Jo Bronckers
Chair FIBREE the Netherlands
Instead of collecting points, becoming a unique shareholder1
The first loyalty program was introduced in the 18th Century with a copper token by American Merchandisers who wanted their clients to always come back to them (Loyalty 1.0). Over 40 years ago Texas Airlines and American Airline introduced the first frequent flyer program. (Loyalty 2.0).
Lately, with the emerging blockchain technology, a lot of loyalty programs are popping up as new or transformed versions. Based on this technological advancement, we will in this paper explore a functional evolution, an integration of a new component into loyalty programs. And finally we will illustrate how blockchain-based loyalty programs can be introduced in the real estate and construction industry.
From points to shares
Loyalty 3.0 in web 3: Loyalty points which loyal customers are collecting, shall not only give them discounts to products or services but make them real shareholders in the company itself by exchanging collected points to real company participation shares. Shares may not be the right word, since we are handling virtual shares based on tokens. However, those tokens represent real world asset shareholding, so let’s name them shareholding-tokens. Loyal customers can now be rewarded by becoming a shareholder, with an ever-growing stake in the company that owns their homes and compounding yields, monetary returns the longer they keep renting their home from this real estate company.
A loyalty program that allows customers to exchange their points for shares of the company can offer even greater benefits than loyalty 2.0. Customers feel good not only because they are rewarded for good tenancy, but also because it now takes them to an even higher level of commitment by even allowing them to become co-owners of their property with all the benefits - and risks - involved. They will financially benefit from direct returns now they are co-owning their home property (and other properties the company could have in its portfolio). A clear win-win for both and no better trigger to invest in good relationships with the tenants. It helps the homes owning company to build enhanced trust and credibility with its long-term customers.
By allowing customers to become shareholders, the loyalty program creates a deeper level of engagement. Customers feel that they invested in the success of the company, which can lead to increased brand loyalty and advocacy. But also, they will treat the homes and surroundings more carefully as these are their own property. Savings on maintenance costs can now be used to lower property management costs and further improve fund Loyalty 3.0-campaigns.
Evangelos Lianos
Chair FIBREE Greece
The Real Estate Investor’s perspective
When residents become co-owners, it might decrease the equity of the initial investor and probably at a certain point a majority share could become a minority share. Is this a problem for the initial investor? Yes and no is the honest answer. Yes, it is a problem if you think very traditional. Because if you no longer hold most of the shares, you will lose control of the company.
One can also argue it becomes difficult to get a mortgage loan for such a complex shareholder structure. Or it will be extremely difficult to get consensus about maintenance decisions that constantly occur. Furthermore, loyal tenants are less likely to move. And precisely moving a tenant offers good opportunities to increase the rent by a jump, thus improving the return on investment. No, it need not be a problem at all, because accurately considered, all the above arguments are no longer valid in today's times.
A majority of shares is not necessary for anything at all, you still have a win-win partnership with your tenants who are increasingly becoming co-owners. If you manage the property professionally and are transparent about it, you can make the different scenarios transparent and convince everyone what are the best choices to make. Loyalty-token holders can be given specific voting rights quite easily (or exclude voting rights in specific cases), effectively creating a transparent digital association of owners.
The invested equity that is taken over by loyalty tokens can be reinvested in newly acquired real estate properties and thus you can actually achieve the benefits of scale faster than otherwise when contracting management-, maintenance- and other services, which gives you extra advantages as an investor that you can also share with the token holders.
So, it actually creates more opportunities for more and more customer-satisfaction! To obtain a mortgage loan, structuring the entity taking out the loan correctly is necessary. The bank will then experience lower subject risk, as the likelihood of all shareholders simultaneously defaulting on the loan becomes lower as the shareholder spread increases. The argument that, as an investor, you can make less return because tenants mutate less often is actually out of place in this day and age.
It is increasingly difficult to reconcile with ESG objectives, especially in the areas of Social and Governance. Of course you may try to increase rental income by a jump when mutating, but it is anything but social to do so at the expense of the residential enjoyment of sitting tenants.
Beyond Loyalty 3.0A next loyalty 3.0 level can be reached when loyal shareholders who collaboratively own a part of the company decide to use their combined purchase-power to reach collaborative cost-benefits when tendering for additional services that normally are marketed to individual residents. Think of utility services, facility services, gardening services, security services, or discounts at local shops or online services, and more. And this again further strengthens both their loyalty to and the brand image of the home owning company.
Blockchain technology is needed to divide costs for services and revenues for shareholders in a trusted and automated escrow solution. The shares will become tokens and the payments will be arranged via smart contracts triggered by many different data.
These thoughts may be new for residential real estate, but it is not a new idea. A few years ago, JetBlue US, the retailer John Lewis, T-Mobile and Melia Hotels launched similar programs.
We believe with the vast technological possibilities of blockchain, and the tokenization of real-world assets (real estate, equity, art, precious objects, patents & IPs, etc.), such a loyalty-to-shareholding platforms can materialise.
It can unlock a snowball-effect. Loyalty-to-shareholding schemes can attract a wider range of customers and educate them to invest in tokenized securities, even though traditionally they have not invested in the stock market.
Next question that pops up is how should tokens that represent a share in the investment company be legally treated. At this point surely some additional experimenting and further exploration is needed, because also regulators are still exploring the regulatory amendments that are needed to guide society in a prudent way into the tokenisation era. Legal compliance is still an important challenge because regulatory frameworks are not always clear, not available or not fit for purpose.
Or said differently what exactly is the purpose and what is then the regulation to comply with? Should a token be structured as a NFT? A financial savings instrument? As a security token? Partially a utility token? Or as a hybrid token that combines different purposes?, Should it be tradable over the counter only, or also on a secondary market?
The functioning of Loyalty 3.0 equity-tokens
Such a loyalty-to-shareholding (equity-token-holding) is in its design moderately simple. Let’s take an easy example outside the real estate industry: A Consumer, let’s name him Max Schmidt buys building material usually from a company called Bauer Construction Materials, because he knows their products, and those are satisfying his professional needs. When he pays at the material distributor’s shop, via the Bauer merchant app, Max will be identified by his loyalty ID number or code which he shows either via the Bauer app or as technology evolves, via his e-wallet and collects the loyalty points / tokens (let’s call them BLT).
Max now has collected 5000 BLT and they can be either converted to discounts in the form of printable or e-QR coupons or next time when he goes to the shop, he pays some amount in cash, or credit card or bitcoin and some with the BLT value. As the adoption and use of BLT is evolving, more stores will recognize, provide and exchange the tokens via two e-wallets based on blockchain technology, merchants e-wallet and customers e-wallet. No intermediaries, no fees, highest transaction security. It might take time for all merchants to align with the technology but sooner or later they will.
Max can even decide to barter trade his 5000 BLT with 50kg of cement at any stage. The moment he converts the BLTs, those are burned.
Until here our Bauer’s loyalty system works like the classic points-to-rewards systems, and we are not anticipating worries with the regulators. Things need to be assessed in more detail when BLT tokens can be exchanged to receive Bauer shareholding, participation in the Company, giving Max some shareholding rights, eventually voting rights, profit rights, financial / monetary benefits, dividends from the Bauer Company.
The moment Max receives his first shareholding tokens he becomes a shareholder / investor in Bauer and he has the benefits like any other shareholder. Eligible for dividends and he may be able to trade the tokens on (predefined, approved, secure) digital exchanges and sell them to other investors. He will be registered in the cap table and Max can start receiving dividends or any other benefits like the classic shareholders.
It is evident that Max, who is not only a points collector but newly became a shareholder, is much more loyal to Bauer’s Products and subsequently to the Bauer Company. Max will see a double benefit from the increased revenues and profits the Bauer will generate (also due to his own purchases).
The answer for a growing social problem
Now that Max's example is clear, then it takes little imagination to roll out a similar loyalty 3.0 programme in the residential rental market. There will be a growing group of tenants and third-party service providers and perhaps other residential landlords who want to join the loyalty 3.0 network for residential tenants and the amount of data to be processed back and forth is increasing exponentially as is the importance of quality, reliability and security of all this data. Token holders must be able to identify themselves and will have different data rights. Services suppliers, contractors, property managers or government agencies such as the tax authorities will also be connected and given certain - aggregated - token-data depending on their role and purpose. For all of them, the system must be clear upfront and reliable to be able to add value. You will understand that this will still be quite a challenge in the real estate world, and it will take time. But nevertheless, it is a path that could become very real with new technologies like blockchain, IoT and smart contracts in the not-too-distant future. And it may come sooner than many of us still think.
Creating a loyalty program that allows customers to exchange points for shareholding-tokens requires a combination of blockchain infrastructure, loyalty program platforms based on blockchain technology, “very smart” smart contracts, easy handling of digital wallets by safe apps, trading platforms, analytics, secure custody and security platforms.
To our knowledge, a few real estate tokenisation projects are investigating and already developing such a Loyalty 3.0 offering to residential real estate. All signs – also in other industries - show that advanced loyalty programs will offer more than classic tangible material rewards and will significantly reduce classically contrary interests of tenants and the offering company forever.
So what withholds commercial real estate investors copying similar ideas to real estate and create Real Estate Loyalty 3.0? It is a huge market that can be unlocked. Worldwide there is a growing wealth-gap and as a result a growing affordability-gap between owning or renting a home, although renting a similar space is often more expensive and doesn’t allow its residents to gain equity of their home. Loyalty 3.0 can gain the interest of a large group of the world’s population that currently is increasingly affected by this affordability-gap. Property ownership is the most important asset and the basis for creating stable wealth for households. Loyalty 3.0 is the perfect answer to fill this growing wealth gap and is therefore highly likely to be of great interest to a wide range of households. For socially oriented property investors, this makes it the perfect tool to deploy.
The momentum for such a loyalty scheme proposition is clearly there and in terms of timing, there is nothing actually stopping them from starting more with this. Unfamiliarity with blockchain technology and courage to experiment are perhaps the main obstacles yet to be overcome. And for those who want to explore Loyalty 3.0, but don't know how to go about it, we are sure that if you contact FIBREE, they will be happy to help you with it.
Conclusion
With this article, we tried to reduce the unfamiliarity with the variety of opportunities for applying blockchain technology in the real estate sector. What remains is - as in every technological & operational advancement - to have the courage to be an early adopter who benefits the most. We leave that to the pioneers among real estate investors. But one thing is for sure: The first social property investors who will show this courage of implementing Loyalty 3.0 will take customer relationships in commercial property to unprecedented new levels.
1 Utz, M., Johanning, S., Roth, T., Bruckner, T., Strüker, J.;2022, From ambivalence to trust: Using blockchain in customer loyalty programs, University of Bayreuth, Faculty of Law, Business & Economics and more universities, International Journal of Information Management, Volume 68, February 2023, 102496