WO2015026293A1

WO2015026293A1 - The creet model

Info

Publication number: WO2015026293A1
Application number: PCT/SG2014/000370
Authority: WO
Inventors: Allan WU XIAOJUN
Original assignee: Wu Xiaojun Allan
Priority date: 2013-08-23
Filing date: 2014-08-04
Publication date: 2015-02-26
Also published as: SG2013064209A

Abstract

Commercial energy defines the intensity of commercial activities in a city. Commercial Real Estate - Energy Theory (CREET) is a brand new theory to interpret the dynamics related to the aggregation, spillover and dilution of commercial energy in cities and the implications on commercial real estate. The CREET Model is created based on the theory to quantify the commercial energy level of each city through an index on a relative basis. The CREET Model comprises four major parts: • Commercial Activity Model • New Hierarchy Model of Cities • CREET Index Model •CREET Matrix The CREET Model is relevant to policy makers especially for their urban planning strategies to accommodate the future commercial activities through this quantified and structured methodology. The Model is also useful to investors and developers to enable their business decisions when it comes to the selection of cities for investment and asset allocation among different property sectors i.e. office, retail and hospitality etc.

Description

THE CREET MODEL

1. OVERVIEW

Commercial energy defines the intensity of commercial activities in a city. Commercial Real Estate - Energy Theory (CREET) is a brand new theory to interpret the dynamics related to the aggregation, spillover and dilution of commercial energy in cities and the implications on commercial real estate. The CREET Model is created based on the theory to quantify the Model comprises four major parts:

• Commercial Activity Model

• New Hierarchy Model of Cities

• CREET Index Model

• CREET Matrix

The relation between them is described in the Figure1.

The CREET Model is relevant to policy makers especially for their urban planning strategies to accommodate the future commercial activities through this quantified and structured methodology. The Model is also useful to investors and developers to enable their business decisions when it comes to the selection of cities for investment and asset allocation among different property sectors i.e. office, retail and hospitality etc.

2. DESCRIPTION

2.1 COMMERCIAL REAL ESTATE - ENERGY THEORY (CREET)

Commercial activities of the service industry generate commercial energy, an aggregated dynamism derived from the intensity of the generation, allocation and movement of the five key elements i.e. goods, capital, labor/talent, information and technology. When we describe a busy place full of activities or a city full of energy, we are referring to the high intensity of human activities there accompanied by capital flow, goods distribution, consumer spending, information gathering/dissemination or creativity generation etc. In summary, commercial energy is a concept defining the intensity of commercial activities in a city. On a relative basis, Commercial Real Estate - Energy Theory (CREET) is a new theory to interpret the dynamics related to the aggregation, spillover and dilution of commercial energy in the city and the implications on commercial real estate.

Cities, the agglomeration result of human activities function as the body for human, public and private entities, real estate and infrastructure to interact together to generate and aggregate the urban energy which includes both commercial and non-commercial energy. Public entities like the government and private entities like companies and factories are housed by real estate to function as the organs in the body. Human beings move through infrastructure such as trains and roads to reach everywhere in the cities are like blood in vessels running through the body parts. Telecommunication systems are like our nerve system sending the signals throughout. Likewise, the energy is therefore generated and aggregated in the cities. Larger or more centrally located cities tend to generate higher commercial energy. The urban agglomeration and its efficiency derived from economies of scale, time saving and resources optimization are self-reinforced processes. Higher aggregation of commercial activities leads to higher efficiency. Once the critical mass is formed, the city is like a magnet pulling more and more resources and activities towards it, which generates higher commercial energy.

Cities with more focuses on service industry have higher commercial energy. Service industry covers most of the generation, allocation and movement of the five key elements except for the generation of goods which is completed by the primary and secondary industries. Unlike the primary and secondary industries which largely rely on natural resources and machinery for production, the service industry depends heavily on human capital for value generation. Therefore cities focusing on the service industry have high intensity of human activities conducting various commercial activities.

Commercial real estate in the cities provides spaces for the commercial activities. Therefore, cities with high commercial energy are supposed to have high demand for commercial real estate. In a market with equilibrium, commercial real estate supply matches well with the demand driven by the commercial energy. Markets with insufficient commercial energy but high commercial real estate supply are in oversupply condition or vice versa.

The CREET Model is created based on the theory to quantify the commercial energy level of each city through an index on a relative basis. The CREET Model comprises four major parts:

CREET Model

Commercial Activity Model

New Hierarchy Model of Cities

CREET Index Model

CREET Matrix

The CREET Model is based on an integrated analytical framework of the urban economy as in Figure 2 (in drawing).

2.2 MODEL 1 : COMMERCIAL ACTIVITY MODEL

The Commercial Activity Model as illustrated in Figure 3 is new methodology to interpret the economic activities. The simplified model shows that service related commercial activities are either between business and business or business and consumer. All the activities are revolving around five key elements: goods, capital, labor/talent, information and technology. The whole economic cycle is about generating the five key elements and then allocating and moving them among businesses and consumers constantly. The generation, allocation and movement of the five key elements are optimized by the market forces and regulated by government forces. The model could be used to explain all commercial activities which form an important part of the overall economy. For example, real estate industry, banking industry and consumers form interdependent relationships among themselves. Real estate developers and banks form business to business (B2B) relationship. Real estate developers build office spaces which are leased to banks for their operations. On the other hand, banks lend capital or provide treasury services to real estate developers. Both banks and real estate developers also form separate business to consumer (B2C) relationships. Banks take deposits from consumers, which form capital pool for their lending activities. Real estate developers sell residences to consumers who might also get mortgages from banks.

2.3 MODEL 2: NEW HIERARCHY MODEL OF CITIES

2.3.1 GLOBALIZATION

Globalization has been the primary force driving industrialization in the emerging markets in recent years. In particular, the economic landscape in Asia has evolved dramatically in the past three decades thanks to the four key factors of globalization, trade liberalization, MNCs' global expansion, technological advances and global financial integration. While the world economy continues to integrate, the paradigm of growth has shifted to the east amid the rapid rise of the two economic giants, China and India. The dynamic changes of economic fundamentals have lead to repositioning of Asian cities.

2.3.2 TRANSFORMATION OF ASIA CITIES

Cities in Asia have been reinventing themselves by capitalizing on their various advantages, adopting progressive policies and upgrading infrastructure to jostle for the lead roles in the fast changing economic landscape in the region. With their unique political models, cultures and histories, Asian cities have embarked on different development patterns. However there are some common underlying principles, particularly towards achieving efficiencies.

Referring to Figure 4 (in drawing), driven by the four globalization forces, most cities start their growth model with rapid industrialization accompanied by urbanization, infrastructural upgrades and employment growth. The rise of the middle class and their pent-up appetite for consumption catalyze further growth. The service sector, particularly the labor and skill based service sector, which evolved as a result of the industrialization and population Concentration, is the critical push to transform cities from manufacturing-based economy to service-oriented economy. The typical growth model in Asian cities is an upward spiral economic matric with globalization and internal forces interacting with each other to drive growth.

Based on the model, service industry covers most of the generation, allocation and movement of the five elements except for the generation of goods which is completed by the primary and secondary industries. (Please refer to Figure 5 in drawing). Globalization forces the specialization for higher productivity of each of the five elements and more efficient allocation and movement of them. When the economy advanced from manufacturing-driven to service-driven and innovation-driven economic model, the technology, information and talent elements become increasingly important. Therefore, the Service industry takes on greater importance and a larger share of the city's GDP when the economy advances to the more developed level. Meanwhile, consumers become more sophisticated with rising income and living standard and therefore have higher demand of various personal services.

2.3.3 CITY - THE CENTER OF EFFICIENCY

City provides the base for the commercial activities. The formation of a city is both an agglomerate and endogenous process to achieve efficiency. Historically, traders and merchants congregate at central locations for more efficient aggregation and redistribution of goods, capital, people and information. The emergence of these markets facilitates price discoveries and transactions. Over time, these markets evolve into towns and later cities, and attendant to this, is the growth and aggregation of various services to facilitate further business-to-business activities and to meet consumer needs.

Typically, manufacturing activities cluster within or around the cities to take advantage of the labor pool and superior infrastructure, as well as the access to suppliers, resources and information. Cities of course also provide housing and facilities for residents who not only participate in the commercial and non-commercial activities there but also form the consumer market for goods and services. Other than being the physical bases for human activities, cities are key economic components for productivity and efficiency. Generally, higher urban efficiency could be derived from more economies of scale, time saving and resources optimization when the agglomerate and endogenous processes constantly reinforce each other.

Cities rise or decline over time depending on the adaptability of their public and private sectors to the changing political and economic landscapes. Historically, cities thrived if they could constantly reinvent themselves to improve their efficiency to ride the economic waves domestic and abroad. Amid the globalization in the past decades, cities such as Manila, Penang and Yangon lost their leading roles in the region while many other cities including, Tokyo, Seoul, Shanghai, Hong Kong, Singapore and Bangkok have transformed greatly in order to be relevant to the changes. The intensifying competitions among them to be the leading cities in recent years are nothing else but race for efficiency today and tomorrow at all facets.

2.3.4 MODEL 2: NEW HIERARCHY MODEL OF CITIES

While we consider the key Asian cities such as Tokyo, Seoul, Shanghai, Beijing, Bangkok, Hong Kong, Singapore, Mumbai, New Delhi, Sydney and Melbourne, they are undoubtedly economic powerhouses in their geographical regions. However they play different

commercial roles thank to their efficiency in different facets. The New Hierarchy Model of Cities re-group cities based on the roles they play in the global, national and local economies. This grouping is not about the political power or economic might of each city; rather it is about the cities' geographical reach of their economic roles. It is envisioned that this grouping will be instructive for understanding the depth and breath of commercial activities of each city and the related potential demand of commercial real estate spaces. (Please refer to Figure 6 in drawing).

New Hierarchy Model of Cities

2.3.4.1 GLOBAL FINANCIAL AND SERVICE CENTRES (GFSC)

Definition:

Global hub of finance, trading, service, information and logistics

Provides the region with capital, legal service, technology and human capital • The regional hub for MNCs

Globalization in the past decades reshaped the economic landscapes in Asia and at the same time forced many Asian cities to specialize to be competitive. One of the most aspiring roles many cities are competing for is the global financial and service center (GFSC) for Asia to complement London and New York in the west. As the commercial hub, the GFSC is the central node linking different regions to facilitate the global commercial activities in generation, movement and allocation of five key elements i.e. the capital, goods, people, information and technology.

The GFSC is a combined term of the global financial center (GFC) and the global service center (GSC). The GFC focuses more on the capital element while GSC deals mostly with the other four elements i.e. goods, people, information and technology and provides the base for MNCs to function in the region. We can find GFC like Zurich in Switzerland and GSC like Rotterdam in Netherland. But in the Asia context, the GFC and GSC roles are usually combined. In general, the term of the GFSC is not equivalent to the concept of "gateway city" which refers to a city in strategic location with good connectivity. The GFSC is usually a regional gateway city but not necessarily the other way around.

New York, London, Hong Kong and Singapore are the four leading GFSCs in the world. The common features of the 4 GFSCs are: 1) widespread use of English; 2) home of international currency; 3) compatible legal system; 4) open economy; 5) strong and vast economic hinterland.

Once the two most successful manufacturing and trading power centers in Asia, Hong Kong and Singapore have gone through significant structural transformations in the past three decades and emerged as the two leading GFSCs in Asia. The success of Hong Kong and Singapore illustrates the importance of progressive public policy and efficient institutional infrastructure in staying relevant and competitive in the globalization era. Both cities share few critical advantages compared to other Asian cities including:

Strategic location

Established institutional infrastructure

Open economic policy and favorable tax rates

Professional and clean civil servant system

Autonomy

2.3.4.2 NATIONAL HUB AND GATEWAY CITIES (NHGC)

Definition:

National hub of finance, trading, service, information and logistics

The gateway of domestic and international markets

• The center for national headquarters of domestic conglomerates and MNCs

Some cities have established their status as the hub for the whole nation. Such cities have evolved over decades, if not centuries, in a confluence of political and economic advantages, developing the power base for political, economic and social elites who can support and propagate its own dominance. This dominance often also translates to higher priority for investment in public infrastructure, which in turn improves the connectivity to other cities and entrenches the hub status. These national hubs are also mostly the financial centers for their countries, being either home to the national stock exchanges or the regulatory authorities such as the Central Banks or in many instances, both. Tokyo, Seoul, Shanghai, Beijing, Bangkok, Kuala Lumpur, Jakarta, Mumbai, Delhi and Sydney are hubs and gateway cities at the national level.

With the higher efficiency from superior infrastructure, good connectivity and proximity to key public and private resources, naturally more investments and resources gravitate towards these national hubs, evinced today by the high concentration of domestic corporate headquarters and country headquarter offices of MNCs in these hubs. Skilled and unskilled labors are attracted to these cities for job opportunities, forming deep talent pools. With this virtuous cycle of increasing efficiency, such cities tend to outgrow other cities in the country.

Some cities are so dominant in their nation in terms of economy and population they dwarf the other cities in the country. Typical cases of these super hubs or megapolises are Seoul and Bangkok, both playing multiple roles in relatively small countries. They are the national capital and economic power centers in themselves as well as the financial, cultural and educational centers for their countries. For large countries like China and India, the role of national hub could be shared by two or more most outstanding cities with extensive international connectivity, political preference and economic strength. Coincidentally, both Beijing and Delhi host the central governments and central banks in additional to their strong economic fundamentals and state of art infrastructure. While Shanghai and Mumbai are the traditional national hub and gateway cities with tremendous domestic economic influences particularly the main stock exchanges they host. Luckily, Shanghai and Beijing are far away from each other to have their own focus of geographic coverage, likewise for Delhi and Mumbai.

However, the shifts of political preference could potentially affect the role of cities. The rivalries between cities to be the leading cities for the nation sometimes could also be so entrenching that become the local culture and competitions at all facets.

2.3.4.3 ECONOMIC POWER CENTRES (EPC)

Definition:

Economic powerhouse with integrated industrial value chains of global or regional influences

Innovation center of high concentration of technology talent pool

• Service sector is more local centric

Many cities in Asia have developed great economic capacities amid the industrialization progress in the region in the past decades. Cities with proactive public policies and resilient private sectors have been able to develop different competitive advantages when taking part in the global value chain and at the same time manage to adjust their roles constantly to be the most efficient participants or specialists in certain manufacturing sectors. Over time, different cities have found different industrial focuses and reached certain critical mass of key elements. Some cities have developed particular competitive advantages when the key elements form integrated production system including manufacturers, suppliers, distributors, R&D centers, specialized labor pools to even wholesale markets. Cities with economies of scale and competitive advantages in certain industrial sectors have emerged as the powerful manufacturing centers.

Once certain critical masses are formed, these powerful manufacturing centers are like magnets attracting more key players and resources. Meanwhile, urbanization takes off when large amount of rural labors migrate to these manufacturing centers. Cities grow as more and more lands at the urban fringes are converted for industrial and residential usage. From ports to railways, from highways to airports, from cables to satellites, infrastructures are upgraded constantly to move goods, people and information around efficiently. Service industry also grows to facilitate the manufacturing activities and meet consumption demands of growing population in these cities. The industrialization and urbanization are mutually reinforced processes to grow these cities to economic power centers with great efficiency. Nagoya, Shenzhen, Suzhou, Tianjin, Chongqing, Dalian Qingdao and Bangalore are the key economic power centers in Asia. 2.3.4.4 DOMESTIC REGIONAL GATEWAY CITIES (DRGC)

Definition:

Domestic regional hub of finance, trading, service, information and logistics

Gateway of domestic regional and international markets

Center for regional headquarters of domestic conglomerates and MNCs

For higher efficiency, dispersed cities in each region need a more centralized hub to further aggregate and redistribute goods, capital, people, and information and provide consolidated services at the regional level. The hub of each region functions as the local gateway city linking the region with other domestic regions and even overseas markets. There is empirical evidence to show that these hubs are always strategically located in the region connecting the rest of the region with strong economic, cultural and political ties. Over time, these cities entrench their hub status by leveraging on their key efficiency elements including economies of scale, a central location for time saving, developing a critical mass for resources optimization. Examples of regional hubs include Osaka for Kansai area, Fukuoka for Kyushu area, Chengdu for West China, Guangzhou for South China, Shenyang for Northeastern China, Wuhan for Central China Chennai for South India and Melbourne for Victoria.

Many hubs are economic power centers themselves. But compared to other economic power centers, the hubs usually have more diversified economic structures especially in higher proportion of service industry due to the service role they play in the region. Some hubs might be less powerful economically compared to other cities in the region but may be exceptionally efficient in their financial, educational and public institutions, locations and infrastructure. Most domestic corporates and MNCs set up their branch offices at these hubs to run the regional operations

2.4 CREET INDEX MODEL 2.4.1 METHODOLOGY

Using the Commercial Activity Model as the core, the CREET Index Model expands the five key elements i.e. goods, capital, human, information and technology into 16 key indicators.

Please refer to Figure 7 in drawing for the more detail of CREET Index Model.

Model 3 - CREET Index Model

An indicative index is generated through a specific formula for each indicator. This is based on the quantity data related to and weight assigned to each indicator. The respective sum of the indicative indexes forms the element index. The sum of the five element indexes forms the CREET Index. 43 key cites in Asia Pacific are chosen for the index computation in 2013.

2.4.1.1 Capital Element

Indicator C1: Banking Sector Operations

The banking sector is the most direct source of capital for commercial activity. Therefore the number of banks in a city and the type of headquarter operations is a good proxy for its economic vibrancy. The formula of the Bank Index is as follows:

Step1 : 200 top Asia banks (2012), 50 top China banks (2012) and 50 top world banks are combined to form a bank sample list.

Step2: Operation presences of these banks are identified in the listed 43 cities.

Step3: Based on the information provided by the banks, operation presences of these banks in each of the 43 cities are categorized into four groups: global headquarter, Asia/Asia- Pacific headquarter, country headquarter and city branch/representative office.

Step4: Different weights are allocated for each group in each city (global headquarter-40%, Asia/Asia-Pacific headquarter-30%, country headquarter-20% and city branch/representative office-10%).

Indicator C2: Presence of Stock Exchange

The stock exchange is one of the critical platforms of capital allocation to the economy. Cities hosting the stock exchanges draw a cluster of offices of listed companies and a suite of their service providers such as investment banking, brokerage, accounting and law firms. As a result, the intensity of commercial activities of these cities with stock exchanges tends to be higher. The formula of the Stock Exchange Index is as follows:

Stepl : stock exchange presence index comprises two parts, the basic score and the market cap score.

Step2: Based on the data of stock exchanges from "World Federation of Exchanges", cities with a stock exchange will receive 5 as the basic score. The median of the market cap of stock exchanges (Seoul) is used as the base number with the weight of 5 used to calculate the market cap score of each market. The sum of the basic score and the market cap score then forms the stock exchange index.

Note: Small-scale stock exchanges not being listed in the "World Federation of Exchanges" are not included in the exercise since these small set-ups have limited regional or national impact.

Indicator C3: Presence of Financial Administrative Authorities

In most Asian countries, the presence of financial administrative authorities such as the central banks and other regulatory bureaus also leads to intensive lobbying and approval activities. They form natural draws to many other relevant industry players. A C3 score is allocated to each city based on the presence of the key financial regulatory authorities, the level of financial regulatory authority and the size of the economy behind the authority. The formula of the financial administrative authority Index is as follows:

Indicator C4: Number of CFA Charter Holders

The number of CFA charter holders is used as a proxy for intensity of the financial asset management activities in each listed city. The CFA charter holders based in each listed city, a number obtained from the CFA Institute database, are used for the calculation. The average number is given a weight of 1.5 for the CFA index formation.

Capital Element Index Formula is the sum of the four indexes above:

2.4.1.2 Information Element

Indicator 11 : Number of Fortune 500 Companies

The late twentieth century has seen the rapid expansion of multinational corporations (MNCs). The MNCs are like many interdependent economies forming an interwoven global production and service networks, which further deepens the globalization. According to United Nations, the value added of MNCs accounted for about 10% of global GDP in 2011 and its share of global exports increased from 29% in 1990 to 40% in 2011. Asia's integration with the global economy provides MNCs both manufacturing bases with cost advantages and markets for growth. The MNCs bring in capital, technology and management expertise, which expedite the industrialization process of Asian economies. As a result, the presence of MNC headquarters and offices is an important indication of the commercial energy. As MNC headquarters and offices are mostly involved in management activities, the presence of Fortune 500 companies is therefore categorized as one of the indicators of the information element. The formula of the MNC Index is as follows:

Step 1 : Operation presence of the Fortune 500 companies is identified in the listed 43 cities.

Step2: Based on the information provided by the companies, their operation presence in each of the 43 cities is categorized into five groups: global headquarters, Asia/Asia-Pacific headquarters, country headquarters, domestic regional head office and city branch.

Step3: Different weights were allocated for each group in each city (global headquarters-40%, Asia/Asia-Pacific headquarters- 30%, country headquarters- 15%, regional head office-10% and city branch/representative office-5%).

Indicator I2: Number of International Meetings

International meetings are important channels for information exchange and networking. These events also generate commercial activities in different business sectors in the city. Data from ICCA 2012 is used to measure the relative economic significance of international meetings. The criteria of international important meeting from ICCA statistics are: 1) at least 50 participants, 2) regularly held; 3) held in at least 3 different countries. The average number of meetings of the 43 cities is used as the base number with a weight of 2 to compute the International Meeting Index.

Indicator I3: Number of TV Channels

TV today remains a critical platform for creating content and disseminating information. The number of TV channels is also a good proxy for the vibrancy of the media economy. Media companies rely on a mixture of advertising revenues, subscriptions and state-funding to generate original content and license content from other media companies. As such, media companies, especially those broadcasting TV channels, employ a large number of staff to sustain programming. The average number of TV channels of the 43 cities is used as the base number with a weight of 2 to compute the TV channel Index.

Indicator 14: Number of Newspapers Newspapers, like TV channels, play an important role in information gathering and dissemination. Newspaper companies employ a large number of staff to gather information, produce and distribute the newspapers, earning revenues from advertising and newspaper sales, all of which contribute to the commercial activities in the city. The average number of newspapers of the 43 cities is used as the base number with a weight of 2 to compute the Newspaper Index.

Information Element Index Formula is the sum of the four indexes above:

2.4.1.3 Technology

Indicator T1: Patents Granted

Technological advances, particularly in the field of information technology (IT), have accelerated speed of globalization. IT helps to eliminate bottlenecks with more accurate and timely dissemination of market information and more efficient business processes around the world. In effect, this facilitates the global division of labor. As such, the marketing, R&D, production processes can now be located separately in the most efficient or productive locations around the world as part of a seamless value-chain.

The intensity of R&D and the commercialization processes of new technologies are part of the commercial activities in the city. The most direct indicator of the vibrancy of technology- related activities in each city is the number of patents filed per annum. Data from the intellectual property office of every country/city is used to generate the Technology Index with the formula as follows:

2.4.1.4 Human

Unlike the primary and secondary industries which require natural resources and machinery for production, the service industry depends heavily on human capital for value generation. Knowledge based activities are clearly the leading forces in the service economy.

Indicator H1 : Population

Population forms the base of the human capital for various economic activities. Other than being a source of manpower for the city be the labor pool for the economy, the local population also forms a constant consumer base for the retail sector in the city. Therefore, the population size of a city is an important indicator of the intensity of commercial activities, its commercial energy. The population size of the metropolitan area is used for the population index as the metropolitan area, rather than the administrative area, hosts the actual economic acitivities for a city. We define the metropolitian area for the city as the area where people can change jobs without relocating their residences or where they can relocate their residences without changing their jobs. The formula for the Population Index is as follows:

The average population size of the 43 cities is used as the base number with a weight of 7 to compute the population Index.

Indicator H2: Airport Passenger Traffic

Airport passenger traffic is used as the proxy to measure the capacity of people movement in and out of the city. The higher intensity of commercial activities, the greater commercial energy the city has, the higher volume of inflow and outflow of people. The business related to such human movement such as the airlines and airports are also part of the service industry. They generate commercial activities on their own too. The formula for the Airport Passenger Traffic Index is as follow:

The average annual airport passenger traffic number of the 43 cities is used as the base number with a weight of 3 to compute the Airport Passenger Traffic Index.

Indicator H3: Enrolment of College Students

College students represent one of critical sources of the manpower talent pool. Cities leverage good and sustainable education systems to produce talents for their economic activities. Even though cities can and do import talents from elsewhere, the local supply of college graduates typically forms the core layer of the talent pool. Thus cities with a large number of institutes of higher learning enjoy competitive advantages in human capital for economic growth. The formula for the College Student Index is as follows:

The average enrolment of college student of the 43 cities is used as the base number with a weight of 2 to compute the College Student Index.

Indicator H4: International and Domestic Visitor Arrivals

International and domestic overnight arrivals are important measures for the vibrancy of the tourism economy, including the demand for hotel rooms and related services such as retail, F&B and transportation. Together with the airport passenger traffic, the international and domestic visitor arrivals are used here to measure the external connectivity of the city, which forms an important factor of commercial activities. Visitor arrivals here refer to non-resident visitors who stay at least one night in the city. The formula for the International and Domestic Overnight Arrivals Index is as follows:

The average international visitor arrival number of the 43 cities is used as the base number with a weight of 2 to compute the International Visitor Arrivals Index.

The average domestic visitor arrival number of the 43 cities is used as the base number with a weight of 1 to compute the Domestic Visitor Arrivals Index.

The Human Element Index Formula is the sum of the five indexes above:

2.4.1.5 Goods

Based on the Commerical Activity Model, economic activity involves the generation, allocation and movement of the five elements. The generation of goods is completed by the primary and secondary industries while the allocation and movement of goods is part of the service industry.

Indicator G1 : GDP

As an important measure of the economic activities, GDP recognizes the value-added from goods produced and services provided. For the purpose of measuring the intensity of commercial activities, the commercial energy, GDP is used here as the proxy for the manufacturing and service activities related to goods. The GDP also includes the value- created related to other four elements i.e. information, technology, human and capital. Clearly GDP is critically important in the index composition but for the purpose of this model, it is grouped under the Goods element. The formula for the GDP Index is as follows:

The average GDP number of the 43 cities is used as the base number with a weight of 8 to compute the GDP Index.

Indicator G2: Retail Sales

All manufactured goods need to go through distribution channels to reach the consumers. The retailer is at the end point of the distribution channel. Total retail sales in a city therefore is used to measure the intensity of this allocation process as part of the commercial energy. The formula for the Retail Sales Index is as follows:

The average retail sales number of the 43 cities is used as the base number with a weight of 3 to compute the retail sale Index.

Indicator G3: Land & Port Freight Capacity

All manufactured goods need to go through various logistics networks to reach the business users and consumers. The land and port freight capacity of each city therefore is used to measure intensity of this movement process as part of the commercial energy. The formula for the Land & Port Freight Index is as follows:

The average land and port freight capacity of the 43 cities is used as the base number with a weight of 4 to compute the Land and Port Freight Index.

The Goods Element Index Formula is the sum of the three indexes above:

2.4.2 CREET INDEX MODEL

CREET Index Model is the sum of the five element indexes below:

2.5 GREET MATRIX

The final step of the CREET Model is to combine the CREET Index Model and New Hierarchy Model of Cities to form the CREET Matrix, which shows the relative positions of cities from two dimensions; one, the city's commercial energy level and the other, the role the city plays in the region. For CREET Model, please refer to Figure 1. For CREET Matrix, please refer to Figure 8 in drawing.

3. NEW

3.1 COMMERCIAL REAL ESTATE - ENERGY THEORY (CREET)

Commercial energy is a new concept created by Allan Wu to define the intensity of commercial activities in a city. On a relative basis, Commercial Real Estate - Energy Theory (CREET) is a new urban theory to interpret the dynamics related to the aggregation, spillover and dilution of commercial energy in the city and the implications on commercial real estate.

3.2 COMMERCIAL ACTIVITY MODEL

The Commercial Activity Model is a new model created by Allan Wu to interpret the complicated economic activities in a city in an original and conceptual way.

The model shows that commercial activities are either between business and business or business and consumer. All the activities revolve around five key elements: goods, capital, human, information and technology. The whole economic cycle is about generating the five key elements and then allocating and moving them among businesses and consumers constantly. (For illustration, please refer to Figure 3).

3.3 NEW HIERARCHY MODEL OF CITIES

The New Hierarchy Model of Cities is a new model created by Allan Wu to interpret the transformation of cities towards the Center of Efficiency and the new roles they play in the region. The Model also introduces the new terms including 1) Global Financial & Service Center (GFSC), 2) National Hub and Gateway City (NHGC), 3) Economic Power Center (EPC) and 4) Domestic Regional Gateway City.

The Model re-groups cities based on the roles they play in the global, national and local economies. This grouping is about the cities' geographical reach of their economic roles. It is envisioned that this grouping will be instructive for understanding the depth and breath of commercial activities of each city and the potential demand of commercial real estate. (For illustration, please refer to Figure 6).

3.4 CREET INDEX MODEL

The CREET Index Model is a new model created by Allan Wu to construct the CREET Index which measures the intensity of commercial activities, the commercial energy in the city.

An indicative index is generated through specific formula for each indicator based on the quantity data related to and weight assigned to each indicator. The respective sum of the indicative indexes forms the element index. The sum of the five element indexes forms the CREET Index. 43 key cites in Asia Pacific are chosen for the index computation in 2013. The Index will be updated and published every year going forward.

(For illustration, please refer to Figure 7). 3.5 CREET MATRIX

The final step of the CREET Model is to combine the CREET Index Model and New Hierarchy Model of Cities to form the CREET Matrix, which shows the relative positions of cities from two dimensions; one, the city's commercial energy level and the other, the role the city plays in the region.

(For illustration, please refer to Figure 8).

3.6 COMMERCIAL USE OF THE CREET MODEL

CREET Model is an integrated model created by Allan Wu. CREET Model use Commercial Activity Model as the core to derive the CREET Index Model, which is combined with the New Hierarchy Model to form the CREET Matrix. (For illustration, please refer to Figure 1).

4. INVENTIVE STEP

The Commercial Real Estate-Energy Theory (CREET) and CREET Model are integrated inventions by Allan Wu, synthesizing the data, observations, data and facts in urban commercial activities and demographics. The CREET leads to the CREET Model which in turn helps to interpret the complicated urban economic activities using structured and quantified methodologies.

The knowledge framework, reasoning and development process of the CREET and CREET model is fully described in Part 2 Description.

5. INDUSTRIAL APPLICATION

The CREET model is relevant to policy makers especially for their urban planning strategies to accommodate the future commercial activities through quantified and structured methodologies. The model is also useful to investors and developers to enable their business decisions when it comes to the selection of cities for investment and asset allocation among different property sectors i.e. office, retail and hospitality etc.

APPLICATION 1

By studying the five element indexes and comparing them across the region, the municipal policy makers can understand their home cities' comparative advantages and weaknesses and therefore adjust their policies to address growth issues and craft out long term strategies to enhance their cities' competitiveness.

APPLICATION 2

By forecasting the 16 indicators, the CREET Index model could be used to forecast the potential commercial energy of each city in the years ahead. Urban planers can then plan commercial spaces through optimal zoning exercises to accommodate the future commercial activities in the city.

APPLICATION 3

With the current CREET Index and the forecast, the investors and developers can have a more structured and quantified reference when making strategic decisions for city selections and asset allocations.

APPLICATION 4

The current CREET Index and the forecast can also be translated to current and future demand strength of commercial spaces for each city. Together with the existing commercial space supply in the market and the future development pipelines, investors and developers can map out the demand and supply equilibrium analysis and forecast. This will enable the better decision making for individual projects and investments. In general, the CREET Index Model will help the stakeholders of public and private sector to make more efficient decisions and therefore optimize the resources allocation for the economy. There could be significant savings garnered from minimizing wasteful decisions that have resulted in over-planning, over-investment and over-development.

ILLUSTRATION 1

The Hierarchy Model of Cities can help us understand the different positioning of cities and their commercial potential. The commercial potential decides demand for office, retail and hospitality space. The upside of a real estate investment largely depends on the growth potential of the city where the asset is located as well as the specific location of the asset. For institutional and private investors, it is important to understand the role each city plays in the region and their potential by understanding their growth drivers and the risk associated.

The current CREET Index and the forecast could also be translated to current and future demand strength for each city. Together with the existing commercial spaces supply in the market and the future development pipelines, investors and developers can map out the demand and supply equilibrium analysis and forecast. This will enable the better decision making for individual projects and investments.

(For more details, please refer to Figure 9).

ILLUSTRATION 2

CASE STUDY OF THE GRADE A OFFICE MARKETS IN HONG KONG, SHENZHEN AND GUANGZHOU

Hong Kong, Shenzhen and Guangzhou are the three key cities in the Pearl River Delta, one of the three economic engines in China. However, the three cities play different roles in the region. As determined by the New Hierarchy Model of Cities, Hong Kong is the Global Financial and Service Center (GFSC). Shenzhen is the Economic Power Center while Guangzhou is the Domestic Regional Gateway City for South China.

The CREET Index using 2012's data are 143, 74 and 69 for Hong Kong, Shenzhen and Guangzhou respectively. Hong Kong leads in the capital and information elements as it is one of leading global financial centers and the base for many MNCs. Home to world- renowned technology companies such as Huawei, Tecent, ZTE, Shenzhen leads in technology element as it is one of the most dynamic technology hubs in China. Guangzhou on the other hand leads in the human and goods element.

The capital and information elements are most relevant to grade A office demand in the city as banking, financial companies and MNCs are major tenants of grade A offices. The demand strength on a relative basis based on the CREET Index is 97, 25 and 16 for Hong Kong, Shenzhen and Guangzhou respectively. On the supply side, the stock of Grade A office space in Hong Kong is about 60% more than Shenzhen and 100% more than Guangzhou in 2012. Given the considerably higher demand strength in Hong Kong, the average rental of Grade A office in Hong Kong is well above that of Shenzhen and Guangzhou.

However the supply in Shenzhen and Guangzhou are both going to double in the next 5 to 7 years. This casts doubts over whether Shenzhen and Guangzhou can absorb this new supply or if market rents might have to drop as a result of the oversupply. The CREET Index forecast could help to answer a question like this. And the CREET Index for Hong Kong, Shenzhen and Guangzhou are listed below. (For more details, please refer to Figure 10).

Claims

CLAIM 1: COMMERCIAL USE OF THE COMMERCIAL ACTIVITY MODEL

The model shows that commercial activities are either between business and business or business and consumer. All the activities revolve around five key elements: goods, capital, human, information and technology. The whole economic cycle is about generating the five key elements and then allocating and moving them among businesses and consumers constantly. (For more details, please refer to Figure 3).

CLAIM 2: COMMERCIAL USE OF THE NEW HIERARCHY MODEL OF CITIES

The Model re-groups cities based on the roles they play in the global, national and local economies. This grouping is about the cities' geographical reach of their economic roles. It is envisioned that this grouping will be instructive for understanding the depth and breath of commercial activities of each city and the potential demand of commercial real estate. (For more details, please refer to Figure 6).

CLAIM 3: COMMERCIAL USE OF THE CREET INDEX MODEL

The CREET Index Model is a new model created by Allan Wu to construct the CREET Index, which measures the intensity of commercial activities, the commercial energy in the city.

An indicative index is generated through specific formula for each indicator based on the quantity data related to and weight assigned to each indicator. The respective sum of the indicative indexes forms the element index. The sum of the five element indexes forms the CREET Index. 43 key cites in Asia Pacific are chosen for the index computation in 2013. The Index will be updated and published every year going forward. (For more details, please refer to Figure 7).

CLAIM 4: COMMERICAL USE OF THE CREET MATRIX

The final step of the CREET Model is to combine the CREET Index Model and New Hierarchy Model of Cities to form the CREET Matrix, which shows the relative positions of cities from two dimensions; one, the city's commercial energy level and the other, the role the city plays in the region. (For more details, please refer to Figure 8).

CLAIM 5: COMMERCIAL USE OF THE CREET MODEL

CREET Model is an integrated model created by Allan Wu. CREET Model use Commercial Activity Model as the core to derive the CREET Index Model, which is combined with the New Hierarchy Model to form the CREET Matrix. (For more details, please refer to Figure 1).