Virtual real estate to have profound consequences for real world property. Here’s how

Virtual real estate is a game-changer, and is likely to have profound and lasting consequences for the tangible property market. It has the hallmarks of an evolutionary step in property ownership. No longer the sole purview of gamers and cryptocurrency entrepreneurs, the idea of owning a piece of virtual property is enticing, not only for speculative investment but for a generation of prospective buyers raised on Minecraft and cryptocurrency. Over the last few months, the volume of transactions for commercial real estate in XR (extended reality) has ramped up. These digital landscapes will grow into a fully functioning economy in a few short years and offer a synchronous digital experience integrated into our lives as social media is today. They will allow people to find friends, participate in events, and do things they typically do in real life, but in a mirror world that enables them to create an alternative existence. It must be stressed that at this point, no one knows the limitations, weaknesses and dangers investors really face in getting into XR. Due diligence is paramount before becoming involved in the multitude of possibilities. So far, platforms are limited to gaming companies and others such as Sandbox, Decentraland, Sommium Space, Upland and SuperWorld. But we can foresee that it will not be long before this is a heavily populated sector. Prices are currently volatile as the worlds seek to balance their overall economies. And currently, the separate worlds are not open to each other, meaning if you choose to go with Sandbox, you stay in Sandbox. Companies have rushed to register trademarks, and even Hong Kong property tycoon Adrian Cheng Chi-kong and alternative investing firm Sun Hung Kai and Company have been snapping up virtual land, signalling that a lot of investment that would usually have gone into the tangible market is now flowing into cryptocurrency. These new worlds will have tangible benefits for businesses, retailers, developers and investors. XR will allow companies to further decentralise their office space in the commercial sector. Already hastened by the pandemic, taking staff away from physical offices has been a way to optimise operational costs, prevent physical interaction and any resultant virus spread, and save staff the expense, risk and grind of daily commuting, especially in sprawling cities like Tokyo. With XR, satellite offices in more affordable and accessible areas make sense to a business’s bottom line and boost its ability to attract talent. XR offers companies another space for staff to meet, conference and attend team building in a tailor-made space. This decentralisation would likely see a knock-on effect in the tangible residential market as owners and tenants search for extra office space in their homes. While this sounds very environmental, social and corporate governance (ESG) friendly, there are pitfalls such as the real, excessive energy required to power these XR platforms and make life as seamless as possible. Developers will make their money more or less the way they do in the tangible world by buying land, building virtual office blocks and selling or renting to occupiers. Currently, this is beyond any government regulation or taxation and ESG requirements. Furthermore, it is pandemic proof. Big brands are clamouring to get into the XR space, particularly given the success of e-commerce in light of the pandemic. Possibilities abound, with shops being able to sell tangible stock or NFTs. In December 2021, Nike bought a virtual shoe company, RTFKT Studios, that makes NFTs and sneakers. On 17 December 2021, Adidas sold more than US$22 million in NFTs within a few hours. Buying an NFT can give owners access to unique physical goods, like a hoodie and the tracksuit worn by the Bored Ape that Adidas owns, and upcoming digital experiences. XR already opens up a plethora of possibilities for collaborations with famous artists and influencers. It allows retailers to showcase their products to a younger generation, as most investors in virtual land are under the age of 50. NFTs themselves are not always the money mints they have been made out to be. Like in the tangible world filled with enfranchised merchandise, NFTs are dependent on popularity. This year beanie babies could be all the rage, next year, they could be worthless. User traffic and location will be a measure of this popularity in virtual land, and prices will rise and fall accordingly. Investors may also encounter intentional fraud or put their funds into fly-by-night operations and lose everything. More importantly, the cryptocurrency in which all these items are traded is highly speculated, and its value can fluctuate wildly. XR provides another channel to retailers in addition to bricks-and-mortar shops and the e-commerce channels that are so popular now. Once XR becomes more common, there is a higher chance that a significant number of retailers will reduce their tangible world footprint, forcing shopping centre owners to once again re-evaluate their marketing strategies, layouts and spacing plans. NFTs will change homebuyers’ behaviour, especially for the next generation. If buyers can build a whole world in their square at a fraction of tangible cost and attract sufficient user traffic to generate passive income over and above potential land price appreciation, the attraction to tangible property investment wanes. Even though these users would only make up a fraction of the potential pool, owning a home becomes less critical to the next generation. If it behaves only half as well as predicted, XR will drive real-world demand in the industrial property sector from an exponential need for data centres, logistics centres and manufacturing hubs. Data centres will be the top priority to cover the need for speed, security and e-commerce on a global scale, as retailers extend their reach even further. Powering them will be paramount, pushing the alternative energy sector to undreamed-of heights. Hannah Jeong is head of valuation and advisory services at Colliers in Hong Kong