Why investors should be careful about the metaverse real estate boom

In 2021, real estate on metaverse platforms reached half a billion dollars. If current trends continue, sales this year could reach $1 billion. 

All of this sounds a little surreal. Today, companies like Metaverse Group, a Toronto-based virtual real estate agency, are busy dropping millions of dollars on parcels of digitised land, developing them, and then leasing them out. 

But leasing them out to whom, you might ask. People willing to take a gamble. Lorne Sugarman, the CEO of the Metaverse Group, compares the great “land grab” to “the early days of European settlement in the US.” 

In the metaverse, real estate “will appreciate as more people and brands arrive.” 

Will it, though? Is “digital gentrification” here to stay?

Perhaps it is. Nevertheless, Edward Castronova, a professor of media at Indiana University, certainly won’t be investing in virtual property.

Castronova, author of “Life is a Game,” has published numerous papers on the economies of synthetic worlds. Now, of course, some academics argue that the metaverse is not a synthetic world; in fact, it’s just as real as the “real” world, they protest.

Castranova told TRT World that the “current metaverse real estate boom is a speculation market,” and that booms “like this have been happening every four-five years since the early 2000s.” 

Contrary to popular belief, there is “no content in most of these places. There is nothing that attracts eyeballs. And only eyeballs generate value.” 

Castranova added, a “URL is a ticket to virtual land too, but at least it gives access to a genuine value stream.” 

Although “short term speculative gains are possible,” Castranova has “never seen long-run value emerge from a virtual land product.” 

Castranova, clearly no fan of the property rush occurring in the metaverse, believes that we are witnessing “the slow-moving decay of naively invested money, exactly as you would find with day traders and sports gamblers.” Others, though, are less sceptical.

Ten-fold growth

A land boom, as many readers already know, involves a rapid increase in the market price of real property (such as housing). Prices continue to rise until they reach unsustainable levels; then, spoiler alert, they decline. Sometimes precipitously so. 

A century ago, the state of Florida experienced a land boom of epic proportions, with land speculation prices based more on hype and lies rather than actual economic realities. More recently, the world experienced the financial crisis of 2007–2008, when the bursting of real estate had ripple effects, from New York to New Delhi. Of course, real estate bubbles can be very difficult to identify, even as they are occurring in real-time. The line between intrinsic value and current market is a fine one.

However, in virtual worlds, identifying real estate bubbles appears to be a little easier. The period that occurs just before a crash is known as the froth. A frothy market is characterised by bullish investors that ignore, intentionally or otherwise, market fundamentals. 

Speculation and supercharged emotions reign supreme. Rationality cast aside. Right now, in the metaverse, things look very frothy indeed. Are we destined for a digital real estate crash, now that many pieces of virtual property are selling for more (and sometimes much more) than actual, real-world property?

TRT World reached out to Janine Yorio, the CEO of Republic Realm, a leader in metaverse and non-fungible token (NFT) innovation and investment. According to the company’s website, “Republic Realm is one of the most active investors in and developers of the metaverse real estate ecosystem.” 

The company invests in, manages, and develops assets “including NFTs, virtual real estate, metaverse platforms, gaming, and infrastructure.” Today, Republic Realm is one of the largest landowners in Axie Infinity, Decentraland, The Sandbox and Treeverse, all leading virtual spaces that allow users to create, use, and, most importantly of all, monetise their own virtual reality NFTs. In short, when it comes to the metaverse and virtual property, Yorio is very much a person in the know.

Republic Realm, owner of more than 3,000 NFTs, has holdings in 24 metaverse platforms. According to research carried out by Republic Realm, which Yorio was kind enough to share with TRT World, since January of 2021, “the average price of a parcel in the four major metaverses has increased by tenfold, from $1,265 to $12,684.”

For anyone looking to purchase property in the metaverse, the average price of a parcel of real estate is about $11,000 today. At the time of writing, according to Republic Realm’s research, the platform Decentraland “has a market capitalisation of $6.5 billion and more than 800,000 registered accounts.”

Interestingly, according to Yorio and her colleagues, the term “metaverse real estate” has absolutely “nothing to do with ‘real estate’ at all.” How so? In short, these are “programmable virtual spaces in very early-stage technology companies. 

Unlike “real” real estate, there is “almost no chance of generating meaningful income from these assets. Real estate is generally a steady asset class that is used to counteract a portfolio’s exposure to tech or other high-risk asset classes.” However, this “asset class has exactly the opposite effect.”

Differences of definitions aside, do the gurus at Republic Realm see a crash coming any time soon?

In short, no. As the company’s research shows, “only about 25,000 individual crypto wallets actually own metaverse real estate.” In other words, in a world of eight billion people, very few are actually invested in this mysterious new world. 

“Compared to the number of people (180m+) who own Bitcoin or 360k+ who own NFTs,” the researchers call metaverse property investments a “drop in the bucket.” 

However, they stress that there is immense growth that has not yet been realised. Just because a crash is not inevitable any time soon, this doesn’t mean that a crash won’t come. Before going any further, it’s important to note that, rather obviously, Republic Realm very much has a horse in the metaverse race. In fact, it recently paid more than $4 million for land in Sandbox, the aforementioned futuristic platform.

Analysts at Republic Realm firmly believe that “the metaverse is the greatest wealth creation opportunity in our lifetime, the transition from a 2D internet to a 3D interactive one. Again, though, wealth creation for whom? Savvy investors, hedge fund managers, and wealthy celebrities, it seems.

 As Republic Realm’s research notes, the majority of “investors in this space are either crypto “whales” – people who are already very comfortable with the risk and volatility of crypto investing or professional investors, specifically hedge funds and family offices.” 

These are not your everyday citizens. They are “generally sophisticated investors who understand that this is a derivative trade of crypto and that total loss of principal is one likely outcome.”

Yorio stresses that, although “metaverse real estate prices have catapulted to new highs in recent months, the asset class is still held in the hands of very few people. As more investors look to gain exposure to this tightly-held asset class, they will find few good options and the existing choices are likely to further increase in value until new metaverse platforms selling their real estate come online.” 

The best way – and perhaps the only sensible way – to invest in metaverse real estate she advises, “is through a broadly diversified portfolio, managed by professional investors” with inside knowledge. 

In other words, if you plan on purchasing property in this (brave?) new world, please exercise caution. Speak with people in the know, otherwise, you could find yourself duped like the Florida-based investors of yesteryears.