Virtual Real Estate Returns: Metaverse-Sky is the Limit!

In the 1980s cult film “Tron”, a programmer enters the world of his own video game and must fight for his life. In the Starship Enterprise franchise, Captain Picard’s crew heads to a holodeck for training purposes. There, it is possible to sail the oceans of the world on a traditional skipper. Of course, the virtual reality that we can experience today is still a thousand leagues from these fantasies. Nevertheless, many areas of our environment have become heavily virtualized.

Billion-dollar company Facebook has taken a major step into virtual reality. First, the company’s founder, Mark Zuckerberg, decided a year ago to change the name to Meta: it sounds like an abbreviation of Metaverse – the general term for digital parallel worlds. On the other hand, the entrepreneur, who still seems young, has invested billions in the further development of virtual platforms. Since then, companies in many industries have felt the need to develop business models for the metaverse. The real estate sector seems to have found a virtual solution to land scarcity or rising land prices. Platform users are already buying lots in a parallel universe through platforms such as Sandbox or Decentraland.

Registration in the sandbox is very simple: First, the new user must choose and equip his avatar. This can move by hopping, walking or gangman. However, contact with monetary reality is just a few clicks away. On a green background with squares of the same color, an orange square is on sale for 7,000 USD, which is the equivalent of 5.5 Ethereum. This corresponds approximately exactly to the price per square meter of real land between Zurich main station and Paradeplatz. So the highest card in Monopoly. Offers welcome. The fact that the other party only appears with an abbreviation and can be depicted as a heavily pixelated robot does not necessarily inspire confidence. The avatar is on his little plot – and now what?

No hindrance thanks to tenant protection

The happy new owner of a plot acquires the right to dispose of it as he pleases. Commercial use is often in the foreground, but not only. In the sandbox, for example, users can also develop games, with the platform supporting them with an intuitive toolkit. Anyone who does not attach importance to this will strive – like him in real life – to achieve a decent return, for example with a temporary lease to other users. There are no shackles or rules for setting the rent. In the instructions for Sandbox there is the encouraging sentence: landowners can decide the amount of rent themselves. However, according to the guidelines, the owner must be guided by certain guidelines, for example, the proximity of so-called social hubs. The tenant can develop games himself on his domain, the owner does not share the profits.

As with all freely tradable goods, the value of a metaverse package is determined by supply and demand. The more attractive a piece of digital flooring is, the more people will pay for it. The closer players are to their own property on average, the more revenue can theoretically be generated with the plot, which in turn justifies a higher price. Location quality is also an issue. Particularly well-located properties are those that are closest to the game’s entry point or in areas where other attractive game content and offerings already exist. In one respect, however, real and virtual real estate differ dramatically: while in the real world land is basically a scarce and limited commodity, in the metaverse new ones can be created with the click of a mouse. Whether it’s in the game universe in which you are invested or in the emergence of new competing metaverse projects (see graph 1).

Figure 1: The metaverse is unlimited in extent. Source: Sandbox.

market in its infancy

The virtual land market is currently still manageable and is trading in very small volumes. Driven by the hype, price bubbles inevitably appear, as can also be seen with cryptocurrencies. For example, in early January 2021, the average plot of land in the sandbox was still selling for less than $150. After a longer and regular price rise, the virtual floor was trading at the end of October around 2,500 USD, which already corresponds to a price increase of around 1,550%. The announcement of an early publicly available alpha version of the game catapulted trading prices to over $16,000. Landowners were also getting a lot of trash from their competitor Decentraland. According to the company’s creative director, initial land sales were $20. Today, the cheapest plot is already worth 3,500 US dollars. Last year, crypto company bought land near the virtual Bahnhofstrasse with many fashion boutiques. At a record price of $2.49 million (see chart 2).

Figure 2: Real estate in the metaverse. Number of transactions and average sale price of packages in The Sandbox game, 7-day average. Source: Raiffeisen Economic Research

The formation of a bubble in price action should occupy investors’ nerves for some time, as the potential for Sandbox, Decentraland and what may come is only a small part of it so far. The world of games, intended to attract the majority of users willing to pay, is still in its infancy. Additionally, the future of virtual landscapes is tied to the future development of the metaverse. The decisive question here is when the Metaverse will be suitable for the masses. It also and above all depends on cultural factors. The game still smacks of teenage shacks not broadcast in Europe, while in Asia it has become a veritable national sport. In many projects, it is suspected that trading the digital soil is the main goal and less the creation of a true metaverse. As a buyer, who is not only speculating on rising prices in the short term, you are ultimately betting that a product will indeed be created in the future that will also attract players and other investors. The fact that major companies such as Meta (Facebook) have expressed interest in developing their own Metaverse projects could be an indication that the digital parallel worlds that are actively used will indeed become established in the future. Today, however, it is simply impossible to estimate what they are. If you are lucky enough to support the right horse, you can benefit greatly. However, the probability of putting your money into a dead-end project is many times greater.

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