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Byte Sized Real Estate Investments

How NFTs are creating a new digital real estate asset class

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By now you probably already know about NFTs. You probably already know that these “non-fungible tokens” have taken the art world by storm, thanks to the groundbreaking sale of Beeple’s $69m auctioned artwork at Sotheby’s. But what you might not know is that these cryptocurrency powered pieces of stored data have made a foray into real estate. In fact, right now you can buy blockchain properties that exist only in the digital realm.

Virtual real estate is gaining steam, but you have to know your way around the market. Gaming pros have a head start. The most popular “metaverse” land includes Decentraland (which recently sold a plot for $283,567 on March 21) and Somnium Space (which sold an estate for over $500,000 on March 16). The buying and selling of virtual properties are tracked on a website called NonFungible.com.

With NFT real estate comes digital real estate brokers. Republic Realm is one private investment firm that focuses on the acquisition, management and development of virtual land (and recently raised a funding round of $36 million which was led by crypto investment company Galaxy Digital). The pandemic certainly helped this virtual real estate boom.

“Everyone was moving to digital spaces for gatherings and socialization,” said Julia Schwartz, who works in real estate business development at Republic Realm. “On the heels of this NFT move, we’ve seen support for digital land, which is purchased and sold in NFTs.”

Here’s how these investments work: when a metaverse launches (like The Sandbox for example), the developers will do a presale and drip out certain “parcels” (how NFT properties are sold) in the beginning and price them more favorably (the more parcels are assembled together the more you can build a building with parcels together). After that, primary and secondary sales help drive the market value. 

The beauty of digital land is that, much like regular real estate, there is scarcity. Many metaverses have a limited number of parcels. The hard thing is knowing which metaverse will become popular. “We want to create a diversified portfolio, manage it actively, buy and hold,” said Schwartz. “As value is created on the parcels that we purchase it will drive value to the metaverses we’re working in.”

Certain properties in the metaverse can even have corporate sponsors.

If you understand real estate, the virtual version isn’t all that different “Just as a real estate investment fund will acquire various properties and have a certain investment thesis, we’re taking the same approach for digital real estate and it’s interesting because the asset class is so nascent,” adds Schwartz. “All the trends driving people into online spaces, the momentum in the crypto market, which NFTs are aligned with, it’s a good space to be in.”

Right now, the most popular properties are in the downtown districts of each metaverse. The casino is often the most frequented location according to Schwartz. The more content that a metaverse has, the busier it is and the more it’s worth. “Content will be important,” said Schwartz. “We’re taking a serious approach to developers on our land that will drive foot traffic and drive engagement. Engagement and user growth is what we’re focused on.”

Who is into virtual real estate, you ask? Many of the investors are early adopters in cryptocurrency, as well as investors who believe in the future of virtual real estate. “We’re seeing a lot of interest from traditional real estate investors who understand the fundamentals of real estate investing,” she adds. “They’re interested in more crypto focused arenas. We’re still super early. As that tech continues to grow and progress, we’ll see it become more mainstream.”

It could take some time before it gains steam. There are some signs of promise: in Decentraland, where land that sold there in 2019 for $500 is now worth $8,000 today.  “It’s speculative, but we have reasons to believe this isn’t just a passing trend,” said Schwartz. “The first movers will be rewarded financially for taking the early bets. There are certain parcels of land that sell for prices comparable to real-world real estate. It’s interesting to see it unfold.”

In the metaverse, different neighborhoods attract different kinds of people. That explains why there are different virtual “cities” that attract a different audience—by what’s already there. It isn’t just skyscrapers or homes, but the personality of each virtual city. There are virtual shopping malls and art galleries. Districts are being developed, each with a different personality. “The metaverses that perform best are ones that have the most content, the most ways to engage their users. We want to create an arts and culture district, for example, and we are always looking to build new developments with interesting partners,” said Schwartz. For example, there’s a Times Square-like space in the central district, where Bloomberg News is being broadcasted. “It suggests the metaverse is here to stay.” 

She compares what is happening with digital real estate to the early days of social media. Much of the institutional investment world does not realize how much time younger generations are spending socializing online. “Younger generations are accustomed to socializing through gaming, which helps inform our thesis that if kids are already operating in these metaverses, then when they grow up, that will translate into certain types of crypto-based metaverse interactions,” she said.  

Even on an advertising level, it’s great exposure for a brand. “When you advertise on Madison Avenue, you only get to reach those who walk by, but ad space in the metaverse is unlimited,” said Schwartz. “Anyone on a computer can see it. It’s a brand or marketing exercise where you can reach existing fans but also new audiences you would have never had exposure to.”  

NFTs to the moon

In another interesting example of virtual real estate, the first-ever NFT house was recently sold on the moon as part of an auction with Open Sea. Created by Roman Kropachek, co-founder of data recovery software firm CleverFiles, he has worked with a team of architects and 3D visual artists to create this NFT house on the moon, which has its own 3D map, interior, and exterior visualization, and a complete house layout. It’s considered “a piece of digital art.”

“The popularity of NFTs has already triggered a lot of artists to test out their creativity and come up with new trends, some of them being more successful than others,” said Kropachek.

A rendering showing what the completed moon house would look like.

The moon house is no fantastical McMansion, it’s a very space-age practical home that could function on the planet. “The house has two main blocks with designated areas for living, work, kitchen, lab, gym, technical premises and even a greenhouse,” said Kropachek. “It’s a very detailed layout of how an actual house on the moon can look like.” 

Non-fungible but fully-functionable? Perhaps. But this is just the beginning for Kropachek. “I think we will definitely see more architecture concepts being created and sold as NFT art in the coming months,” he said. “I also think that it would not be limited to just houses, like the house on the Moon, Mars, or both the house which is sold as NFT and the real house that is a package deal.

He adds: “My guess is, we’ll see new ideas for urban design, like museums and galleries, installations and public recreation zones, but also some completely out of box ideas, exactly like a house on the Moon, as your imagination has no limits for creating this.”

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