Virtual realty: Tokenisation, blockchain, metaverse and digital twins

Web3, the idea that loosely describes what could be the next iteration of the internet, is coming for real estate. Most incumbent players in the traditional property industry do not know much about decentralisation, blockchain technology and token-based economics. But they might need to start learning quickly – or hire those who are in the know.

There is a lot to digest. Web3’s blockchain technology brings the access to a decentralised ‘digital ledger’, enabling the creation of tokenisation and smart contracts. Then there is the metaverse, which opens up the world of augmented reality (AR) and virtual reality (VR) and ‘digital twins’, offering interactive planning and operation of real-world assets. 

“The world of digital real estate is absolutely ripe with opportunities for investors and real estate companies seeking to reach a new generation of leading tech enthusiasts,” says Michael Beckerman, CEO of CREtech, which organises real estate technology events.

Lloyd Wahed, CEO of fintech and blockchain adviser Mana Search, hosts a Web3 podcast. “Real estate in the metaverse is exciting,” he says. “It’s a new world of untapped potential. Through blockchain and AR/VR, a more flexible and creative real estate market is being incubated. New revenue streams such as NFTs [non-fungible tokens] and other innovative ownership models present an enticing prospect.”

Vincenzo Tortis, chief information and digital transformation officer at COIMA, arguably one of Europe’s most technologically advanced real estate fund managers, says: “We are very interested in the potential of the metaverse, blockchain technology and augmented reality.”

COIMA has created a proptech accelerator that Tortis says “gives us access to some of the most interesting start-ups in those areas”. HabiSmart is a three-year programme with a budget of €5.75m.

But there are challenges. Wahed points to “a lack of established legal frameworks, murky property rights law and ownership models, and security and privacy concerns”. He also believes the volatility – both in the markets and public perceptions of the metaverse – should not be underestimated. Cryptocurrencies have a bad name since the downfall of FTX founder Sam Bankman-Fried.

Many of the industry’s key players are young and inexperienced. Yet real estate investors and companies cannot avoid working with tech firms if they are to capitalise on potential opportunities. “Real estate will need to on-board the right talent to guide them through the choppy waters of the metaverse,” Wahed says.

Breaking it down: tokenisation

One of the first areas the industry needs to become more acquainted with is tokenisation. For real estate this could mean ‘fractional’ ownership of buildings, through divisible tokens stored on a blockchain.

Roger Clarke, CEO of London-based real estate stock exchange IPSX, says: “I am a resounding advocate of any opportunity to democratise commercial property investment through fractionalised ownership, as a way of unlocking the asset class to the large majority without sufficient capital to play at an institutional level, whilst promoting greater liquidity in a traditionally illiquid sector.”

The industry ought to be “taking proactive steps to open-up commercial real estate to those who would otherwise be on the outside looking in”, he says. 

Beckerman believes that tokenisation could produce “potential game-changing improvements that the sector requires”. But for this to happen, the “securities need to be tradable in a liquid secondary market, allowing investors to buy into or exit the asset at their discretion”. And it needs to be in a regulated environment where investors will be properly informed and protected. 

Last year, KD Tokens, a subsidiary of Hong Kong tycoon Henry Chen’s Knight Dragon Investments, tokenised ‘Building 4’ at the heart of a 10m sqft real estate development in London’s Greenwich Peninsula. The transaction, estimated at £140m (€158m), involved the minting of digital tokens that entitle holders to share 80% of the gross profit generated by Building 4. It is the first tokenisation of prime real estate in central London.

Clarke says: “Whilst there has been some positive progress in this space, including Knight Dragon’s tokenisation project in the last year, we still need to go much further.”

Tokenisation could provide other possibilities. Stefan Plesser, CEO of Synavision, which provides management software for sustainable buildings, says “[It] will facilitate the transformation towards sustainability. Digital-quality management will become a cornerstone of the transformation towards sustainability connecting technology, economics and legal aspects of the real estate world.”

Blockchain: smart contracts

Blockchain could be very relevant to real estate investors’ net-zero efforts through the use of smart contracts. Smart contracts are programmes stored on a blockchain that run when predetermined conditions are met.

According to the book, Blockchain Technology and the Circular Economy, by Mahtab Kouhizadeh et al, smart contracts can encourage stakeholders to adopt circular-economy (CE) practices. “When customers return the recyclable wastes, smart contracts can generate an automatic payment in forms of cryptocurrency to reward customers and further encourage CE initiatives,” it says.

The approach could be applied to buildings. Tortis says: “It is quite possible that blockchain technology will also be used to record a building’s carbon footprint and certify the supply chain that has gone into the construction of a new building. This is an area where a digital ledger could be useful from a sustainability perspective.”

He adds: “The use of blockchain technology and smart contracts will create much greater transparency in the real estate market. I do believe smart contracts are coming in real estate. They will be much more efficient and less costly. However, it is very important to make sure that the regulators are involved in this if we want to speed up the process.”

Digital twins: mirror image

According to McKinsey, around 70% of C-suite technology executives at large enterprises are exploring and investing in digital twins. Although the use of term can vary, McKinsey defines a digital twin as a “virtual representation of a physical asset, person or process”.

Buildings are an obvious candidate for the concept. German company Synavision provides digital twins for smart buildings. These can be used, says Plesser, for performance-based contracts that implement quality management to de-risk real estate investments. “Engineering, quality management, legal, and economic management will all profit from digital twins,” he says.

Tortis says: “At the moment, the most interesting of the metaverse technologies is digital twins. This allows us to visualise different elements of new construction at an early stage. We now create a digital twin for every new building we embark on.”

But the use goes beyond the design phase, according to Conan Lauterpacht, partner at Sustainable Future Ventures, Patrizia’s built environment technology venture capital fund. “There has been a rapid expansion in the potential applications for digital twins in the last five years, driven by the increasing use of BIM [building information modelling] during design and construction, the rapid expansion of smart building technologies and sensors and, most recently, the increasing need to understand the carbon lifecycle of a building.”

Ray Fang, partner in the real estate practice of law firm Goodwin, says: “Simulation technology backed by data can also help managers plan for changes to a building over time by testing management strategies on a digital twin before executing the same in the real world. This has the potential to be hugely beneficial, for example by more accurately predicting replacement costs. By monitoring and forecasting occupation and user activity, a manager can adjust energy resources to optimise a building’s carbon footprint.” 

Further development of building twins is currently facing challenges, according to Lauterpacht, especially in “successfully carrying digital-twin data from the design and construction stage through to the asset/property management stage”. He believes valuable data is often lost. 

Metaverse: virtual realty

Digital twins can also have a sales and marketing purpose in residential real estate. One of Patrizia’s portfolio companies, GBuilder, takes building information modeling (BIM) data, augments it, and uses a gaming engine to generate high-definition 3D renders of every unit in a residential development. Lauterpacht says this “improves developer margins by increasing off-plan purchasing, reducing material waste and enabling greater unit customisation for buyers”.

Marketing applications go beyond residential. Research firm Gartner predicts that, by 2026, a quarter of people will spend an hour a day in the metaverse for work, shopping, education, entertainment and social activities.

Neil Oberfeld, shareholder at law firm Greenberg Traurig, says: “Given the potential size of the market, many retail, hospitality and entertainment brands are seeking a first-mover advantage in the metaverse. Buying or leasing real estate in the metaverse could allow brands to better connect with some customers and to sell more goods and services online.”

Virtual real estate is a new frontier. In platforms like Decentraland and The Sandbox, ‘investors’ are making enormous virtual real estate purchases. One anonymous user reportedly paid US$450,000 (€420,100) to purchase a plot of virtual land in The Sandbox next to Snoop Dogg’s virtual residence, Snoopverse.

Yet price increases are driven by scarcity that is designed into platforms like Decentraland and The Sandbox. “That heightens the investment risk involved, even if organisations making the investments aim to derive utility from their virtual real estate by, for instance, using it as their metaverse base of consumer interactions.” 

Owning virtual real estate includes benefits, such as no property taxes, reduced transaction costs due to no title insurance or escrow costs, and accelerated closings. There is no recording of deeds with the clerk and recorder. Instead, the transaction is recorded in the blockchain. However, doing business online might carry a higher risk of fraud.

“Property owners in the metaverse own an NFT, not actual real estate,” Oberfeld warns. “Unlike real property, the metaverse potentially could disappear with a push of a button. The metaverse also is privately owned and it has no government or police to help protect your property interest, although some platforms are operated by non-profit organisations.”

Caution seems best advised. Tortis warns: “I note the branding opportunities that have been used by fashion, sports and leisure brands in the virtual real estate markets. But this is not a straightforward process. It would require considerable investment and expertise in what would be a very new skill area for us because it is essentially digital gaming. I’m not saying that it will not be interesting for real estate companies, but I would need to see a clear business case for it.”

Tortis is concerned about intellectual property rights and “how they might be compromised by someone reproducing one of our iconic physical assets in the digital space”. He adds: “It’s important that we protect ourselves.”