Real Estate Asset Tokenization: Current Status and Prospect Analysis

Introduction

The concept of real estate asset tokenization ( RWA ) is not a new phenomenon in the cryptocurrency market, having emerged as early as 2018. The asset tokenization and Security Token Offerings ( STO ) at that time bore similarities to today's RWA concept. However, due to the immature regulatory framework and the lack of obvious potential return advantages, these early attempts failed to develop into a mature market segment.

In 2022, with continuous interest rate hikes in the United States, the yield on U.S. Treasury bonds significantly surpassed the interest rates for stablecoin lending in the cryptocurrency market. As a result, tokenizing U.S. Treasury bonds into RWA has become increasingly attractive to the crypto industry. Consequently, some well-known DeFi projects, traditional financial institutions, and even some governments have begun to explore RWA.

In the past two years, multiple real estate RWA projects have emerged in the market. They aim to expand the real estate investment market in various ways, diversify real estate investment products, and lower the entry barriers for real estate investors. This study explores the advantages and disadvantages of the design of real estate RWA and its potential market through case analysis of these projects. Since these projects primarily target real estate assets and investors in North America, the discussion of related policies, regulations, and market conditions will mainly focus on the North American real estate market.

Methods of Real Estate Tokenization Market

The real estate market is a vast field full of investment opportunities. Research by Statista in March 2023 shows that the North American listed real estate market is valued at $1.3 trillion, while the global listed real estate market is valued at $2.66 trillion.

The core objective of the tokenization of the 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 range of investors, and to enhance the liquidity and value of real estate assets. These products mainly take three forms:

1. used for decentralized real estate ownership for financing.

2. specific area real estate market index product.

3. tokenized real estate as collateral.

In addition, tokenization and blockchain integration have also enhanced the transparency and democratic governance of real estate assets.

Real Estate Investment Trust ( REIT ) is a company that owns, operates, or provides financing for income-producing real estate. REIT offers ordinary investors an investment opportunity, allowing them to earn dividend-based income and total returns, while helping to grow the local real estate market. REITs and real estate RWAs share similarities in providing diversified property investment opportunities, effectively lowering the barriers to investment and increasing the liquidity of real estate assets. However, traditional REITs typically do not provide investors with management opportunities or ownership, maintaining a centralized operating model. Nonetheless, their rigorous asset review and investment structure within a strict regulatory framework provide a solid blueprint for real estate RWA projects.

In the operation of real estate RWA projects over the past two years, we have gained a clearer understanding of their advantages and disadvantages.

Real estate RWA projects usually have the characteristics mentioned above. After深入研究具体案例, I found that due to differences in management and product approaches, each project faces different situations in actual operations.

Case Study

In this chapter, I have chosen three real estate RWA projects for analysis. Each project adopts a different approach to tokenization of the real estate market and is the most popular in its field. It is worth noting that these are still early projects, 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 on the market, focusing on providing investments in U.S. residential real estate primarily on Gnosis and through the Ethereum and Gnosis blockchains (.

RealT acquires residential properties and tokenizes the ownership contracts of those properties in accordance with U.S. regulations. The management, maintenance, and rent collection responsibilities of these properties are entrusted to third-party management organizations. After deducting expenses, the rent generated from specific properties is distributed to their Token holders. While RealT is responsible for the tokenization process, they are legally separate from the company holding the real estate assets. As stated on their website, if the company defaults, the Token holders retain the option to appoint an alternative company to manage the company holding the property contracts. It is worth noting that they do not require joint investment in the properties they introduce to the market. Property Token holders can receive a share of the property rental income each month, excluding approximately 2.5% for maintenance reserves and management fees, which are typically around 10% of the value.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-dab211e0a60d06e6971df918fdfd7e26.webp(

Taking this property in Montgomery as an example, the total value of the real estate tokenization is $323,020, with each Token priced at $52.10, a total of 6,200 Tokens issued. The property generates a monthly rental income of $2,600. After deducting operating and management expenses totaling $622, the monthly net profit is $1,978, resulting in an annual income of $23,736. Therefore, each Token receives a distribution of $3.83, with an annualized return of 7.35%.

For this property, RealT offers 100% Token, which means RealT does not need to co-invest with clients and maintains an almost risk-free operating model. The management agency charges 8% of the rent and the remaining part of the maintenance fees, while the investment platform only charges 2% for tokenization of the property, selecting management agencies, and overseeing management. Through this method, the RealT team can save a significant amount of management time, focusing on finding qualified properties and bringing their tokenization to market.

However, while decentralized ownership promotes risk sharing among investors, it also presents challenges. Problems arise when investors' financial interests are too small to make the management costs of the company viable. A report explains the conflict of interest between real estate token holders and RealT. RealT chooses management agencies to manage its owned properties; if RealT has a significant ownership stake in the properties, it can reduce agency costs; therefore, inefficient management will negatively impact them. However, if RealT's stake is too large, it may negatively affect token liquidity, and minority shareholders may also become free riders. These owners may expect large shareholders to supervise whether the hired management agencies are financially viable. On the other hand, if RealT's stake is small, RealT may lack sufficient motivation to choose management agencies or participate in the oversight process, and many investors may find it difficult to effectively take on the responsibility of overseeing the management agencies.

I checked the latest ten sold-out tokens on the RealT market and used the relevant blockchain explorer to find the number of holders for each property.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-c1c5e1d087322a31c0503638bef22e30.webp(

As shown in the chart, RealT divides properties into different numbers of tokens, so that the price of each token is approximately $50. Most properties are located in Detroit, with about 500 token holders, and two properties have more than 1,000 holders. Now, combining this with the number of tokens held by each holder, we can understand the investment range of RealT investors.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-98de8e550c8f155cd34513c6f18133cf.webp(

About 90% of RealT investors invest less than $500, about 9% invest between $500 and $2,000, and 1% invest more than this amount. This indicates that RealT has, to some extent, successfully created a real estate investment market for small investors and increased the liquidity of the housing market.

According to transaction data from the RealT wallet, RealT has paid out approximately $6 million in total rent. The platform fees fluctuate based on maintenance costs, insurance, and taxes, ranging from about 2.5% to 3% of the rent, which translates to around $150,000 to $180,000 in platform revenue over the past two years. However, since RealT does not mandate participation in real estate investments and has no specific restrictions or guidelines regarding the level of investment participation, the revenue that RealT earns from rental income remains undisclosed.

From a corporate structure perspective, RealT established Real Token Inc. in Delaware as the central entity of the company. This entity does not own any real estate assets; it merely serves as the operating entity for the RealT project. Additionally, RealT 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 primary purpose is to simplify legal procedures, allowing users to participate in investments in all properties by signing a contract with a 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 financial or legal issues of one property do not affect the operations of other properties or the parent company under RealT.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-51f60a9aeef26de0b7ff4137c0ddf278.webp(

) Parcl

Parcl protocol is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl is used to gain perpetual exposure to synthetic assets using the AMM framework. Parcl introduces the Parcl Labs price feed, which creates indices based on the sales history of real estate in specific regions. The sales history period can vary depending on the transaction frequency of the properties. After the index is created, investors have the opportunity to speculate on property values, allowing them to go long or short on real estate prices.

This approach allows Parcl to avoid legal issues, as there is no actual real estate involved in the platform's operations. Some may question whether it is truly a real estate RWA project, as it does not meet the aforementioned criteria. However, it is a relatively popular RWA project that has received investments from some well-known industry institutions. Including it when discussing the diversification possibilities of real estate RWAs is reasonable.

![Bricks and Blocks: A Study of Real Estate in the RWA Market]###https://img-cdn.gateio.im/webp-social/moments-2d5e54fcb98d7f6a6b8be8bdd09d5971.webp(

Parcl's testnet was launched on Solana in May 2022, and the current TVL is $16 million. After more than a year of operation, Parcl does not seem to have attracted much attention, with daily trading volume of less than $10,000 and fewer than 50 daily active users.

Parcl's products are simplified and developed quickly. Parcl Labs' price feeds and index markets are well-designed and easy to use.

In terms of operations, the Parcl team actively launched user acquisition programs such as Parcl Point and Real Estate Royale. Despite these advantages and support from many well-known investment institutions, Parcl still maintains a relatively low market visibility, with a small user base and limited trading volume. Perhaps the market is not yet ready to accept real estate index products.

) Reinno

Some large cryptocurrency companies are also exploring the possibility of allowing users to tokenize real estate as collateral for loans. A well-known company announced in July that their central bank digital currency team is working in this direction. A large DeFi project has integrated with a company to support real estate mortgages. RealT offers the option to use tokenized real estate as collateral for loans, although this service is limited to the tokens they issue. Essentially, this service is more like a token lending product and does not substantially increase the liquidity of real estate owners.

Reinno is an abandoned 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 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. Once approved, Reinno will create a special purpose company for the transaction in Delaware. Then, Reinno will create a smart contract for the real estate tokens, which owners can use as collateral to obtain loans. The loan limit will be based on the value of the tokens.

The second product is mortgage financing. After users purchase a property and obtain a mortgage, they can