The first post in this metaverse series explained that the metaverse aims to become a mass interconnected network of virtual spaces, which extends our off-line reality to the online world. So what does this mean for Real Estate?

Metaverse platforms promise to transport users to virtual offices, cinemas, churches, shops, galleries and temples, while in the comfort of their homes. Certain businesses already have offices in the metaverse, and many retailers operate virtual stores.

Whilst nothing can replace “bricks and mortar” real estate, virtual real estate is already a new asset class for investors and definitely a space to watch. As with all metaverse opportunities, however, interested investors need to be aware of what dealings in virtual land actually entail and the potential legal issues.

What is “land” in the metaverse?

The metaverse offers a new supply of lucrative plots of “land” – defined plots of virtual space on metaverse platforms. Virtual land in the metaverse can be bought, sold, traded and rented much like “real world” properties, albeit through different transaction mechanisms. Payment is made via cryptocurrencies and the asset actually purchased comprises a non-fungible token (NFT), which is another form of blockchain-based digital asset.

Land can be purchased in a number of existing metaverse platforms (including The Sandbox, Decentraland, Somminum Space and Cryptovoxels), which allow users to landscape, build structures and dwellings and host concerts, exhibitions and get-togethers on virtual spaces. While an infinite number of metaverse platforms (and hence, virtual land plots) can be created, to ensure digital real estate has value, supply on the “main” platforms is limited – for example, Decentraland is made up of 90,000 parcels of virtual land, each sized at around 16 x 16 metres. 

Virtual land is, in turn, differentiated by factors such as neighbourhood and proximity to other popular plots.

The virtual land rush

The excitement around the metaverse has already created a virtual land rush. Some of the highest-value investments include:

• TerraZero, a metaverse technology company, acquired 185 Decentraland parcels, valued at approximately USD $2.78 million. TerraZero intends to build a new-generation online entertainment destination with immersive experiences like concerts, film screenings and shopping.
  
  
• Republic Realm, a digital real estate investment fund, set a record for the most expensive public virtual real estate acquisition to date, paying USD $4.3 million for land in The Sandbox.
  
  
• Jamestown, a US real-estate developer focused on adaptive reuse and retail created a metaverse version of its One Times Square property (the 26-story former headquarters of The New York Times) and hosted 20,000 people at a virtual New Year's Eve celebration in December 2021. Jamestown then invested over USD $500 million in redeveloping its physical One Times Square site with virtual and augmented reality installations.

The metaverse hype has reached the debt markets too. Last year, a borrower acquired two parcels in Decentraland with the help of the first-of-its-kind metaverse mortgage backed by TerraZero.

Virtual vs. physical real estate

Virtual and physical real estate are (literally) worlds apart. From a legal perspective, however, there are two main differences – how they are owned and how they are regulated.

Ownership

You can’t actually own virtual real estate as you would physical property. When you buy a plot in the metaverse, your purchase is recorded on a blockchain. You are then assigned a certificate of ownership via an NFT issued on the blockchain (here, the image of the plot of land), which is stored in your crypto wallet and functions as a title deed. 

Strictly speaking, you have indisputable proof of ownership of the NFT which you are then free to sell via an NFT exchange. Unfortunately, you don’t have the same power over your plot of land, virtual 500-story building or mega mansion, which are hosted on a private metaverse platform.

While NFTs exist on the blockchain, metaverse land exists on private servers running proprietary code with secured, inaccessible databases. As such, key functional aspects of property use are subject to the platforms’ unilateral control in accordance with their Terms and Conditions. 

Generally, platforms don’t claim ownership of their users’ assets, although that may just be the current status quo. The Sandbox’ Terms of Use clearly stipulate that TSB Gaming reserve “the right to amend these Terms at any time”. 

In addition, both The Sandbox and Decentraland are entitled to suspend users’ accounts and stop offering their services altogether without prior notice (i.e. the total discretion to de facto devalue all land and vanish the world it exists in). In this worst case scenario, you would retain your NFT, but the Decentraland / Sandbox land plot to which it relates would disappear. Needless to say, this goes beyond the limits restrictive covenants might impose, for example. There are no analogous restrictions on physical property ownership – a local municipality could not suddenly block off your land to all visitors.

Regulation

Virtual real estate is not currently regulated by any national property laws, unlike physical real estate. The metaverse is a global virtual domain, unrestricted by territory or custom, so it is hard to assert a metaverse government or law (although, the US SEC has recently tried to claim jurisdiction on the basis that more Ethereum transactions are technologically processed in the United States over any other country). 

Contrary to physical real estate, which is governed by centuries of historic legislation, for now, metaverse real estate is largely regulated through code and platforms’ T&Cs.

Key points to consider

Pros

• Growth potential: The metaverse property market is currently valued at USD $47 billion and expected to reach USD $679 billion by 2030. While property owners wait for their land to appreciate, they can convert their plots to anything from conference centres to marriage venues, set up billboards to generate advertising revenue and rent their premises out to brands eager to open virtual shops. Since the metaverse is still in its infancy (and more and more people are turning to video games and virtual worlds) there is significant growth potential.
  
  
• Lower transaction costs: Virtual land transactions are governed by smart contracts: self-executing agreements between the buyer and seller, directly written into lines of code. For land sales, for example, the smart contract will automatically transfer the land NFT from the seller’s crypto wallet to the purchaser’s once a payment has been processed. The underlying “metaverse tech” allows the parties to a deal to be certain about the outcome, while trimming transaction timelines from months to minutes and slashing costs otherwise spent on intermediation and commissions.

Cons

• Speculative: While the potential to make a profit may be high, metaverse investments are highly speculative. Much like the internet in the 1990s, it is difficult to predict what the metaverse’s future may hold. Return on virtual land will depend on the popularity and commercial success of individual metaverse platforms, the stability of cryptocurrencies and the impact of future regulation (or lack thereof).
  
  
• Potential for nil value: Unlike physical estate, where you are always comforted by the fact that you still have a piece of land you can touch and stand on, in a worst-case-scenario, the value of a metaverse property may reduce to zero. This is a significant drawback that will need to be overcome in order to attract mainstream investment.

Assuming real estate transactions in the metaverse take off, many more legal issues will have to be navigated. As transactions become more frequent and sophisticated, lawyers will be needed to dissect platforms’ T&Cs, resolve T&C disputes, help prepare smart contracts’ real-life counterparts and advise on emerging legislation.

Read the full Metaverse blog series here Contemplating the metaverse: Opportunities and risks (linklaters.com)