Welcome to the Zoomaverse (and you are welcome to it).
Mark Twain is famously credited with saying: “Buy land, they’re not making it any more.” And then along came the metaverse.
No doubt we all remember our basic micro-economics course and what we learned about the importance of demand and supply in setting prices. Given that the global population of just under 8 billion is forecast to grow to around 10 billion by 2050, the demand side looks promising. In this context, the lack of new supply would make land seem to be a highly attractive asset.
Indeed, the evidence that’s available shows that the value of land has generally risen in real terms over time. The real price of UK farmland grew by 0.33% annually over the 232 years from 1781 to 2013 and by 0.71% from 1801 to 2013 (Jadevicius, A; Huston, S; Baum, A and Butler, A [2018]: ‘Two Centuries of Farmland Prices in England’, Journal of Property Research, Vol 38, pp 72-94). In real terms, houses in Amsterdam grew in price by 0.45% for the near-350 year period from 1628 through to 1974 (Eichholtz, P (1997): ‘A Long Run House Price Index: The Herengracht Index, 1628-1973’, Real Estate Economics, 25:2, pp175-192).
A recent paper suggests that long-term real income growth rates for UK commercial and residential real estate owned by Oxbridge colleges has been close to zero for all property types (Chambers, C; Spaenjers, C and Steiner, E [2021]: ‘The Rate of Return on Real Estate: Long-Run Micro-Level Evidence’, HEC Paris Research Paper No FIN-2019-1342). But buildings wear out over time and depreciate in real value, and sometimes they even depreciate in nominal value. A long-term real income growth rate of zero for buildings sitting on land surely implies real increases in land values. It’s not just the author of Huckleberry Finn suggesting that you should buy land, it’s the data too.
But what will the data say 100 years from now? Already (since around 2005) we have seen a relative decline in the value of the land that shopping centres sit on. Shopping centres went from being the top-performing property asset type to the worst performing sector in 15 years. The reason why this happened is the creation of vast quantities of cyberspace, the supply of which is limited only by the availability of electric power and the capacity of all the world’s servers, computers and mobile devices. As we choose to shop online, we shift economic activity from physical retail space to cyberspace, which creates an over-supply of that retail floorspace. Shopping from home might just be the beginning. Working from home might have the same effect, as economic activity moves from the office to the Zoomaverse (and, yes, I am averse to it). Teenagers sign up for E-sports and don’t need a pitch to play on. Gamblers go online and don’t need a casino. We are even being encouraged to get our healthcare online or over the phone. So it seems that Mark Twain’s advice wasn’t, unlike diamonds, forever.
Crypto, NFTs and Metaverse plot
So should we buy plots in the metaverse? Well, I would take a lot of persuading, given the idea that the supply of cyberspace is pretty much unlimited. But is the metaverse the same thing? The metaverse can be defied as a virtual reality world where users can interact, game and experience things as they would in the real world. That will include buying plots of ‘land’. Mark Zuckerberg would love to sell us the idea that there is one limited metaverse (the Facebook/Meta one), and that metaverse will no doubt have an (initially) limited supply; but there is no reason why many other metaverses will not be created, whether their promoters define them as metaverses or not. Exactly the same considerations apply to bitcoin, initially the crypto-currency and still the best known, but now one of many.
Nevertheless, the fact that the supply of bitcoin is (currently) limited – and also, perhaps, because it had first mover advantage – that makes it valuable. So maybe the Meta-verse will be equally popular.
What will determine the value of any particular location? Will this be determined by proximity to a virtual central business district or by being next door to fashionable neighbours? Is next door even a viable concept? Will travel around the metaverse be instantaneous and free?
How limited will the space be? Will I need permits to build? Will building control avatars come and tell me that I can’t put virtual double glazing in my virtual house because my land is in a virtual conservation area?
Will the metaverse be decentralised and democratised? Will big decisions be made through the votes of landholders? Or will voting rights be confined to the landed, like the 19th century UK? Since 0.01% of bitcoin traders own 27% of the bitcoin, what does that say about the democratic nature of this supposedly democratised land?
How to value a metaverse land plot
What would a plot of ‘land’ in the metaverse be worth? As always, going back to basics should be insightful. There are only three ways of valuing property: direct capital comparison, the cost approach and the income approach. I would not buy crypto currencies because the only way I could value them would be by direct capital comparison, which is like saying, “Jim just paid $25,000 for one bitcoin and lost his shirt, so I’ll do the same”. No doubt metaverse estate agents will be telling me that a prime plot in cyberland is worth $25,000 a square metre because a well-known rapper just paid that for his cyber-mansion. Thanks, but no thanks.
The cost approach is of similarly limited relevance. This valuation method is founded on the idea that the value of something is based on what it cost to build. It doesn’t work for valuing real land, let alone a metaverse greenfield site.
But the income approach is interesting. Will my metaverse plot earn a rental income? What will the lease terms be? What will be the risk premium and discount rate? Will my investment be liquid and trade-able? Will anyone see the irony of buying real assets in a virtual world? Will metaverse nomads pay toll fees to travel through my land and hotel rates to stay there when their virtual car has been blown up by a Fortnite crew?
The possibilities and questions are endless, like the metaverse. I don’t think that I, or my digital twin, will be moving there soon.
