How to design RWA products for real estate real assets under Hong Kong compliance?

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23-11-28 16:58

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Original author: Ye Kai (WeChat/Twitter: YekaiMeta)

Editor's note: In this article, author Ye Kai, who has extensive experience in the RWA field and is a digital marketing expert, and author of "Token Economic Design Patterns", "Asset Tokenization", "Fan Economy", "Social Media Operations", etc., combines his years of experience in real estate private equity fund business to provide a detailed introduction on how to design real estate RWA products from both product structure and product design paths. The full text is as follows:

The RWA craze in Hong Kong has reignited the STO trend from a few years ago. In September, Hong Kong claimed to have approved the first real estate fund STO product, but there hasn't been much news lately. Let's discuss the tokenization of real estate assets and how to design RWA products.

The recent communication from Hong Kong RWA defines (temporarily) security tokenization, while other types of more complex digital securities are not yet encouraged or require more complex regulation. The current security tokenization, as defined by SFC, refers to traditional financial products (bonds or funds) that adopt DLT (distributed ledger technology), which need to be issued as fund-type securities products first and then held through DLT technology and digital wallets.

The regulatory strategy of Hong Kong's SFC, although relatively compromising and regressive, is relatively safe from their regulatory perspective, and is suitable for traditional financial institutions and old money to enter and try in a familiar way.

Combining years of experience in real estate private equity fund business, our traditional business mainly serves real estate enterprises, with main investment and financing services including bond issuance, ABS and REITs. After the implementation of the "three red lines", real estate enterprises have turned to Hong Kong for overseas bond issuance. This product is actually very similar to the basic traditional financial products currently defined. In addition, real estate REITs are also listed and traded on the Hong Kong Stock Exchange, but because the stock business of the Hong Kong Stock Exchange is too strong, there are only a dozen or so real estate REITs, far lower than the scale of the REITs market in Singapore and Japan. Financial products such as bond issuance, ABS and REITs related to real estate can all adopt the Fund model. Bond issuance is fixed-income financing, credit rating + mortgage or credit enhancement, which can be done through private equity fund model; ABS, which initially securitized assets such as income rights, franchise rights or accounts receivable, also requires a private equity fund structure; REITs, which focus on income rights, adopt a private equity fund + special plan or trust for trading structure. As we are accustomed to using real estate to replace real estate, because there are also some infrastructure, industrial real estate, logistics real estate, etc., so I will use real estate asset securitization or real estate financial products to describe them later.

In fact, the financial products of real estate asset securitization have already been very mature, and basically all need to be in the form of Fund, which matches the regulatory requirements of SFC. Therefore, theoretically, it can become one of the preferred underlying assets of Hong Kong RWA.

Hong Kong Real Estate STO Case Study Report

Tai Chi Capital announced the launch of PRINCE Token, the first real estate fund security token for professional investors in Hong Kong. PRINCE Token is issued by a closed-end fund managed by Pioneer Management, a subsidiary of Tai Chi Capital, with a fundraising target of approximately 100 million yuan and an entry fee of HKD 1000, far lower than the usual requirement of USD 1 million for investing in private real estate funds. The raised funds will be used to acquire five retail properties located in the tourist hotspot of Prince Edward in Kowloon, with details of the target properties yet to be disclosed. By holding PRINCE Token, investors can receive rental income generated by the relevant properties each year and benefit from the future appreciation of the properties. PRINCE Token will be settled on the public Ethereum blockchain and, subject to regulatory approval, will be listed on the HKbitEX platform, realizing greater liquidity potential.

Currently, Tai Chi Capital's Vanguard Asset Management has been approved for the 4th and 9th asset management licenses for uplift, which allows for the management of virtual assets and portfolios consisting of up to 100% virtual assets. Tai Chi Capital's HKbitEX is also applying for a virtual asset trading license.

Real Estate Physical Asset Securitization Tokenization Product Design

We combine the traditional real estate asset securitization product model to analyze and compare with the above-mentioned Taiji Capital's real estate STO case, in order to understand the design ideas of real estate physical asset securitization tokenization.

First, product structure.

As mentioned earlier, real estate asset securitization is based on the form of private equity funds. The product structure is generally achieved through the acquisition or holding of equity in SPV companies/project companies by private equity funds (if the raised assets are used for acquisition, it is acquisition; if it is self-owned assets, it involves asset transfer). SPV refers to a special purpose vehicle, which can be simply understood as an intermediate company to achieve the purpose of holding or acquiring. For example, when Pioneer Asset Management's private equity fund acquires the Prince Edward Shop in Kowloon, it needs to set up an SPV. In this structure, the fund manager can represent the interests of the private equity fund to sell or dispose of the property assets themselves or transfer the equity of the project company holding the property assets. As shown in the figure:

Second, Product Design Path

Designing and issuing a real estate asset securitization product is a rather complex process. Let's briefly outline the design path for real estate asset securitization products as a reference for everyone to consider when designing RWA products in the real estate industry.

Participants and underlying assets.

1) Participants

These two are the foundation of real estate securities products, as the core purpose of designing products is to invest in real estate assets through the issuance of securities: on the one hand, it can enable the original equity holders of project assets to obtain financing; on the other hand, it can also allow more investors to participate in real estate project investment.

The participants in the product mainly consist of five parts: initiators, original equity holders, managers, investors, and other service organizations. The first four are relatively easy to understand. For example, in the case, the initiator may be Taiji Capital, the manager may be Pioneer Asset Management, and the original equity holder is undisclosed, possibly Taiji Capital's own assets or financing clients such as Jiaozhouye Real Estate. Investors are those who purchase the product, but the investors in mainland real estate asset securitization products are mostly institutional clients, and there are fewer retail investors. In addition, other service organizations play an important role in product design and issuance, mainly composed of legal service organizations, accounting service organizations, evaluation service organizations, custodian organizations, and distribution organizations, etc.

2) Basic assets

The core of real estate securities products lies in the selection of underlying assets. Generally speaking, there are three core features required:

- Basic assets must be real estate with clear ownership and cannot be attached with other rights.

-The project must have been built and entered a stable operation period. Real estate assets that have not yet been built or invested in are difficult to securitize.

- The project should have a sustainable and stable operating cash flow, and all financial indicators should be healthy.

The Prince Edward Shop in the case is a typical commercial property, whose income mainly comes from rental income of commercial property leasing and fees for supporting services. However, whether such commercial property assets can become high-quality securitized assets depends on three aspects: universality, scarcity, and cash flow quality. The universality of the shop goes without saying. The scarcity of the asset is mainly the rarity of the asset. For commercial property, its rarity lies in location, location, location. The Prince Edward Shop is located in a tourist area, which is not bad, but specific location needs market research data. The quality of cash flow mainly evaluates the timeliness of cash flow recovery and the diversification of income sources. The higher the ability to timely repay cash flow, the more diversified the income, the less likely there will be fluctuations and declines. These are evaluated by professional service agencies.

2. Product design concept

The core idea of designing real estate asset securitization products is for investors to indirectly hold underlying assets through investing in securities products, and to obtain final returns through the cash flow generated by the operation of underlying assets and the premium obtained from selling underlying assets. The returns are generally distributed based on the annual income of the underlying assets, and the principal is recovered and asset premium returns are obtained when the product expires and the assets are sold.

In product design, trust-enhancing measures are also considered, such as mortgages and guarantees. A layered structure can also be set up, with subordinated structures (priority, inferior) set up in private equity funds, providing a certain level of risk protection for priority shares by subordinated shares.

Finally, I would like to leave a thought-provoking question for friends who truly want to participate in the Hong Kong RWA and are willing to think:

Combining with the previous product design disassembly analysis, please analyze the problems and details that need to be refined in the case of Pioneer Asset Management's real estate closed-end fund STO.