Virtual real estate: How to buy land in the metaverse

Virtual real estate is booming as more and more people are buying land in the metaverse. We look at how it works, the risks, the costs and recent returns.

Can’t afford to get into the property market? How about a digital property? No seriously, virtual real estate is a thing and it has been booming. In April 2022 alone, about $A59 million worth of virtual property changed hands according to the Everyrealm April 2022 Metaverse report. And that’s despite a drop of 33.5% from March.

What is virtual real estate?

Let’s start from the ground up. Virtual land refers to plots of land located online in a number of online worlds collectively known as the metaverse.

You can’t walk on your virtual land or even touch it. However, that hasn’t stopped people from flocking to virtual real estate and it’s expected to keep growing.

Some pundits believe the virtual property market has the potential to be big – really big. Crypto asset manager Grayscale estimates that ‘land’ in the digital universe could be a $1 trillion business in the future.

How to buy land in the metaverse

To score a piece of virtual real estate you will need to head into a digital world. Some of the most popular online worlds are found on the platforms of Decentraland, The Sandbox and NFT Worlds. But there are plenty of others such as Earth 2, Nifty Island, SuperWorld and Wilder World. To get started you will need to sign up to the platform of your choice.

Buyers can choose to buy direct through the ‘for sale’ section of their preferred digital world or use a site such as OpenSea that acts as a virtual marketplace complete with property auctions.

When you find a block of land you like, you can choose to pay the asking price or negotiate with the seller – just as in the real world.

If you later choose to sell your property, the process works in reverse. You can list it for sale on the platform or advertise it with a third-party site.

How do you pay for virtual real estate?

A key difference with buying (or selling) virtual property is that the lots of land are paid for with cryptocurrency.

If you plan to buy a property, you will need a crypto wallet to convert fiat money (notes and coins) into cryptocurrency. But not just any crypto. You need to use the digital currency used by a particular platform. For instance, Decentraland and The Sandbox are both Ethereum-based.

Once the purchase is completed, details of your virtual property will be forwarded to your crypto wallet. You can then be verified as the official owner of the land via blockchain – the open ledger system on which all cryptocurrency is based.

Why would you buy metaverse land?

Two drivers are behind the interest in virtual property – bragging rights if you buy a place next to a celebrity and the potential to make money.

One avid fan of rapper Snoop Dogg is reported to have paid $US450,000 ($A628,000) to buy a virtual block of land next door to one of Snoop’s virtual properties on The Sandbox.

There can also be opportunities to make a capital gain on your virtual land if you sell at a profit further down the track. Or you can decide to build on it and rent the place out to other community members in the metaverse to hold virtual parties or exclusive events.

How does the cost compare to physical property?

Like physical property, the cost of virtual real estate varies in line with location – the more popular the site, the higher the price. With virtual property, however, ‘location’ doesn’t just refer to a given neighbourhood. It also encompasses which platform the land is found on.

As a guide to the cost of virtual property, the Everyrealm April 2022 Metaverse report shows land in The Sandbox sold for an average of $8,794 in April 2022. In Decentraland the average price paid ranged from $14,131 (land) to $51,300 (estates). In NFT Worlds, an average of $38,675 was paid for virtual property.

The average price for virtual real estate
← Mobile/tablet users, scroll sideways to view full table →

Source: Everyrealm Metaverse report April 2022. *Figures converted to AUD using the exchange rate as at 1 June 2022. 

Just as certain real-world locations are seen as less desirable – and are therefore cheaper – some neighbourhoods in the metaverse are more affordable. On the SuperWorld platform, for instance, the average price paid for virtual real estate in April 2022 was a modest $433.

Clearly, these average prices are far cheaper than buying a block of bricks and mortar property. In addition, you won’t face upfront costs such as stamp duty and legal fees, and presumably, as a virtual landholder, you won’t be asked to regularly fork out for council rates.

What are the risks of virtual real estate?

Virtual property is very different from real land and getting into the market comes with significant risks. These are worth a closer look.

Risks around currency conversion

Cryptocurrencies are highly volatile, and in the time lag between buying the relevant digital currency and finalising the purchase of your virtual property, you could find the value of your digital money has dropped. This brings the potential risk of having to tip more fiat currency into your crypto account to make good with the purchase.

A volatile virtual property market

Virtual property itself is also volatile. The Everyrealm Metaverse Index, which tracks virtual property across 14 different metaverses, recorded a 1,400% gain in average prices in the second half of 2021. However, during the first quarter of 2022, the index had dropped 35.3%. In April 2022, market values fell a further 33.5%.

Everyrealm attributes the price falls to the slowdown in the market for non-fungible tokens (NFTs). It added that the cooling market also reflects the decision by Meta (the owner of Facebook) to levy a 47.5% fee on creators who make and sell digital assets in Meta’s ‘Horizon Worlds’ virtual reality platform. This could potentially see virtual developers walk away from virtual property.

The upshot is that some virtual property owners may have made big gains. But, as is often the case with anything crypto-related, it’s a fair bet plenty have lost money on virtual property.

Lack of scarcity

One of the reasons real estate rises in value over time is because there is a finite supply of land. The same can’t be said for property in the metaverse.

Sure, certain locations may be more attractive than others. But just as the number of cryptocurrencies has risen to around 10,000 in 2022, up from just a handful of digital currencies 10 years ago, there is nothing to stop the creation of more metaverses. This possibility takes scarcity out of the equation, something that is a key driver of capital growth.

Questions around legal ownership

The other aspect to consider with virtual property is whether you are the true legal owner of the asset.

When you buy virtual land, you are in effect buying a non-fungible token (NFT). Sure, these exist on the blockchain. But the land exists only on the server, which runs the computer code that creates the property in the first place.

When users sign up to a platform they are asked to agree to the terms of service. Most of us simply click the ‘yes’ box rather than wade through pages of legal jargon. However, the terms of service can impact the value of your investment.

As a guide, the terms of use for The Sandbox make it clear that if virtual land buyers breach various conditions, Sandbox reserves the right to delete any metadata that does not comply with its terms.

Tax and virtual real estate

The Australian Taxation Office (ATO) has made it clear that gains on crypto assets are in its sights. If you dispose of a crypto asset, including NFTs, you will need to calculate a capital gain or capital loss and record it in your tax return.

“Crypto is a popular type of asset and we expect to see more capital gains or capital losses reported in tax returns,” Assistant Commissioner, Tim Loh, cautioned.

Remember too, you can’t offset crypto losses against salary and wages income.

The ATO warned that its formidable data collection processes reveal many Australians are buying and selling digital assets. Assuming any gains made selling virtual property will fly under the ATO’s radar could land you in hot water.

The bottom line is that virtual real estate is no substitute for the real thing. If you decide to get into the digital market, be aware of the real-world risks that apply.

Cover image source: kate3155/Shutterstock.com