Update:Mar. 15, 2021
The Revenue Model of the WIC
Income driven by the twin pillars of rent and innovation-based revenue
~Stable operation over the long term powered by the development of Shenzhen
In this section, we would like to provide an outline of the revenue model of the World Innovation Center (WIC) development project that will be primarily managed by our company in Shenzhen, China. The WIC will involve the construction of several high-rise office buildings and innovation-related facilities on a 127,000m2 site (an area equivalent to three Tokyo Domes) owned by our company (through its land use right) in Futian District, a prime area within the rapidly developing city of Shenzhen.
The WIC will be the nexus of a large-scale redevelopment project, and we are finalizing its details with the authorities.
As far as the timeline is concerned, the Chinese authorities intend to start the demolition of existing facilities in the area as early as 2022 and commence redevelopment in stages. While there are still several issues to address during the review, we will expedite our various negotiations with the authorities to ensure that we can successfully obtain the final construction permit as soon as possible.
Monthly rental income of 300 to 400 yuan/m2, a figure that is expected to rise by 5% per year due to population growth
The biggest source of revenue for the WIC is rental income. While an in-depth study of the design and specifications of buildings will be carried out in due course, it can be projected at this point based on various data such as Shenzhen's booming real estate market that the expected monthly rental income will be around 300 to 400 yuan/m2 (4,800 to 6,400 yen/m2), depending on the development area and the functions of the facilities. It is also common in China to charge rent for common areas such as stairways.
The real estate boom in Shenzhen has temporarily abated due to the COVID-19 pandemic, with the vacancy rate creeping up slightly. Nevertheless, this area will no doubt witness an increase in demand for office space and an influx of people in the long run as the nexus of China's national project to develop the Greater Bay Area, which includes the neighboring cities of Hong Kong and Macao. Private research institutes have suggested that rent in this area will continue to rise at an average rate of 5% per year over the long term, and we have incorporated this level of projected growth into our revenue model for the WIC. South China is one of the most vital areas in the country's urban competitiveness agenda, and Shenzhen holds the key to driving domestic demand for the development of high-tech industries and technologies with high added value. We will prioritize the satisfaction of tenant companies and secure the appropriate levels of rental income by maximizing their experiential value through matching them with startups, building an information system infrastructure that consolidates innovation-related data, and offering community-based functions that are exclusive to tenants.
The second pillar of innovation-based revenue: Investing in startups and organizing large-scale events
The WIC will not simply comprise office buildings. It will serve as an innovation platform where leading high-tech companies from Japan, China, the U.S., Europe, and Asia can move in and develop new technology while participating in marketing activities and actively interacting with one another. We also hope to provide tenant companies with services with extraordinarily high levels of added value and receive fair compensation for these services. This is what we refer to as "innovation-based revenue," which will serve as the second pillar of the revenue model of the WIC alongside rent. For instance, we can generate relatively stable revenue by organizing large-scale events throughout the year, such as pitch contests that involve startups in Shenzhen, of which one million are said to exist, and technology trade shows featuring the different provinces and outstanding companies in each region in China.
Uncovering our second and third investment projects in China
Once this Shenzhen project is on track, corporate acquisitions and capital tie-ups in China will become attractive options. The massive Greater Bay Area (GBA) centered on Guangzhou and Shenzhen is gradually being built up as an extensive urban network as it simultaneously transitions to a smart industrial structure that will draw in major cities in the vicinity, such as Foshan. We will continue to hone our information-gathering capabilities at the WIC and pursue various investment opportunities in the GBA and other areas. In the future, we may also collaborate with leading foreign funds and investment firms in Singapore and other countries.
Serving as a business incubator that facilitates the discovery of future unicorns
It has been said that there are already one million startups in the Shenzhen area, making it impossible to keep abreast of the constantly evolving business opportunities and insider information without actually being there. Unicorns such as the second- and third-generation BAT (Baidu, Alibaba, and Tencent), as well as the Singapore-based Grab and the Indonesia-based Gojek, which have been expanding rapidly in Asia, will certainly make their mark out of the countless venture companies here. We expect to be well-positioned to uncover promising golden eggs moving forward by working closely with leading accelerators that support startups. The stable revenue generated from the WIC can then be tapped on to fund startups and companies from Japan, the U.S., and Europe, as well as local companies in China, creating a virtuous cycle of innovation and growth.
Construction to begin by the end of 2022, with lease commencing in stages as early as 2023
Although we are currently working with the local authorities on the schedule for the completion of the WIC, we are around six months behind our original plan of completing construction by the fall of 2022 due to the impact of the COVID-19 pandemic. If the construction work can carry on smoothly, we expect the first batch of companies to be able to move in by the end of 2023. As this is a massive facility, the depreciation, taxes, and outsourcing expenditures for its operation and management will also rise accordingly. While we are unable to provide a specific range for these figures at the moment as we are still negotiating details such as the total area and floor area ratio with the Chinese authorities, we expect the occupancy rate for the buildings to rise after 2025, which will bring the consolidated net income of Miyakoshi Holdings to very high levels. At the same time, this income is expected to grow steadily moving forward as a result of rent increases and other measures.