Real Estate Considerations
What if Real Estate prices drop causing Real USD to fall under 100% collateralization
If the treasury value backing Real USD falls beneath 100% of the circulating supply of Real USD then the mechanism that s built into the design to automatically bring the treasury value back up above 100% kicks in. In the case the treasury falls beneath 100%, 50% of the rental income is added back into the treasury to recollateralize it, rather than being distributed as a rebase. This ensures that given a long enough period of time the treasury will always return to 100% collateralization.
Real estate is extremely volatile, are you concerned that the real estate market is going to nuke?
Like any other market, the price of real estate can rise and fall based on a number of factors. However, unlike crypto or equities, the real estate market is significantly less volatile. The drops occur over a much longer timeframe and are generally less substantial in terms of the loss of value.
Here are three indicators we can use to project a decline in the housing market based on the last housing market crash:
How will a declining housing market impact the value of the Real USD treasury?
With the housing market already in decline and the USDR treasury growing, it’s important to note that the treasury will not incur the full loss of market value as new properties added during a decline will be purchased closer to their bottom. The entire treasury will never fall by 20% as the whole treasury wasn’t added in only one purchase at the top. Take this hypothetical chart for example:
As shown, a growing treasury offsets the total decline in asset prices as the assets added get closer to the bottom.
How will a declining housing market impact Real USD's yield and collateralization?
A drop in the value of the treasury’s underlying assets does not automatically mean a loss of yield for holders. USDR’s yield is primarily derived from rental income, not the valuation of the assets themselves. As such, we expect to continue collecting the projected rent from tenants in managed properties, despite any paper loss on the underlying asset itself.
Further, the collateralization rate of the USDR treasury isn’t completely dependent on the price of housing. An appreciation in the price of TNGBL can offset losses to property valuations. Yield earned from protocol owned liquidity can also be used to bolster losses.
That said, a decline in the estimated value of the treasury’s real estate assets will lower the collateral value of USDR. If the collateral value drops below 100%, 50% of the rental yield will be diverted into the treasury until the backing is at 100%. While the yield to holders may decline to recollateralize the treasury, the drop in yield will not be total or permanent. We’ll maintain a 50% return on the current yield to prevent a mass exodus from the system while we replenish the treasury.
Will a declining house market force Real USD liquidations?
No, the real estate in the USDR treasury is owned outright, it’s not financed, it’s completely unleveraged. The only mechanism that can force USDR asset liquidations are redemptions from holders. If the redemption amount of USDR exceeds the DAI in the treasury, assets will be liquidated in order to fulfill redemptions. In this case, pDAI will be issued to allow Tangible adequate time to appropriately liquidate assets, extracting maximum value from the assets.
However, as long as the market cap of USDR is fully collateralized and yield payments flow to holders, we don’t foresee a drop in housing being an automatic trigger to redemptions.
How does a declining housing market benefit Real USD?
With an expanding market cap, Tangible will have the opportunity to DCA into new property purchases, adding assets to the treasury at or close to the bottom of their recent valuation. The more assets that are added towards the bottom, the greater the increase in valuation will be when the market turns around.
This is no different to what institutions like Blackstone are doing, preparing $50 billion vehicles to buy up residential property during this downturn.
What is the selection process for the properties in the treasury? Do they all come from Tangible’s marketplace?
We have a team who identify high-yield properties which are added to the marketplace and subsequently the USDR treasury. These properties are already tenanted with an established high yield. This established yield also serves to insulate these properties from price volatility as the markets move.
The majority of properties currently in our pipeline are in the UK where we have a property management team and realtor relationships established with a large number of high-yield locations identified. We don’t have any geographic restrictions and plan to diversify locations as we grow with the US next on the list. In addition to internally sourced properties, Tangible will list properties from any owner looking to sell, provided they pass due diligence with our team. However, we’re not actively seeking out user properties at this time.
What happens when there are no tenants leasing the property, resulting in zero rental income? How does the ecosystem accommodate such a scenario?
2% of the property value is held in a vacancy reserve. This supplies yield in the event of a vacancy. Once the property is tenanted again, a percentage of the yield from that location will be used to resupply the reserve. Many of our current properties have tenants on government aid meaning the rental reliability is extremely high, over 99%.