Real estate meets the metaverse

The combination of the slow-to-change real estate sector with the rapidly moving blockchain and non-fungible token (NFT) area may appear counterintuitive, but the technology behind NFTs could give rise to a surge in digital developments for real estate.

Already, vast sums are flowing around these digital worlds. Blending the digital and physical worlds could result in a market capable of generating $5 trillion in value by 2030, according to consultancy McKinsey & Company, spurred on by Facebook’s parent company doubling down on the space with its rebrand to Meta.

And while there may be a consensus that technology will shape the real estate sector, details on how this may materialize are less clear. The most developed ideas fall into three broad areas: virtual property in the metaverse; recording real-world transactions on virtual ledgers; and tokenizing shares in investment funds.

“Depending on what your background is, you will likely define digital real estate in a different way to the person next to you,” says Richard Woolsgrove, director at PLP Architecture. The firm behind 22 Bishopsgate, a commercial skyscraper in London, has been an active backer of blockchain-linked projects, launching its own NFT collection in July.

Woolsgrove says digital real estate marks a “shift in our perspective of what digital space is in relation to our physical world,” with digital assets becoming a “viable space that we feel like we actually inhabit,” such as those in video games or on social media.

“Digital real estate, at its most fundamental level, is just when these virtual spaces are defined and then given a commercial value,” he says, pointing to virtual worlds such as Decentraland and Sandbox, worlds where users can buy plots of land as NFTs with cryptocurrency.

The concept of real-world constructs, such as ownership, value and market demand existing within a digital space raises more questions about how such spaces will operate and develop, Woolsgrove says, with other emerging factors yet to be taken into consideration. He notes: “The possibilities for what a blockchain-backed real estate market might look like are genuinely endless.”

On the back of the intrigue surrounding the space, a number of big brands and financial institutions have been “buying up tracts of virtual land or opening metaverse shopfronts,” says Aimee Dring, associate in the real estate team at law firm Lewis Silkin.

“Digital real estate, at its most fundamental level, is just when these virtual spaces are defined and then given a commercial value”

Richard Woolsgrove
PLP Architecture

From a “brand, marketing and customer experience perspective,” there are countless opportunities within the space, she says. Possibilities include retailers having “virtual spaces where shoppers can browse and try on items,” or “walk around a remodeled kitchen without visiting a store,” she adds.

Metaverse platforms such as Decentraland have garnered strong interest from advertisers and markets as they provides users with the possibility of “investing and purchasing land to provide virtual experiences” which can then generate greater ‘real’ revenues, says Luigi Croce, partner at law firm Advant Nctm.

Elsewhere in the metaverse, platforms such as Spatial allow users to purchase virtual real estate that can later be renovated, resold or rented at a later stage. “Users are able to leverage spaces such as conference rooms, art galleries and concert halls to provide virtual experiences and mimic the benefits of purchasing real-world properties, but can all be managed quickly and efficiently from one platform,” adds Croce.

The technology also marks a potential development of the “digital twin” concept – the idea of having a digital recreation of a real-life asset.

What was once the domain of architects and planners may soon be within the wheelhouse of building owners and operators, who can use “predictive modeling” based on customer footfall data to “trial alternative spatial layouts, or to prepare for and test protocols for dealing with security or other emergency incidents,” Dring says.

And while it is apparent that some businesses “just want to have some skin in the metaverse game,” owning digital assets may give them a “commercial and competitive advantage” over competitors as the technology develops.

“The jury is probably still out on that one,” Dring adds.

On the flipside, others view the opportunity at the intersection of blockchain and real estate to be within the brick and mortar of real-world assets.

The affordances of blockchain technology, namely its ability to act as a host for ledgers in transactions, means the space is a natural fit for the real estate sector, says Croce. He believes the technology could revolutionize contracts within the real estate market, “streamlining and expediting” what can often be a lengthy process.

“Blockchain technology would make it possible to bring together all information concerning a property into one, immutable location, accessible to all parties and ensuring accurate and secure transaction and ownership history,” he says.

“Smart contracts could eliminate the need for declarations of trusted third parties… for the provision of financing”

Luigi Croce
Advant Nctm

The technology may also allow for greater transaction transparency and for agreements to be automated through smart contracts – computer programs on a blockchain that are activated when certain conditions are met.

“Smart contracts could eliminate the need for declarations of trusted third parties such as notaries, as well as other intermediaries, such as banks, for the provision of financing,” adds Croce.

But the affordances of such smart contracts can be detrimental in certain circumstances. He says that while the unamendable nature of smart contracts means that they are “useful” for instantaneous transfers, it is not always practical in many real-world scenarios.

“Smart contracts wouldn’t be suitable for cases where there is the need to provide for a significant interim period between signing and closing, which may also contain previous or subsequent conditions,” Croce says.

But other affordances are helping to maintain optimism and interest within the space. In light of rising interest rates, one key advantage of blockchain-backed real estate is the cutting out of middlemen, says Jawad Ashraf, chief executive of metaverse platform Virtua. He says that buyers and sellers alike will be able to “strip property sales” of their bureaucracy, expediting the process while lowering costs.

He points to the first real estate sale in cryptocurrency in Portugal as a potential template for future transactions. The deal took place between the buyer and seller on two laptops in an office and happened in just a matter of minutes, a marked departure from the drawn-out nature of existing methods.

Yet, already, the barriers that affect the current real estate market are hampering deals within the blockchain space. Ashraf says the regulatory process that precedes these kinds of transactions can be “time-intensive and ­laborsome.”

“In a market that moves so quickly, this needs to change before its full growth potential can be realized,” he adds.

In short, the possible outcomes of a blockchain-backed real estate space are vast, diverse and developing, and the underlying technology evolves. But whether it is in a digital world or a virtual one, it is apparent that the space is gaining traction among traditional real estate firms and digital natives alike.

Investing in the future

Another possible application of blockchain technology in the real estate market is within the investment fund space. Tyler Welmans, UK blockchain lead at Deloitte, points to “tokenized” investment funds that allow institutional and retail investors “exposure to traditional real estate by purchasing assets that function in a similar way to cryptocurrencies, but which represent and are backed by investment fund units.”

In practice, this means investors could purchase a digital real estate token, similar to an NFT, that represents the ownership of property, an equity interest in the company that controls the property, or a right to share profits from the asset.

Whereas real estate investment trusts act as a pool of various assets, real estate tokens would allow for investments to be linked to individual assets. Ownership of assets can therefore be transferred from investor to investor almost instantly.

One of the first commercial successes of the approach came in 2018 with the issuance of Aspen Coins – tokens that represented ownership of the luxury St Regis Aspen Resort in Colorado.

The introduction of such tokens marks a departure from the “highly illiquid” real estate world of today, says Oi-Yee Choo, CEO of ADDX, a regulated private market exchange based in Singapore. She says tokenization of funds, loans and assets “democratizes” real estate financing from the perspective of the investor, as blockchain-backed fractional ownership brings minimum investments down from millions to thousands of dollars.

The technology is inherently built to facilitate this, Choo explains. “Tokenization automates manual actions such as yield distributions or ownership tracking in the secondary market. This means it is efficient enough to serve a large number of investors each holding a fractional share of a portfolio of properties, and minimum investment thresholds can be significantly lowered,” she says.

The outcome is liquidity, with tokens being traded in small units “inexpensively,” affording investors the ability to not only access trades, but also the option of exiting early, “before the deal fully matures,” Choo says.

It is an area that is gathering attention beyond Web3-native companies, with the most immediate opportunities of blockchain and real estate being in the tokenization of real estate funds, says Thomas Olsen, partner at management consultancy Bain & Company’s New York office and the firm’s global co-lead on its Web3 and metaverse practices. He says that tokenizing a fund is “in some ways easier” than tokenizing individual assets since there are “already defined reporting and regulatory workflows” in place.

Looking ahead to the potential mainstreaming of the blockchain-backed real estate market, Olsen says the market will more likely catalyze Web3 and technology investors into the real estate space, as opposed to encouraging real estate players into the technology sector.

But above all else, the fantasy, escapism and worldbuilding of the metaverse have galvanized the interest of early adopters, while those in the real estate space view the technology as a tool to supplement and improve the existing markets, providing the proving ground for commercial opportunities that bridge the gap between the real and virtual worlds.

As PLP Architecture’s Woolsgrove says: “There will be endless opportunities to add or rethink value – whether financial, social or environmental. Where exactly though, we’ll have to wait and see.”