Over the last few months, the volume of transactions for real estate in extended reality (XR), also known as the metaverse, has ramped up. These digital landscapes will grow into fully functioning economies in a few short years that offer a synchronous digital experience integrated into our lives as social media is today.
The Metaverse is NFTs, but with land
Virtual real estate is a game-changer and likely to have profound and lasting consequences for the tangible property market. It has the hallmarks of an evolutionary step in property ownership. It allows property investors to buy squares of land, as NFTs, and either build on them, let them or hold them until their price increases and then sell.
"Creating buildings and items on XR will improve the land’s user traffic and further increase its value"
Investors like to buy land near high-profile names as they expect it will be developed first. Sitting on the vacant land leaves the owner reliant on the plot’s value increasing. But, creating buildings and items on XR will improve the land’s user traffic and further increase its value.
No longer the sole purview of gamers and crypto entrepreneurs, the idea of owning a piece of virtual property is enticing, not only for speculative investment but for a generation of prospective buyers raised on Minecraft and cryptocurrency. Companies have created “worlds” with a limited amount of “land” prospectors can buy using cryptocurrency, and an increasing number of people and companies have bought into the idea.
XR has a new Hong Kong in the making
On January 5 2022, one of the leading decentralised-gaming virtual worlds, Animoca’s Ethereum-based The Sandbox, announced that it had signed on multiple Hong Kong partners from the entertainment, professional services, finance, real estate, and gaming sectors to create Mega City, a virtual Hong Kong cultural hub. The partners have acquired land NFTs in the open metaverse and are committed to building experiences in Mega City. To celebrate, The Sandbox held a virtual land sale that was so popular many would-be investors left empty-handed. Animoca itself is a Hong Kong company.
Among those penning their names to Mega City was Hong Kong tycoon Adrian Cheng, alternative investing leader Sun Hung Kai & Co, professional services firm PwC Hong Kong and blockchain-related investment and asset management company TIMES CAPITAL. On 19 July 2021, the South China Morning Post signed a deal to bring authentic cultural experiences to Mega City, past, present and future.
Over the last few months, the volume of transactions for commercial real estate in XR has ramped up. These digital landscapes will grow into fully functioning economies in a few short years that offer a synchronous digital experience integrated into our lives as social media is today. They will allow people to project themselves through avatars, shop, find friends and new experiences, participate in events, and do things they typically do in real life, but in a mirror world that enables them to create an alternative existence restricted only by their imagination and the technology of the day.
It’s the wild west, east, north, south, and anywhere else you choose
It must be stressed that at this point, no one knows the limitations, weaknesses and dangers investors really face in getting into XR. Due diligence is paramount. So far, platforms are limited to gaming companies and others such as The Sandbox, Decentraland, Sommium Space, Upland and SuperWorld. But we can foresee that it won’t be long before this is a heavily populated sector.
"NFTs themselves are not always the money mints they have been made out to be, as their prices depend on their popularity"
NFTs themselves are not always the money mints they have been made out to be, as their prices depend on their popularity. User traffic and location will measure this popularity in virtual land, and prices will rise and fall accordingly.
Investors may also encounter intentional fraud or put their funds into fly-by-night operations and lose everything. More importantly, the cryptocurrency in which all these items are traded is highly speculated, and its value can fluctuate wildly.
Prices are volatile as the XR worlds seek to balance their overall economies. And currently, the separate worlds are not open to each other, meaning if you choose to go with The Sandbox, you stay in The Sandbox.
Investors like Cheng have been snapping up virtual land, signalling that a lot of investment that would usually have gone into the tangible market is now flowing into cryptocurrency. These new worlds will have tangible benefits for businesses, retailers, developers and investors.
Virtual commercial spaces offer companies more options
XR will allow companies to further decentralise their office space. Already hastened by the pandemic, taking staff away from physical offices has been a way to optimise operational costs, prevent physical interaction and any resultant virus spread, and save staff the expense, risk and grind of daily commuting, especially in sprawling cities like Tokyo. Obviously, long daily commutes are not a consideration in Hong Kong. However, XR offers companies another way for staff to meet, conference and attend team building in a tailor-made space.
With XR, satellite offices in more affordable and accessible areas make sense to a business’s bottom line and boost its ability to attract talent.
This decentralisation would likely see a knock-on effect in the tangible residential market as owners and tenants search for extra office space in their homes or nearby shared settings, bolstered by all that XR has to offer. While this sounds very ESG (Environmental, Social and Corporate Governance) friendly, there are environmental pitfalls such as the real, excessive energy required to power these XR platforms and make life as seamless as possible.
The virtual mall
Big brands are clamouring to get into the XR space, particularly given the success of e-commerce in light of the pandemic. Possibilities abound, with shops being able to sell tangible stock or NFTs. In December 2021, Nike bought a virtual shoe company, RTFKT Studios, that makes NFTs and sneakers. On 17 December 2021, Adidas sold more than US$22 million in NFTs within a few hours. Buying an NFT can give owners access to unique physical goods, like a hoodie and the tracksuit worn by the Bored Ape that Adidas owns, and upcoming digital experiences.
"XR also needs financial and real estate services, virtual architects, automakers, and services we cannot imagine at the moment."
XR provides another channel to retailers in addition to bricks-and-mortar shops and the e-commerce channels that are so popular now. Once XR becomes more common, there is a higher chance that a significant number of retailers will reduce their tangible world footprint, forcing shopping centre owners to once again re-evaluate their marketing strategies, layouts, and spacing plans to attract tangible footfall.
Entertainment and more
XR is made for entertainment and already opens up many possibilities for brands to collaborate with famous artists and influencers. It allows retailers to showcase their products to a younger generation, as most investors in virtual land are under the age of 50. But it also needs financial and real estate services, virtual architects, automakers, and services we cannot imagine at the moment.
Virtual land will change homebuyers’ behaviour, especially for the next generation. If buyers can build a mansion in their square at a fraction of tangible cost and attract sufficient user traffic to generate passive income over and above potential land price appreciation, the attraction to tangible property investment wanes. Even though these users would only make up a fraction of the potential pool for tangible homeownership, owning a real-life home becomes less critical as XR lends itself to more of a co-sharing market
If it behaves only half as well as predicted, XR will drive real-world demand in the industrial property sector from an exponential need for data centres, logistics centres and manufacturing hubs. Data centres will be the top priority to cover the need for speed, security, and e-commerce globally, as retailers extend their reach. Powering this metaverse will be paramount, pushing the alternative energy sector to undreamed-of heights.
This article was first published in the South China Morning post on 15 February 2022 and updated by Colliers on 10 March 2022.