It was only a matter of time before the NFT craze came for real estate.

Non-fungible tokens, or NFTs, serve as digital proof of ownership that live on blockchain networks. Often connected to cryptocurrencies like bitcoin, they are billed as secure ways to monetize virtual assets.

In recent months, investors have used them to buy rights to professional basketball highlights, viral memes and celebrity tweets. Recording artists have used them to distribute their music. Some of these digital assets are commanding substantial sums of money. On March 11, the auction house Christie’s sold an NFT for a piece of art for $69 million.

NFTs went from being this little fringe movement to Christie’s auctioning them off. Some people might dismiss it as a bubble, but what I see instead is just an industry that was ripe for transformation…

Janine Yorio, Republic

Now, there is an NFT market for real estate that exists purely in digital environments. The NFT for “Mars House,” a 3D rendering of an extraterrestrial home, sold for 288 units of the cryptocurrency Ethereum, equal to more than $500,000 at the time of sale on March 17. And, as online video game worlds, known as metaverses, have become hubs for commerce – the designer Marc Jacobs launched a line of avatar accessories in Nintendo’s Animal Crossing world, for example – space within them has become a commodity. One such metaverse called Decentraland has seen two parcels of land sell for prices equivalent to more than $200,000 a piece in the past two weeks.

As the market for virtual real estate gains traction, managers have taken notice. On March 24, the crowdfunding platform Republic launched an open-end fund targeting the emergent asset class.

Claiming to have more than a million users across the Republic platform, Janine Yorio, the firm’s co-head of real estate, expects much of the investment for the Republic Realm fund to come from high-net-worth individuals, many of whom have made fortunes in cryptocurrency and are eager for new ways to access to space. But, she said, the concept is catching on with some hedge funds.

The rise of digital real estate – and NFTs more broadly – tracks closely with a run-up in various asset prices in recent months of the pandemic, ranging from stocks to sneakers and various other collectables. The concern is that government stimulus payments and a lack of other outlets to spend their time and money have driven retail investors to cryptocurrency much like it drove them to buy shares of GameStop and so-called ‘meme stocks.’

In an interview with PERE, Yorio rejected the idea that an NFT bubble is forming. And not only are investors aware of the risks involved in crypto-based strategies, she said, but the volatility is what draws them in.

Below is PERE’s conversation with Yorio, edited and condensed for clarity:

How do you explain digital real estate to the average investor?

The whole concept is buying land inside video games. The video games happen to be based on the Ethereum blockchain, so they are crypto-based video games. But the concept of a video game is one that’s very familiar. If you’ve ever played a video game, whether it’s Super Mario Brothers or Minecraft, you have an avatar, you’re walking around, you see buildings, you see spaces, you see open fields. That’s the real estate inside the video game.

Advertising in video games is not new, it’s been around for a while, it’s a multibillion-dollar industry already. The difference now is these lands can be acquired within the video game using crypto currency. Each of these games has its own cryptocurrency, its own ecosystem and economy, and the users can buy land using crypto currency and develop it. They can put a house, a billboard, a museum, anything they can imagine. They hire a 3D developer who is essentially their architect and contractor all in one, and that person designs a building and they put it on the virtual land. But if they want to be very commercial about it, they can sell the sides of the building for advertising, they can charge admission, they can do lots of different things using the token in that economy, and the token is exchangeable for real world money.

Decentraland is the largest of these crypto based virtual lands. It has its own crypto currency called MANA, you can buy it on Coinbase just like you’d buy bitcoin or Ethereum and that’s the currency you use to buy land in that particular world. So, it can be advertising instead of paying to have your ad up or paying for the duration of the game, you actually own the billboard, you own the building, you own the structure inside that game.

…it’s something that went from ‘no one’s ever heard of it’ to ‘everybody’s talking about it’ in a very short amount of time.

So, the investor who owns a piece of land can charge someone to advertise on it, like any other sort of billboard?

Right. And people are much more creative about it than billboards. A billboard is the most simplistic way of describing it, but for example, Adidas did a sneaker drop inside Decentraland. Obviously, it was an advertisement for Adidas but what they did was drop virtual sneakers that people could claim so their avatar could then wear cool new Adidas sneakers. So, it’s not a flat billboard. It’s marketing that is cool and meets consumers where they play video games, in these worlds where they can connect with people.

If that metaverse were to be taken down or lose favor to a competing online world, what would it mean for the fund’s real estate investments in it?

Our fund is diversified across many metaverses, so we are somewhat insulated from this risk. Any loss would be offset by a gain in the metaverse that took its market share. But, by virtue of it being a decentralized metaverse, no one person or group holds the keys or can shut it down. It is owned by the users and the community, not the operators or the developers. And, through NFTs, the developments built in one virtual world can be transferred to another. In actuality, all the metaverses form one giant metaverse that is connected, and people can trade and transact between virtual worlds.

For more traditional real estate investors, are there other parallels for performance of virtual real estate that equates with a physical piece of commercial property?

You can collect rent, you can do development, you can do an assemblage – buying plots that are adjacent to each other to make one big plot. You can build a neighborhood where you build one attraction and sell off the plots around it, like you would in real life. There are a lot of parallels to real world real estate.

When we talk to traditional real estate investors, they tend to come in two flavors. One is ultra conservative, wants to do things the way they’ve always been done. Then there are early adopters who maybe have dabbled in crypto already and made a lot of money, so they’re excited to try out what’s new and next.

NFTs went from being this little fringe movement to Christie’s auctioning them off. Some people might dismiss it as a bubble, but what I see instead is just an industry that was ripe for transformation and that transformation happening really, really quickly. Art, piracy and how artists earn royalties for their intellectual property is a problem the world has been trying to solve for a while and NFTs are actually a really great solution. We’ve seen how dramatically NFTs can change the art and music world, and now the concept is applying that to the spaces inside these virtual worlds feels very natural when it comes on the heels of the NFT wave.

The pace used to be slow but now it’s glacial when you compare how fast the market is moving in the real world to how quickly financial institutions maneuver.

How much additional attention have you gotten since the $69 million headline-grabbing sale at Christie’s? 

Everybody is talking about NFTs. I’m a mother and all my mom friends are asking me about NFTs. They’re curious and want to understand. I just did Good Morning Canada this morning, talking about NFTs and digital real estate, and that’s a very mainstream news outlet, so it went from very obscure to very popular very quickly. Last week, Taco Bell dropped an NFT, this week Charmin toilet paper dropped an NFT. So, it’s something that went from ‘no one’s ever heard of it’ to ‘everybody’s talking about it’ in a very short amount of time.

Do you think this is an area where institutional investors can get involved or do you see this as something better suited for the accredited retail investor?

I’m not going to name names but there are lots of hedge fund investors who are very keen on crypto. The [traditional] institutions, a lot of them won’t even let you invest in bitcoin on their platforms. You can’t buy bitcoin on Charles Schwab. So, do I think they’re going to be investing in digital real estate? Probably not anytime soon. But individual investors are finding ways to do that without them. There is this lag between what’s happening in the real world and how slowly traditional financial institutions move. The pace used to be slow, but now it’s glacial when you compare how fast the market is moving in the real world to how quickly financial institutions maneuver. There’s a huge disconnect.

What role do you see tokenization playing in physical real estate? Can ownership of actual properties be traded in that format?

People get very excited about this topic but it’s harder for me to understand how this could work because what I think people are most excited about is the prospect of liquidity. And liquidity in real estate is something people have been trying to figure out long before crypto. If you take a $20 million or $50 million building and you tokenize it and trade it on a crypto exchange, it’s not going to have enough trading volume to really represent a true source of liquidity for the holder. So, there’s always that disconnect between what people want and expect and what can actually happen.

Tokenization will change how real estate transacts. Right now, the process is really archaic. There are still fax machines, there’s still title insurance and if you’ve been to a real estate closing lately, even virtually, you’re still signing paper documents. Even if you’re e-signing, you’re still signing. There’s so much about it that is evocative of the 19th century. It hasn’t changed all that much. We’ve added technology but it’s still the exact same process; we’re just doing it with digital documents that are in PDF form, But I think there’s an opportunity to streamline things even further, and that’s what’s exciting about what tokenization can do. You’re seeing it happening with NFTs and digital real estate, and a lot of the learnings from that will be applied to real world real estate, too.

You can collect rent, you can do development, you can do an assemblage… There are a lot of parallels to real world real estate.

Do you see crypto currency reaching a maturity level where that volatility comes down, or is that just baked into the product?

That’s an interesting question. If you think about the sector maturing, the volatility could go away. But what makes crypto so appealing, and why it’s so popular, is because of the volatility. So, I don’t know the answer to that; it’s like the chicken and egg question. If it becomes widely adopted, does the volatility go away? And, if so, do people care about it anymore? The volatility is what makes it [appealing].