Promoted with great fanfare as part of the virtual reality boom, do users and investors still have the interest and appetite in real estate conjured out of bits and bytes?

Earlier this year, investors were all aboard the metaverse hype train as the increasing prominence of the virtual world brought about hopes for a borderless universe with endless possibilities. To capitalise on the opportunity, technology companies, venture capitalists, private equity firms and established brands raced to get a slice of the pie, pouring billions into various metaverse-related projects.

In fact, according to a report by McKinsey, these players have invested more than US$120 billion ($165 billion) in the metaverse in the first five months of 2022, more than double the US$57 billion recorded in all of 2021. Betting on mass adoption in the coming years, investors are exploring different metaverse platforms to find prime real estate that could be worth more than their mortgage in the real world.

However, investors may have to wait longer than expected to reap their returns. Like the avatars in its metaverse, Meta Platforms, the parent company of Facebook, is still finding its legs. In its 3QFY2022 ended September, Meta revealed that Reality Labs, its virtual reality division, lost US$3.7 billion during the quarter, bringing its accumulated losses in 2022 to US$9.4 billion.

“We anticipate that Reality Labs operating losses in 2023 will grow significantly y-o-y. Beyond 2023, we expect to pace Reality Labs investments to achieve our goal of growing overall company operating income in the long run,” said CFO David Wehner in its results filing. Meta’s share price dropped by as much as 73.7% year-to-date to US$88.91 before recovering a little to close at US$117.08 as of Nov 15.

Against this backdrop, does it still make sense for investors to consider metaverse real estate? Although the infrastructure for metaverse lands continues to evolve to support the asset class, scarcity-driven prices seem to be trending down in recent months. According to data by insights firm WeMeta, the average selling price of non-fungible tokens (NFTs) on the metaverse platform Decentraland dropped by more than 85% year-to-date from US$31,460 to US$4,304.

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However, not all metaverse real estate owners are in it for the money. For those interested in developing the next generation of internet Web 3.0, obtaining a piece of land on a large metaverse platform provides them with a space where they can do business, display advertisements, and organise events, says crypto exchange Bybit head of insight Charmyn Ho.

“As virtual land is a new asset class, the market hasn’t yet figured out an appropriate risk discount rate, which subjects the price of these assets to high volatility. It is important to note that some critics claim that there is no inherent value in metaverse land, and thus, the price of land is driven mostly by speculation about the future. As such, forward-thinking investors should consider how best to manage these risks before deploying capital,” says Ho.

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VR real estate millionaire

When discussing the viability of mass adoption of the metaverse, ESSEC Asia Pacific associate professor Jan Ondrus points out that many companies have attempted to integrate the virtual world with the real via VR, augmented reality (AR), or both. Google, for example, released its Google Glasses and Cardboard in the mid-2010s to achieve this goal.

While both products have ceased to exist for various reasons — including privacy concerns and lack of demand — Google has renewed its AR/VR ambitions. The company recently announced the upcoming launch of a new Google AR headset codenamed Project Iris, expected to hit stores in 2024.

But Ondrus believes that Meta Platforms and its social media arm Facebook have more reasons to keep its alternate reality dreams alive — the company has suffered from bad publicity in recent years due to its consumer data privacy issues, exacerbated by its ongoing mass layoffs — the first time in its short history that has been marked more by breakneck growth.

In a way, Meta’s hand was forced. Apple, the overlord of the iOS ecosystem, has disabled the ability of apps to track people. This has caused a lot of businesses based on data tracking for advertising purposes to suffer. And so, Meta has to constantly think about the next step in capturing eyeballs and consumer data, says Ondrus.

“Google has an advantage — it controls Android — while Meta does not control any operating system. The metaverse will be an environment it can control, collect data and attract advertisers. It is an avenue for Meta to find growth opportunities, which may have led other players to feel the same way. Suppose Facebook can convert its three billion users to metaverse users. In that case, it will be a big thing for everyone, creating an ecosystem that allows others to capture value,” explains Ondrus.

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Photo: ESSEC Asia Pacific associate professor Jan Ondrus

Aside from challenges in developing the metaverse software, there are also hardware issues for Meta that are limiting more widespread adoption. Currently, users need to fork out at least US$399 to own Meta’s VR headset Oculus Quest to participate in its metaverse, Horizon Worlds. Although the company announced that it is planning to bring its metaverse experience to smartphone and PC users this year, there have been no further news on the matter.

When it comes to the investment aspect of metaverse real estate, Ondrus says there were cases in the past — before the term metaverse was popularised by Meta — where people made millions from investing in virtual lands. One example is Ailin Graef, widely known as Anshe Chung, the first millionaire on the VR platform Second Life.

Before Second Life, Graef was already a seasoned veteran creating virtual wealth off massively multiplayer online role-playing games (MMORPGs) from trading in-game items and accessories. These monies, however, are in-game currencies that are not legal tender.

In the early 2000s, Graef and her husband delved into Second Life. The couple started buying and developing virtual real estate using in-game currency Linden Dollars, which can be converted into US dollars. With an initial investment of US$9.95, they were able to command virtual real estate equivalent to 36 sq km of land, supported by 550 servers or “land simulators”, which made her achieve profits of more than US$1 million in November 2006.

Today, the Graef couple still runs the virtual real estate development company Anshe Chung Studio, established in 2004 and invests in multiple VR projects outside Second Life.

“People who play games know there is a real market for these in-game assets. It could be anything — swords, clothes, skins — these items can be traded with real money, and some items are worth more than others. Before NFTs, these items were sold on platforms like eBay before being transferred in-game. So these virtual economies are not new,” says Ondrus.

The NFT technology, however, makes such transactions “cleaner”, says Ondrus. Its immutability and traceability allow users to buy and sell VR-related assets with greater security. It also allows for a more efficient secondary market, especially when combined with other players in the ecosystem, such as NFT marketplaces OpenSea and Blockee.

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Banking on ‘scarcity’

Today, several popular metaverse platforms allow users to invest in real estate. Aside from giants like Decentraland and Hong Kong-listed Animoca Brands’ The Sandbox, there are also CryptoVoxels, Star Atlas and Somnium Space, among a growing number of other metaverse platforms.

One of the largest metaverse real estate transactions was made by metaverse investment firm Everyrealm (previously known as Republic Realm), which bought US$4.3 million worth of land in The Sandbox from video game company Atari in November 2021. It plans to work with the latter to develop some properties.

Aside from The Sandbox, Everyrealm’s portfolio spans 28 different metaverse platforms. On Decentraland, it has developed Metajuku, a shopping district inspired by Tokyo’s Harajuku district, known as a street fashion mecca. Tenants of Metajuku include JPMorgan — the first bank in the metaverse — which has established a lounge for its blockchain business unit Onyx.

According to a report released by Onyx earlier this year, the average price of a parcel of virtual land doubled in a six-month window in 2021, jumping from US$6,000 in June to US$12,000 by December across the four leading Web 3.0 metaverses.

Another big-ticket transaction last year was made by Canada-based listed company Tokens.com, which bought 116 parcels of land in Decentraland for US$2.8 million in November 2021. It subsequently purchased more parcels of land, leasing 208 virtual real estate equivalent to over 560,000 sq ft of flat land as at Oct 22.

Most tenants also used Tokens.com’s subsidiary Metaverse Group for its design and development services. Its client portfolio includes over 60 fashion brands, such as athletic footwear retailer Skechers and fashion retailer Forever 21, while other clients include edtech company Sophia Technologies, industrial automation company Schneider Electric and venture capital firm Groundbreak Ventures.

As metaverse-related transactions are mainly done in cryptocurrencies, the token price swings affect the value of the metaverse assets. For example, The Sandbox’s in-game currency SAND fell 89% this year to US$0.65 apiece, from US$5.88 at the beginning of the year. This is in tandem with the ongoing crypto market downturn dubbed a “crypto winter” which saw coins such as Bitcoin and Ethereum drop 64% and 66% respectively year-to-date.

There are also other risks in the metaverse market, says Bybit’s Ho. For one, the price dynamics of the lands depend on various macro and distinctive elements. “Macro factors include how the amount of liquidity in global markets affects the price of metaverse land, as it does for other risk assets. In general, increased liquidity leads to more interest in speculative assets.

“On the idiosyncratic front, these land plots are similar to social media accounts, which can be very valuable if they can monetise high traffic and engagement. In this sense, the best plots of land in the metaverse will be the ones that can attract the most traffic, which will depend on multiple factors, including the location and how the land is used,” says Ho.

This also means that asset values may depend on surrounding buildings and amenities. “There are different neighbourhoods within each metaverse platform, and specific neighbourhoods are more expensive than others. This is similar to how land in Singapore’s CBD is more expensive than in the heartlands.

“Eventually, each neighbour will define the price of your land. This means that there are risks that the land bought might be priced differently depending on the surrounding areas. Nowadays, many lands are already occupied on the more popular platforms, and some investors that bought early have started to cash out,” he adds.

There is also a risk regarding the “scarcity” of real estate. Unlike the real world, which has finite resources, the metaverse platform owners technically can increase the supply to meet a possibly increasing demand. “I assume these platforms are responsible for not destroying the market by flooding it with new land. The question then would be, is the predefined land big enough? If they plan to grow, how would they fix the prices?” Ondrus says.

He points out that while there is a growing number of metaverse platforms, they are mostly not interoperable with one another — these platforms come with their protocols and currencies. So far, one’s avatar cannot travel from one platform to another, which means that purchases or investments made in one metaverse platform are essentially worthless in another.

Ho concurs, adding that market saturation is a clear issue. “There are hundreds of metaverse projects with land for sale, which makes it difficult to pick winners as there has been no clear consolidation of value accrual to any particular metaverse base layer. This is a space where it pays to think like a venture capitalist when allocating your portfolio,” she adds.

Investors are also facing the risk of the platforms’ longevity, says Ondrus. It is difficult to determine which metaverse platforms would remain popular long enough to justify investments and allow investors to reap their returns. This is especially true given the state of the tech world; three to five years is already considered a very long time with constant booms and busts.

Second Life, for example, enjoyed relative longevity. It has been around for about two decades and counting. The platform, released in 2003, peaked at over one million active users in 2013 before rapidly declining in the following years. In contrast, data platform DappRadar found that there have been only about 6,000 unique active wallets on Decentraland in the past 30 days.

While investing in real estate assets in the metaverse involves many risks — especially considering the current crypto winter — Ondrus says there is no telling what will happen in the next few years, which will determine the viability of such investments.

“Would history repeat itself like Second Life? Or will it play out differently? I am not sure. However, I wonder how the next generation will adopt this technology and how it will influence the larger masses,” says Ondrus.

For instance, a McKinsey study released in June found that Generation Z and millennial consumers expect to spend close to five hours per day in the metaverse within the next five years. This expected shift is driven by a desire for greater convenience, connectivity and entertainment.

The firm also found that Generation Z is enthusiastic about the metaverse. For example, the popular metaverse video game Roblox has 50 million daily users, of which two-thirds are under the age of 16. Additionally, luxury and mainstream brands such as Gucci and Vans are ramping up their metaverse strategy to attract younger consumers. Both brands are experimenting on multiple platforms to determine where and how to recruit lifetime customers.

This echoes the experience of Tomas Nascisonis, CEO of metaverse real estate development firm Crypto House Capital (CHC). The ex-proptech business developer says the idea behind his venture was sparked last December when he asked his children — two boys and one girl — what they wanted from Santa for Christmas.

When the wish lists were completed, Nascisonis was bewildered by “odd” requests, such as shoes and hair. After speaking to his daughter, he finds out that the items were meant for his daughter’s avatar in metaverse games such as Roblox and Minecraft instead of tangible items meant for her to wear.

“That is when I understood that our children are already living in the metaverse, and I need to look at it. This is what led to the establishment of CHC,” says Nascisonis.

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Photo: Tomas Nascisonis, CEO of metaverse real estate development firm Crypto House Capital

The London-based tech company aims to enable investors to purchase virtual real estate in the “MetaReal City”, offering risk-adjusted returns via the development, acquisition, management, leasing and sale of virtual properties on blockchain-based metaverses such as The Sandbox and Decentraland. The first of such projects in its pipeline is a residential skyscraper Skylum, followed by a sports area, offices, municipality buildings and schools.

To be sure, Skylum is a replication of an actual, physical building under construction in Vilnius, Lithuania, projected to be completed in August 2023. The Skylum in the metaverse is also under construction, to be completed in 1Q2023. The two buildings have nothing in common except the virtual skyscraper uses its physical counterpart as a reference point, following the same price structure.

“What we are trying to do is to build a two-way bridge between the real and virtual worlds,” says Nascisonis, who has two decades of experience in property business development and property technology.

He adds that investing in metaverse real estate is a cheap and easy way to learn about the opportunities in the virtual world, especially now that even children understand the value it brings. Aside from giving investors insight, it could also provide them with an early adopter advantage, says Nascisonis.

CHC has two typical client profiles — those from the crypto community and those who are not. In the current bear market, the latter forms 80% of CHC’s sales, Nascisonis says. This is because the latter are more excited about the prospects of participating in the new world and are less influenced by the price fluctuations and events happening in the larger crypto industry.

“Of course, it is harder for us to guide them through the investment process and closing the deal takes months. We have to explain to them about crypto wallets and how NFTs work, but they love it, and we are getting a lot of interest from these clients. We are onboarding agents and brokers globally to teach them how to pass this knowledge to their clients,” says Nascisonis.

That said, Ondrus says it is too early to tell whether investments in the metaverse can be considered “sound”. He adds: “Once the dust settles, and we can see better how the market evolves or if there is a clear winner among all the different platforms, it is easier for investors to calculate their risks. For now, the real estate assets’ value is too abstract and difficult to assess as an investment asset class.”

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