Virtual real estate is so hot, investors are selling off Toronto holdings to get in. Should you get in too?

Fashion shows are roaring back, and the biggest one in the world since pre-pandemic times is set to take place in late March.

Organizers are expecting half a million visitors. Paco Rabanne, Dolce & Gabbana, Etro and Tommy Hilfiger will be among the top designers featuring their newest lines and products, and automobile brands are already competing to host the event’s after-party.

But unlike in pre-pandemic times, you don’t have to be famous (or know somebody famous) to attend.

You don’t even have to spend money, or leave your house. All you need is Wi-Fi access and a virtual reality headset you can purchase on the web and connect to your phone.

The event is happening in the fashion district of Decentraland, one of the many 3D virtual realms of the metaverse: a newly in-vogue term for a shared digital space accessible through a browser, like a computer or a virtual reality headset, where people can socialize, attend events, and collaborate on work and business projects.

At the virtual fashion show, attendees will watch digital models walk down digital runways showing off digital clothes, and they will then decide if they want to buy those digital clothes to dress their digital avatars.

The entire spectacle sounds like it would appeal mostly to teenagers, gamers or fashion superfans. But it’s shaping up to be more intriguing to investors than anyone else.

While the digital clothes on the digital models can only be bought with digital dollars, the entire fashion show is backed by real, substantial, financial capital. Brands and businesses are shelling out massive amounts of money in cryptocurrency to participate, hoping the investment will pay off.

Toronto-based cryptocurrency mining company Tokens.com bought the piece of virtual land on which the fashion show is taking place for $2.4 million (U.S.), and CEO Andrew Kiguel feels they were cut a deal.

“Like with real estate in the real world, you want to be a landlord where the traffic is, or is going to be,” said Kiguel, whose company has so far raised $16 million to invest in the metaverse.

“The real opportunity in the metaverse is commercial: renting out virtual space and hosting events for companies and brands looking to advertise to a new demographic and younger digital audience.”

Metaverse-like platforms have existed for the better part of 20 years, in the form of virtual-world games like Roblox and Second Life.

Yet the idea of a sophisticated virtual reality accessible to everyone permeated cultural consciousness just last fall, when Facebook CEO Mark Zuckerberg revealed his multinational tech company rebranded to Meta Platforms Inc., and planned to focus on developing an immersive digital world.

Since then, high-profile investors like George Soros and the Winklevoss twins have invested millions into virtual reality projects. Ark Invest founder and CEO Cathie Wood dubbed the metaverse a trillion-dollar investing opportunity. And someone paid $450,000 for a plot of land just so they could be Snoop Dogg’s digital neighbour.

Virtual real estate sales are projected to top $1 billion in 2022.

In and around Kiguel’s territory in Decentraland’s fashion district, brands are already wrestling for the right to buy virtual storefronts, residential units are selling for tens of thousands of dollars, and everyone from investment banks to accounting firms to podcast hosts are paying to be featured on digital billboards near the fashion show’s runway.

“When Facebook had a hundred users, it was cheaper to buy their ad space than when it had three billion,” Kiguel said. “This is the same thing — people are pre-purchasing prime ad space.”

On paper, the metaverse real estate market appears to have too much upside to pass up: a report from Brand Essence Market Research found that it is expected to grow at a compound annual rate of 31 per cent a year from 2022 to 2028.

That is three per cent more than Toronto’s blazing-hot real estate market inflation of the past 12 months. That potential for growth is compelling several seasoned investors to divest from traditional asset classes for a slice of the digital pie.

“What’s exciting right now for investors is the potential to own a piece of our virtual future,” said Lorne Sugarman, a Toronto-based entrepreneur and former investment banker.

Sugarman divested some of his real estate portfolio in the last year, and used part of that equity to develop and lease territories in the metaverse.

His digital real estate company The Metaverse Group bought 165 digital parcels of land on which they are building virtual corporate offices, a marina and even a yacht.

The developments are already eliciting attention from prospective buyers from around the world.

“The excitement I see in the metaverse is a lot of the same excitement and opportunity I saw back in the dot-com boom: it’s an evolution and deepening of how we interact,” said Sugarman.

“On top of that, I think the pandemic has especially made us crave that.”

Still, the risk is not lost on him.

The metaverse’s nascence, its reliance on cryptocurrencies for in-game payments and, of course, the lack of tangibility of certain assets (a digital home will not shield you from the rain) could dampen interest in the metaverse and stunt its growth as an asset class.

In consequence, the digital scape, depending on who you ask, is either the best investment opportunity since the internet, or the most overvalued bubble since Tulip Mania in 17th-century Netherlands, or something in between.

“The metaverse will happen — everybody is talking about it — but these are early, early days for investors,” said Carolina Milanesi, president and principal analyst at Creative Strategies, a consulting firm for tech companies based in San Jose, Calif.

Milanesi said acquiring capital at a discount rate before the metaverse becomes mainstream could pay off in a big way, but that early investors remain partially blind to future regulations.

“We still have no idea how governments will look at the metaverse from a taxation perspective, a privacy perspective, and would they impose anti-competitive laws? I think there are still major questions around regulation and access that we have to address.”

Milanesi also wonders if the metaverse’s requirement of a fast network and expensive technology might all make it too arcane to ever become as ubiquitous as social media.

The current headsets are also an issue: many users and industry experts find them clunky, and even the head of communications for Meta (formerly Facebook) called the headsets “wretched” in media interviews late last year.

When assessing the Metaverse as an investment opportunity, Milanesi equates it to cryptocurrencies: getting in early could make you rich — but could also get you burned.

She believes that, for now, it is safer to invest in companies that are going to play a role in the metaverse, rather than on consumer goods like a digital house, motorcycle or yacht.

“I think the safest play is to invest in companies working on the cloud or the semiconductor business … they will have a role to play in the metaverse.”

And does she think it’s worth trading one’s current real estate portfolio for a digital one?

“I wouldn’t give that kind of financial advice,” she said.

“What I will say is that, in terms of real estate, I think the rules in the metaverse are no different than the rules in real life: location, location, location.”

I WANT IN, WHERE DO I START?

How do you buy real estate in the metaverse?

Land in the metaverse is divided in square parcels of land, which present digitally as 96-by-96-metre plots in The Sandbox and 16-by-16-metre plots in Decentraland.

Buying a parcel of land inside the metaverse requires you to make an in-game purchase using currency native to the game. Sandbox uses $SAND, Decentraland uses $MANA and Somnium uses $CUBE. All these currencies cannot be directly exchanged with traditional money, but with cryptocurrency Ethereum.

So, I need to own Ethereum to buy land in the game. How do I buy Ethereum?

You can use traditional money to buy Bitcoin, Ethereum and other cryptocurrencies with the help of currency exchange platforms like Coinbase or Gemini. These platforms also allow you to store your cryptocurrency in a digital wallet encrypted with a private code, or key.

So if I buy cryptocurrency and then use it to purchase digital real estate, is that purchase in the metaverse protected? Is this legit?

Digital plots of land (or digital clothes or digital artwork) are bought and sold as non-fungible tokens (NFTs): digital representations of real items whose purchase and sale is verified using blockchain technology. In other words, when you buy a digital plot of land in the metaverse with cryptocurrency, a receipt of your purchase becomes listed on an unalterable digital ledger, which acts as proof that the plot of land was bought by your crypto wallet and, thus, belongs to you. If you then sell your plot of land, your sale also becomes encoded on the ledger.

How do I know which plots of land are for sale?

Most lands in the metaverse have marketplaces where users can browse plots of land that are for sale, though each land runs its market slightly differently. A good browsing tool for land in The Sandbox, Decentraland, Cryptovoxels and Somnium Space is opensea.io.

How do I make money with a digital plot of land?

Like in traditional real estate, resale value and rental income are two main ways to make money with digital property. The rationale here is that properties will be worth far more as demand and interest for the space increases.

The value of traditional real estate is partly predicated on supply and demand. How do I know these virtual worlds like Decentraland and The Sandbox will not just create more digital land, and make the value of my investment drop?

The number of plots of land in Decentraland (90,000), Sandbox (166,500) and Somnium Space (5,000) are fixed, and cannot be easily created. However, it is unclear whether in-game developers will create new land at some point in the future.