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How to Valuate Virtual Land

The concept of virtual land feels both really new and really familiar to me. So I figured I’d take you along on my valuation exercise to see if parcels in Decentraland are currently fairly valued. I’ve analyzed over a billion dollars in NYC real estate using a variety of techniques. And I used all of them here.

Valuating Virtual Land by User Count

Regardless of what you’ve seen or heard, Decentraland doesn’t actually have a lot of people in it. One of the Decentraland cofounders recently stated that monthly active users are around 300,000, which averages to a few hundred people an hour. If they’re only spending 10 or 20 minutes on here, that’s just a few dozen people at any given time. And that’s about all I saw every time I went in.

Monthly Active Users

So let’s first take a look at a non real estate metric that’s more common in tech startups. What is the market valuating each of Decentraland’s monthly active users at?

We could look at the current market cap of MANA, which as of this filming is $6 Billion. Divided it by the MAU, and that’s $20,000 per head. But how do we put that in context? Facebook’s prepping to launch Meta, and its market cap as of this writing is $919B. They have 2.9B users, or $316 per user. Most of the big tech companies have a per-user value of $50-400. Are you willing to pay 63x more than Meta by investing in Mana or Land? This is a terrible sign for Decentraland’s valuation. Chalk one point up for insanely overvalued.

Real World Populations

What if you compare the monthly active virtual land users to real land values with respect to population? 300,000 monthly active users is the virtual equivalent of the population of Buffalo, NY, and I stared at a LOT of land upstate this past summer. It’s where you go to get away from people.

The lowest priced piece of land on Zillow is listed at $7,900 for 3,485sf, or $2.27 per square foot. If you buy a few acres of land, it’s even cheaper per square foot. Meanwhile, the lowest priced parcel in Decentraland right now is 4,350 mana. That’s somewhere between $13-20k (every time I research this stuff it swings by a few thousand a day). A parcel is 16 x 16 meters which is 172 square feet, so it’s anywhere from $75-115/sf. For how sparse the population is, that’s insanely overvalued.

Comparison with Manhattan

Another angle to look at is that Manhattan has a density of 69,000 residents per square mile. Throw in tourists and commuters, and the number of “daily active users” jumps up to nearly 200,000/sq mi during the day. Decentraland has 18,000 daily active users across 90,000 parcels that are 172 sf each, totalling a little over half a square mile. So its density is actually over 32,000 people per square mile, which isn’t more than Manhattan but it would probably be around the 4th or 5th most dense county in America. Also $115/sf is less than 10 times lower than Manhattan prices. AND With continued user growth it might surpass Manhattan, so is Decentraland actually cheap???? MAYBE!! Huh. Chalk one point up for undervalued. Let’s look at it from more angles.

Valuating Virtual Land with Comparables

I’m gonna try doing a comp study, which is one of three valuation methods a real estate appraiser would use. The other two being cash flow analysis and replacement value, which I’ll get to later. A comp study pegs the valuation of a parcel at the average of a bunch of similar parcels with maybe some minor adjustments due to different features. And in a market with high volume, comp studies can override other valuation methods because hey, if someone will pay those prices, then that’s technically what it’s worth.

I suspect a disproportionate amount of buying and selling activity happens at the lowest price level, and from what I’ve seen, the lowest priced parcel changes every day. It’s highly liquid, which is great for a valuation exercise. So let’s study the area around the lowest priced parcel. That particular parcel is also significant because we could use it as a floor for the valuation of all parcels in Decentraland. Btw, I just want to make the clarification that lowest priced doesn’t necessarily mean it’s cheap. Cheap implies that the valuation is low, regardless of the price. 

It’s kinda like if you check nasdaq level ii quotes on a stock, you’ll see all the bid orders way below the price and all the ask orders way above the price, but all the actual trading happens where the two meet. This is different from real world real estate because usually the lowest parcel in a neighborhood is in a shit location or has something wrong with it, or has limited upside potential.

Teleporting and Roads

Location doesn’t carry as much weight as it does in the real world because you can teleport freely around the map, and the draw distances aren’t further than a few parcels.

There’s supposedly a premium for being next to a road. But most land is undeveloped, so I haven’t even walked on a road yet. That premium might be justified later if people put buildings up on all the parcels and you have to start walking in between the alleys. That’s probably why the lowest priced land is in these clusters of lots of minimum sized parcels with no roads in sight. Still, with the ability to teleport, roads just aren’t even that important. Time will tell whether small neighborhoods will develop their own character and create value from there.

Watch the video above starting at 6:24 to see some detailed comparables. Comps have shown me how much variance there is in pricing. Aside from the lowest priced single lots, there isn’t clear market consensus on what the value per parcel is. Sellers can ask for more and claim that being next to something justifies the price, so for that reason I have to chalk up another one for overvalued.

It is pretty clear that having more parcels in your lot comes with some premium though. Because you can build bigger buildings, invite more people, and generate more value out of the space. Just like owning all the properties of the same color in monopoly.

Replacement value

The next most valid justification for selling at a significant premium is if you’ve established that the digital structure you’ve built generates some real world value or utility. And now we can explore the other two real estate valuation methods- Replacement value, and Cash flow analysis.

This is another area where metaverses diverge from real world real estate. Development costs are a whole lot cheaper in the metaverse. You still might have to pay an architect who understands the building code, which is like 10 lines for decentraland vs 4000 pages for NYC zoning code. But once you have a design there’s no construction cost or plan approvals or inspections. You could also just download someone else’s building design and plop it on your site. If you develop a game on your lot, there’s a whole lot more software development costs involved, and that’s a very unique cost. So the replacement value valuation method can play a factor, but it’s hard to peg a standard pricing on the work that goes into it.

What’s more important is whether you’ve given users stuff to do and reasons to conduct commerce! Land owners are experimenting all the time and iterating through models that generate real world value.

Valuating Virtual Land With The Cash Flow Valuation Method

And that’s where the cash flow valuation method can come in handy. If a virtual parcel can reliably generate steady income, as the market matures, it’ll settle on a cap rate and all of these valuation methods will really start to converge to the same number.

But I had a lot of trouble finding sites generating steady income. The lots generating the most buzz right now are the ones backed by a real world brand with lots of resources. Their virtual presence is a for marketing first. They likely don’t care about a metaverse investment.

Sotheby’s did a virtual gallery and auction recently. And there’s tons of galleries displaying and selling NFT’s right now. Some parcels have rentable billboard space, meant to take advantage of the proximity factor. But you’ve got to be really close to a popular venue to generate regular income through ads like that.

The cash flow valuation method is actually pretty inconclusive right now, because there’s just not enough precedent yet, and land owners are experimenting with new use cases daily. So it’s going take quite some time before this market matures. Until then, speculators are just throwing crazy asking prices to see if there’s any takers. And the buyers are really betting on their ability to eventually monetize, or hope that their neighbors attract lots of users, or that MANA and land prices keep skyrocketing. So I’ve really gotta just chalk up a few more points in the overvalued column.

Admittedly, I’m Old.

There’s one other qualitative factor. I’m getting on the bandwagon late. I’m making this video after bitcoin has already gone through two huge bubbles, which is indicative of two things. One, I’m old as f*ck and slow to adopt these days. And two, if an older millennial like me is finally catching wind of what’s going on, it’s too f*cking late. The days of making 1000x on a parcel here are likely behind us. And the bubble might be deflating already while the capital flows to new metaverses.

TLDR; MOST of the asking prices in Decentraland are grossly overvalued.