Real Estate RWA Project Analysis: From Fragmented Ownership to Index Trading

Tokenization of real-world assets ( RWA ) is not a new concept in the cryptocurrency market, having emerged as early as 2018. However, due to inadequate regulation and a lack of significant returns, early attempts failed to gain scale.

In 2022, as U.S. interest rates rose, government bond yields exceeded the borrowing rates of crypto stablecoins, making government bonds a more attractive target for RWA. Mature DeFi projects and traditional financial institutions began exploring RWA.

In the past two years, some real estate RWA projects have emerged, aiming to expand the real estate investment market, provide diversified products, and lower investment thresholds. This article will analyze the design advantages and disadvantages of these projects and their potential markets, focusing mainly on the North American real estate market.

Real Estate Tokenization Methods

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

The main goals of real estate tokenization include: creating more diversified and flexible investment products, attracting a broader range of investors, and increasing asset liquidity and value. The main forms are:

1. Fragmented property ownership financing
2. Specific Area Real Estate Index Product
3. Real Estate Token Mortgage Lending

In addition, tokenization can enhance property transparency and governance democracy.

Real Estate Investment Trusts ( REIT ) share similarities with Real World Assets (RWA), both lowering investment barriers and increasing liquidity. However, REITs typically do not provide management rights or ownership, maintaining centralized operations. Nevertheless, the strict regulation and operational framework of REITs can serve as a reference for RWA projects.

Real estate RWA projects typically have the following advantages and disadvantages:

Advantages:

• Lower the investment threshold
• Improve asset liquidity
• Increase investment options
• Increase transparency

Disadvantages:

• Regulatory ambiguity
• Legal Risks
• High management costs
• Conflict of Interest

The specific projects vary due to different management and product approaches, and the actual operational situations are different.

Case Study

RealT

RealT was launched in 2019 and is one of the earliest real estate RWA projects, focusing on the tokenization of residential properties in the United States.

RealT purchases real estate and tokenizes it in accordance with the law, entrusting third-party management. Rental income is distributed to token holders after deducting expenses. RealT is responsible for tokenization, but is legally separated from the company owning the property. If the company defaults, token holders can designate a new management company.

Taking a property in Montgomery as an example, with a total value of $323,020, each token is priced at $52.10, totaling 6,200 tokens. The monthly rent is $2,600, with a net profit of $1,978 after deducting $622 in expenses. Each token yields an annual return of $3.83, with an annualized return of 7.35%.

RealT provides 100% tokens without requiring co-investment from clients. The management takes 8% from the rent, and RealT charges a 2% tokenization fee. This model allows RealT to focus on finding qualified properties and tokenizing them.

However, decentralized ownership also brings challenges. When investors hold a very small share, the management costs may become unsustainable. There may be conflicts of interest between RealT and minority shareholders.

Data shows that about 90% of RealT 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 to some extent for retail investors, increasing liquidity.

RealT has distributed approximately $6 million in rent on the Gnosis network. The platform fee is around 2.5%-3%, with an estimated two-year revenue of about $150K-$180K. Due to the non-mandatory participation in investment, the specific profit that RealT gains from the rent is unclear.

In terms of company structure, RealT has registered its core operating entity and real estate company parent in Delaware, and established subsidiaries for each investment property. This structure is designed to isolate the financial and legal risks of each property.

Parcl

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

Parcl has launched a regional real estate index based on sales history. Investors can speculate bullishly or bearishly on housing price trends.

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 several well-known institutions and is worth noting in discussions about the diversification of real estate RWA products.

The Parcl testnet was launched on Solana in May 2022, with a current TVL of $16 million. However, it has low attention, with daily trading volume of less than $10,000 and less than 50 daily active users.

Despite the mature product design and active promotion, Parcl still maintains a low market share, which may indicate that the crypto market is not yet ready for real estate index products.

Reinno

Large crypto companies such as Ripple and MakerDAO are also exploring Real World Asset (RWA) products in real estate. Ripple has announced support for tokenized mortgage loans for real estate, while MakerDAO has partnered with Robinland to support real estate collateralized lending.

Reinno is a discontinued project, but its two products are worth mentioning:

1. Loan services based on tokenized real estate. Homeowners can submit property documents to Reinno, and upon approval, create an SPV company and a token smart contract to use tokens as collateral for borrowing.

2. Mortgage financing. After users purchase a property with a bank mortgage, they can tokenize the property ownership for financing to repay the bank loan, and then repay the agreement at a fixed interest rate.

Reinno adopts a centralized offline model, which poses significant risks:

1. As a tokenization service provider rather than a lender, it is difficult to sue defaulting borrowers.
2. It is not possible to effectively prevent homeowners from selling their property or stopping repayment of bank loans after borrowing.

These risks may be one of the reasons for the project's cessation of operations, and the future real estate RWA needs a more mature legal framework.

Summary

Real estate RWA is still in the early stages, with a relatively small market size and user base. This field requires strict compliance and a mature legal framework. Some projects use risk isolation structures or real estate-related financial products to reduce risk. However, to fully realize its potential, legislative progress and operational compliance are essential.

Currently, there is a lack of a clear and consistent regulatory framework, and different regulatory agencies have varying classifications of tokens, leading to ambiguous rules. This threatens potential investors and jeopardizes the long-term viability of real estate tokenization.

Nevertheless, many well-known companies are still trying real estate RWA, and some projects have preliminarily proven their feasibility. With the improvement of the legal framework, real estate RWA is expected to usher in rapid development.