Real Estate in the Metaverse – a Brave New World for Financial Institutions Underwriters?

As an underwriter who writes professional lines insurance for financial institutions such as banks, asset managers, and real estate funds, I’m on the lookout for new exposures or disruptive innovations that might be coming around the corner.

So I read with interest last week this article on CNBC.com entitled “Metaverse real estate sales top $500 million, and are projected to double this year ”:

Interestingly, the NY Times.com wrote about this topic in early December: “Investors Snap Up Metaverse Real Estate in a Virtual Land Boom: Transactions for properties in digital realms are jumping, guided by the same principle in the physical world: location, location, location”:

And the WSJ.com and Fortune.com had articles as well:

“Metaverse Real Estate Piles up Record Sales in Sandbox and Other Virtual Realms: Firms’ purchases of digital land in online worlds are bets that property values will rise as more people join in”:

“Digital land is selling for millions as people scramble to snatch up virtual real estate in the Metaverse—and it could be a multitrillion-dollar opportunity”:

      If this new “space” has caught the attention of old school, mainstream publications like the NY Times and the WSJ, could it eventually become a new asset class -- which someday might need insurance coverage?

      While “virtual real estate” seems far-fetched now, maybe it won’t be long until I’m asked to consider manuscripting a new endorsement to re-define such traditional policy terms as “investments in real estate property” or “damage to any tangible property” to provide coverage for virtual real estate assets?  

      If so, the insurance industry will have to adapt, since these virtual “properties” are built from pieces of code rather than bricks and mortar. In addition, there is a multitude of other legal, financial, and regulatory concerns it will need to reconcile -- i.e. data privacy and biometric risks for all the personal information stored on the devices, intellectual property exposures as NFTs are authenticated and traded, unequivocal valuations of virtual properties priced in often volatile (and platform-specific) cryptocurrencies, etc. Nevertheless, virtual real estate buyers could still need conventional investment advice, portfolio management, and asset valuation services – concepts that are currently contemplated by insurance policies.  

      You might have heard the Metaverse discussed with Facebook’s rebranding to “Meta Platforms, Inc.” last fall (linked here). The term is a combination of “meta” and “universe,” and the concept was first introduced in a 1992 science fiction novel entitled “Snow Crash” and then popularized in the 2018 movie adaptation of the 2011 book “Ready Player One.”

      Though it’s currently more aspirational than real, the Metaverse is described as the next iteration of the Internet – a 3D collection of connected, collaborative, persistent, and immersive networks which combine the physical and digital worlds. It is accessed through technologies like virtual reality (VR) headsets, augmented reality (AR) glasses, or smartphone apps. In the Metaverse, people could come together, using customizable digital avatars, to simulate real-life activities like shopping in virtual malls, meeting in virtual offices or schools, watching concerts or sporting events -- or even buying “investment properties.” 

      As I’m learning, in buying land or buildings in the Metaverse, you’re buying a unique digital asset structured as an NFT or “non-fungible token” (linked here), which is then stored on a blockchain, a tamper-proof digital ledger (similar to a deed). To ensure digital real estate keeps its value, its supply is limited. Metaverse networks create “parcels”, which can only be bought with proprietary cryptocurrencies – a concept called “artificial scarcity”. By owning a parcel, you then have the right to build or advertise upon it; and these early buyers are speculating the properties will increase in value as more people join the world.

      By investing in digital real estate, you could potentially make money if a large brand opens a virtual store on your “land” ( i.e. Samsung), as you would be the brand’s virtual property owner and you’d receive a portion of any sale. Alternatively, you could rent your “land” to an event planner who wants to hold a virtual concert and charge tickets for entry (i.e.  Justin Bieber ). You could also put up a billboard on your property and advertise to digital avatars passing by. Additionally, if your property ends up being well located it could appreciate (or depreciate if it’s not), and you could sell it for a profit to someone else (i.e. the plot of land which sold for a record $2.4M in November):

     As someone who proudly drives a minivan, regularly uses a library card, and lives in an old house with comfortingly creaky wooden floors, buying virtual “land” with several hundreds of thousands (or even millions) of dollars in cryptocurrencies seems to be completely out of this world and highly speculative.

      Yet I’d like to mind this generational gap – it’s not my place to have an opinion on whether or not virtual real estate might have “value” – the “market” will determine that (as it has with new alternative asset classes like NFTs, sneakers, or artwork).

      It was interesting to learn that:

• J.P. Morgan, the largest bank in the U.S., just opened a “lounge” in the Decentraland metaverse – the first bank to do so:

• "There is a lot of client interest to learn more about the metaverse,” Christine Moy, JPMorgan’s head of crypto and the metaverse
• JPM also released a white paper entitled “Opportunities in the metaverse: How businesses can explore the metaverse and navigate the hype vs reality”:

• The bank noted:
•  “The metaverse will likely infiltrate every sector in some way in the coming years, with the market opportunity estimated at over $1 trillion in yearly revenues”
• “In time, the virtual real estate market could start seeing services much like in the physical world, including credit, mortgages and rental agreements”
• Oren and Tal Alexander, two well-known, NYC-based luxury real estate brokers (who once sold a Manhattan penthouse for $238M and who counted Ken Griffin and Kanye West as clients) recently formed a brokerage in the Metaverse to develop and sell properties “in an architecturally significant master-planned community in the virtual world”:

• Last year, Republic Real Estate, a crowdfunding real estate platform, created the “Republic Realm Real Estate Fund” for accredited investors interested in a virtual land in several “metaverses” and, like as they would in the physical world, develop virtual hotels and stores:

• The fund had raised $50M and had returned 145% in its first ten months (through December)
• Two large accounting firms Prager Metis International and PricewaterhouseCoopers recently bought properties for virtual “offices” in the Metaverse:

• "The Metaverse offers new possibilities for organizations to create value through innovative business models, as well as introducing new ways to engage with their customers and communities,” said William Gee, a partner at PwC Hong Kong

      Things are always moving forward, even for an old-school insurance underwriter.  So it might be worth at least monitoring this “new world”, or even starting to become conversant in it?

      While this might just be a fad, cryptocurrencies are certainly experiencing wider adoption in the traditional finance world and people are spending more and more time in virtual worlds (i.e. Meta) – so this might be more than a trend. 

      Consider:

• Millennials and Gen Z have been described as “digital natives” since they are the first generation to grow up in a digital, media-saturated world – and they’re not going to “age out” of their digital habits:  
• For many, the digital world is as important as the real world, as it provides the sort of “third place” outside of work and home that the local coffee shop was back in the day for my generation. And with old school places like bars and coffee shops closed for the past two years due to Covid restrictions, many people went online for social interaction – and have become accustomed to virtual worlds through games like Roblox” or “Fortnight" 
• Some Gen X and Millennials are inheriting an immense about of investable assets, as the U.S. is just beginning the largest wealth transfer in the country’s history -- what economists have dubbed the "The Great Wealth Transfer":

• “Older generations will hand down some $70T between 2018 and 2042. . . roughly $61T will go to heirs -- increasingly Millennials and Gen Xers – with the balance going to philanthropy”
• While Gen X prefers investing in traditional asset classes like stocks and bonds, Millennials and Gen Z have embraced cryptocurrency:  
• According to a CNBC Millionaire Survey, “83% of millennial millionaires own cryptocurrencies and plan to buy more”:

• Interestingly, “the survey found that 45% of millennial millionaires credited inheritance as a factor in their wealth”

      Since those articles came out in December, the prices of Bitcoin and other cryptocurrencies have been shellacked and are currently down about over 50% from their highs in November. 

However, the amounts of money, talent, and corporate backing still flowing into the crypto world are very impressive – and still deserving of longer-term consideration.

The “smart money” in the Venture Capital industry is betting “big on crypto start-ups in 2021 – investing about $30B globally as of late November” across almost 1.3K deals, including virtual real estate: 

• “The ecosystem is currently a melting pot of talent (developers & entrepreneurs) and capital (VCs & institutions). Combine that with a new technology primitive (blockchain/crypto) and you have all of the ingredients required for an explosion of innovation and value creation”

And a couple of weeks ago the US Federal Reserve rather quietly announced it is taking the first steps in the official debate on the potential benefits and risks of issues a US digital currency -- that would be issued and backed by the US central bank:

  So maybe virtual real estate will become the next big thing – and this is indeed “like buying land in Manhattan 250 years ago as the city is being built?"

On the other hand, it might be the next speculative bubble -- backed by an overly passionate fan base and naïve, overly abundant capital?

Or maybe a bit of both?

But remember, way back when (i.e. in 1994), high profile folks like Katie Couric, Elizabeth Vargas, and Bryant Gumbel were just as puzzled and doubtful of the new Internet thing – Check out YouTube: "Today Show": "What is the Internet, Anyway?":