.

By analyzing the latest sold-out 10 real estate tokens from RealT, it was found that most properties are located in Detroit, with about 500 token holders, some exceeding 1000. About 90% of investors invest less than $500, 9% invest between $500 and $2000, and 1% invest over $2000. This indicates that RealT has created a real estate investment market for retail investors to a certain extent, increasing liquidity in the housing market.

According to RealT's transaction data on the Gnosis network, the platform has distributed approximately $6 million in rent. The platform fees are about 2.5%-3% of the rent, equivalent to $150K-$180K in revenue over the past two years. However, since RealT is not required to participate in property investment, the actual profits it earns from the rent are unknown.

From the company's structure, RealT established Real Token Inc. in Delaware as the core operating entity, and Real Token LLC as the parent company of a series of real estate companies. Each invested property has a corresponding series of LLCs set up as subsidiaries of Real Token LLC, owning specific properties and tokens. This structure is designed to isolate the risks of individual properties and prevent them from affecting other properties or the parent company's operations.

Parcl

Parcl is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl offers trading of real estate-related synthetic assets through an AMM architecture.

Parcl has launched the Parcl Labs Price Feed, creating a specific area real estate index based on sales history. Investors can speculate on housing price trends. This approach avoids the legal issues associated with actual property transactions, but it also raises questions about whether it truly belongs to the real estate RWA project.

The Parcl testnet was launched on Solana in May 2022, with a current TVL of approximately 16 million USD. 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 USD and fewer than 50 daily active users.

Although the Parcl product is user-friendly and upgrades quickly, the index market is mature in design, and the team is actively launching user acquisition plans, the market attention and share are still relatively low. This may indicate that the cryptocurrency market is not yet ready to embrace real estate index products.

Reinno

Large cryptocurrency companies such as Ripple and MakerDAO are also exploring the direction of real-world assets (RWA) in real estate. Ripple announced that its central bank digital currency team is attempting to support users in tokenizing properties and conducting mortgage loans. MakerDAO, on the other hand, is collaborating with Robinland to support property collateralized lending.

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 notable real estate RWA-related products:

1. Tokenized real estate loan services: Property owners can submit property documents to Reinno, and upon approval, Reinno will create a special purpose vehicle (SPV) and create a smart contract for the property token. Owners can use the tokens as collateral for borrowing.

2. Mortgage Financing: After users purchase real estate with a bank mortgage, they can tokenize the ownership of the property for financing. The funds obtained are used to repay the bank mortgage, and users then repay the loan to the protocol at a fixed interest rate.

Reinno's operations still adopt a centralized offline model, where customers usually need to submit property documents in person. This method carries obvious risks:

• If the borrower defaults, Reinno, as a tokenization service provider rather than a lender, finds it difficult to sue the borrower.
• The lack of direct contracts between the lending and borrowing parties, especially in the context of fragmented property token financing, results in a lack of legal frameworks to protect lenders.
• Property owners may find it difficult for Reinno to effectively prevent the "double spending" risk of property value when they sell the house or stop repaying the bank mortgage after borrowing.

These obvious risks may be one of the reasons for the project to cease operations. In the future, real estate RWA will require a more mature legal framework to address these issues.

Conclusion

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

In terms of legislation, real estate RWA has not established a clear and consistent framework. Different regulatory agencies in the United States have discrepancies in the classification of tokens, leading to unclear rules and a chaotic process, which may threaten potential investors and jeopardize the long-term viability of property tokenization.

Nevertheless, many well-known financial enterprises and cryptocurrency companies are still actively trying real estate RWA. A small number of projects have preliminarily proven the feasibility of the product during 1-2 years of operation. Considering the enormous scale of real estate in the financial investment field, real estate RWA is expected to usher in rapid development with the establishment and improvement of relevant legal frameworks.