Online worlds are not new but, thanks to advances in 5G communications and virtual reality technology, we are witnessing the blurring of the boundaries between the physical and digital realms. The product of this is the metaverse – a series of immersive online worlds, such as Decentraland and The Sandbox. In these spaces, individuals (transformed into virtual avatars) can socialise, buy designer clothes, attend concerts, purchase art and – increasingly – invest in real estate.

Real estate in the metaverse

Real estate in the metaverse is as varied as in the real world – ranging from tropical islands to customisable shops – with land divided into a series of contiguous parcels. As in the physical world, these parcels are finite – there are 90,000 in Decentraland with a starting price of $10,000 – with their value fluctuating to account for supply and demand as well as the popularity of specific neighbourhoods.

Metaverse inhabitants can buy a digital receipt of a property using a non-fungible token (NFT) that is recorded on a blockchain. Each NFT is secured by a cryptographic key enabling secure decentralised verification of ownership, allowing for their wider application to any type of digital asset.

A virtual boom

Recent developments in the virtual real estate market have been eye-catching: in November 2021, metaverse company Republic Realm bought land in The Sandbox metaverse for a record $4.3 million, JP Morgan reported that the average price of a parcel of virtual land doubled in a six-month window in 2021 from $6,000 in June to $12,000 by December across the four main metaverses and companies – including tech companies, fashion houses and even accountants – have all invested in the virtual real estate market.

What is going on? 

Undoubtedly, some of this price inflation is driven by hype – speculators simply looking to ride the latest techno wave and cash in early before the virtual house of cards comes tumbling down. This analysis is especially compelling when you consider that there are almost countless risks and unanswered questions when it comes to real estate in the metaverse – servers can be shut down, crypto wallet passwords can be permanently lost, who regulates disputes in a virtual world, how much are people actually willing to spend on a building that does not exist, what happens if a metaverse platform simply falls out of fashion…the list goes on.

But, only a few years ago, the existence of virtual worlds where millions of people live online lives would have seemed like science fiction. The sheer scale and the growth of the virtual economy – every year $54 billion is spent on virtual goods – suggests that we should perhaps be open-minded. 

The future

As the metaverse matures, more complex financial instruments could become commonplace. Already, in January 2022, metaverse tech company TerraZero announced it had completed one of the first ever metaverse mortgages with Decentraland. These mortgages are collateralised with the respective underlying NFT as the digital asset, which is then held by TerraZero as the registered owner until the loan is paid back. In return for their down payment, the borrower is granted “deployment rights” enabling them to develop their land, host events and advertise to generate revenue.

Plus, in December 2021, the world’s first tokenized real estate investment trust in the metaverse – MetaSpace Real Estate Investment Trust – launched allowing investors to invest in metaverse real estate by purchasing the company’s native token. The investment trust focuses on buying, leasing, and minting virtual real estate, with profits returned to token holders by way of smart contracts.

Recent developments such as this hint at the possible development of financial products that could mirror the real world. Could we one day see securitisations of metaverse mortgages? Right now, no one knows. But this is a fast-changing new frontier and the pace of change so far suggests that anything is possible. 

The opportunities for next-generation financing companies – and those real-world institutional investors brave enough to back them – could one day prove hard to ignore.