Forecasting Regional Investment

in the Hotel Industry:

An Input-Output Approach

Daniel Freeman
CEM Computerized Economic Models, Rehovot, Israel

Daniel Felsenstein
Department of Geography, Hebrew University of Jerusalem, Israel

Research funded by the Ministry of Tourism, Israel

1
 Background

• Severe demand fluctuations

• Tourism crisis in Israel (2000-2004), stock

of hotel rooms reduced by 33 percent

• Hotel rooms as bottleneck for tourism

development

2
 Research Questions

• What is the number of hotel rooms needed

in peak and trough periods?

• What is the magnitude of the demand push

that can stimulate the hotel sector into new
investment?

• How is this response regionally

differentiated?
3
 Schematic Representation of the
Analytic Process
Data Collection

Multi-Regional Input
Output Model (MRI0)

Estimate
Capacity Estimate Hotel
Coefficients Capital Stock

Investment Model: Estimate

Regional
Regional Rates Government
Multipliers
of Return Subsidy

New Regional Hotel Investment in Response

to Increased Demand
4
 Model

• MRIO Model coupled with Investment Matrix

• 26 sectors, 4 hotel sectors (Grades 1- IV), 6

regions

• All prices 1999 equivalents (base year)

• Forecasting capability: interaction P and X

matrices
5
 Matrix Structure – Forecasting Model
X CA X CY
j n
Eq (1): i
1 1 26 1 1
Final Uses
X=CAX+CY Internal:
Branch Branch
(I-CA)X=CY Output = Regional Output
Coefficients (Sh)
 Output + Private
consump.
(Sh) (Sh) External:
X=(I-CA)-1*CY
Exports
mn
6*26 26*6 6*26 26*6

T0 P X
i
1 P1 26 1
Eq (2):
Value of
Branch Regional Investment Branch
T0 = P*X
Invest. = Coefficients  Output
(Sh) (Sh)
mn
26 26 P26 6*26
6
 Forecasting Model – cont.

Td T1 To
1 1 1
Eq (3):
Total
New Total
Td = T1-T0 Investment
(Extra) = Investment - Base Year
Investment Year 1
6*26 6*26 6*26

7
 Findings
• Size of hotel investment stock

• Estimated and reported returns to capital

• Role of Government Assistance

• Hotel and Tourism industry national multipliers

• Capacity Coefficients

• Forecasting model

8
 Direct Hotel Output (Local and Foreign Tourist
Demand) by Grade of Hotel (M.SH, 1999 prices)

Region I II III IV Total

North 91 287 285 124 787
Haifa 53 76 33 27 189
Center 27 84 89 25 225
Tel Aviv 488 229 84 87 888
Jerusalem 633 311 24 68 1238
South 760 826 206 47 2239
Total 2052 1815 821 778 5566

9
 Hotel and Tourism Outputs; I-O Results (Msh, 1999 prices)

Tourism
Hotels
Domestic Foreign Total

Direct 8,075 14,739 22,815 5,566

Total 14,320 26,065 40,385 5,589

10
 Hotel Rooms by Grade of Hotel and Region

Grade of Hotel North Haifa Center Tel Aviv Jerusalem South Total

I 549 298 230 2,649 2,782 2,691 9,200

II 2,601 604 513 2,090 2,874 4,949 13,630
III 1,682 222 636 943 2,727 1,447 7,657
IV 863 178 509 939 869 3,559 6,916
Main Centers 5,695 1,302 1,888 6,621 9,252 12,646 37,404
Outside Centers 2225 705 355 669 0 1753 5,707
Overall Total 7,920 2,007 2,243 7,290 9,252 14,399 43,111

11
Hotel Investment by Grade of Hotel and Region
(M Shekels, 1999 prices)

Grade of Hotel North Haifa Center Tel Aviv Jerusalem South Total

I 343.9 176.5 141.7 1866 1,678 1684.4 5,891

II 1210 291.2 234.1 971.7 1,237 2167 6,111

III 837.5 175.5 240 388 811 695.12 3,147

IV 328.1 84.14 129.3 244.8 185 854.82 1,826

Total 2,720 727 745 3,470 3,911 5,401 16,975

12
 Estimated Rates of Return by Investment
Category and Grade of Hotel (Million Shekels)

Capital Returns
Investment Deprecia- Hotels Total
Discount
Category tion (yrs) Rate (7%) VI III II I
Plans 30 0.081 7.22 12.39 23.93 22.12 65.67
Licenses 30 0.081 6.17 10.58 20.44 183.90 56.09
Structure 30 0.081 66.65 114.35 220.85 204.19 606.03
Systems 20 0.094 46.16 79.21 152.98 141.44 419.80
Elevators 20 0.094 2.64 4.53 8.76 8.10 24.03
Land Develop. 30 0.081 3.76 6.45 12.46 11.52 34.20
Equip., Furniture 10 0.142 36.15 62.3 119.79 110.75 328.72
Management 30 0.081 3.46 4.94 11.47 10.60 31.46
Miscellaneous 30 0.081 1.05 1.81 3.49 3.23 9.58
Annual Return 173.27 297.30 574.18 530.85 1575.58
13
 Revenues, Profits and Occupancy Rates:
Hotels by Selected Locations
Jerusalem Haifa Dead
Tel Aviv Eilat Herzliya Tiberias Netanya Total
Sea

Revenue per room

(Th. Shekels) 140 178 126 142 218 85 72 138 128

Room Occupancy 61.

63.9 66.5 49.6 70.3 63.7 60.9 62.6 70.4
Rates (%) 8

As Percent of
Total Revenue

58.3 64.4 56.6 50.8 55.8 55.8 48.4 49.5 55.3

Hotel Product
Labor Costs 42.1 36.4 45.8 41.2 42.8 42.8 39.0 44.3 40.4
Profits and Capital
14.2 18.6 7.7 9.5 9.7 9.7 5.2 4.8 11.3
Returns 14
 Capital Returns for Hotels in Select Locations (%)
by (a) % annual room occupancy rates and (b) size of hotel

(a) Annual Room Occupancy Rates (%)

Location Total 1-54 55-64 65-74 75+
Tel Aviv 18.6% 21.0% 21.0% 14.1% 25.0%
Eilat 9.5% 11.1% 7.0% 7.4% 13.0%
Dead Sea 4.8% 0.0% -12.0% 4.3% 14.1%

(b) Size of Hotel (Number of Rooms)

Location Total 40-79 80-149 150-299 300-399 400+
Tel Aviv 18.6% 34.9% 12.3% 22.6% 17.2% 14.1%
Eilat 9.5% 0.0% 13.6% 7.4% 14.3% 5.6%
Dead Sea 4.8% 7.1% 2.6%

15
 Hotel Profitability 1999 (m.Sh)
Output Capital Stock Rooms
5.57 16.97 43,000

Actual Capital Expected Capital

Returns Returns
0.63 (11.3%) 1.57 (28.1%)

Gov. Subsidy
1.14 (27.5%)

Actual Capital
Return
0.63

Difference
0.51 16
 GDP Multipliers in the Tourism
and Hotel Sectors
GDP in Direct GDP in Indirect GDP in
Output Output Total Output
Output and Direct,
Direct Indirect Indirect + Induced Indirect
Unit Demand Direct +
Multipliers Induced
GDP from indirect
M SH 2,648 1,286 3,934 3,788 7,721
hotel demand
GDP from output of
M SH 5,596 5,214 10,810 10,774 21,583
other indicators

GDP from total output M SH 8,234 6,501 14,744 14,561 29,305

Hotel output
Ratio 3:11 3.75 3.8
multipliers
Other industries output
Ratio 0.49 1.49 1.43 2.92
multiplier
Total output multiplier Ratio 1 0.79 1.79 1.77 3.56
17
National Per-Room Occupancy Coefficients
by Grade of Hotel, 1999 prices

1999 Average by Grade of Hotel

Per-Room 1999
I II III IV
Indicator Total
Visitors (Avg) 169 172 182 155 159

Nights (Avg) 446 441 454 406 489

Revenues (Sh) 132,978 229,690 130,142 87,974 91,412

Investment (Sh) 405,482 659,395 437,691 300,940 214,570

18
Hotel Visitors and Visitor-Nights Per Room, by
Region and Grade of Hotel
Grade of Hotel
Total
Region I II III IV
Visitors (Nat. Avg. = 169)
North 151 127 139 174 139
Haifa 125 137 153 94 113
Center 155 87 210 192 80
Tel Aviv 132 132 148 117 119
Jerusalem 152 163 153 150 119
South 202 225 223 149 194

Visitors – Nights (Nat. Avg. = 446)

North 399 326 347 451 427
Haifa 328 352 382 242 347
Center 405 217 524 497 245
Tel Aviv 345 338 369 304 366
Jerusalem 393 418 382 388 365
South 541 576 555 384 594
19
Hotel Revenues and Capital Stock per Room
by Region and Grade of Hotel
Total
Grade of Hotel
Region I II III IV
Revenue per Room (M. Sh.)
Nat. Avg = 0.132
North 0.099 0.166 0.099 0.098 0.078
Haifa 0.094 0.178 0.109 0.054 0.066
Center 0.100 0.117 0.150 0.107 0.040
Tel Aviv 0.122 0.184 0.105 0.064 0.075
Jerusalem 0.134 0.228 0.109 0.082 0.078
South 0.155 0.282 0.160 0.086 0.108
Capital Stock per Room (M. Sh.)
Nat. Avg = 0.405
North 0.343 0.626 0.418 0.289 0.207
Haifa 0.362 0.592 0.418 0.289 0.207
Center 0.332 0.616 0.418 0.289 0.207
Tel Aviv 0.476 0.704 0.446 0.297 0.212
Jerusalem 0.423 0.603 0.430 0.297 0.213
South 0.375 0.626 0.418 0.289 0.207 20
 Number of Hotel Rooms by Grade of Hotel
and Region in Response to Demand Increase
of 100,000 extra Tourists*

Region Total I II III IV

North 661 46 241 242 132
Haifa 800 119 277 242 162
Center 646 66 161 239 180
Tel Aviv 757 275 226 136 120
Jerusalem 658 198 204 194 62
South 494 92 178 82 142

* National Avg. = 592.

21
 Investment Required by Grade of Hotel and
Region in Response to Demand Increase of
100,000 Extra Tourists (M. Shekels, 1999 prices)*

Region Total I II III IV

North 227.1 28.7 101.1 69.9 27.4
Haifa 289.9 70.4 116.1 69.9 33.5
Center 214.9 40.9 67.5 69.2 37.3
Tel Aviv 360.7 194 101 40.3 25.4
Jerusalem 277.8 119.2 87.9 57.6 13.1
South 185.4 57.8 74.4 23.9 29.3

* National Avg. = 240.

22
 Conclusions

• Regional variation in hotel profit levels

• Discrepancy expected versus reported rates of

return

• Regional variation in hotel capacities

• Differing regional responses to increase of

100,000 extra tourists
23
 Implications Arising from Results

• Centrality of the hotel sector within the tourism

industry

• Hotel construction: protracted and time-dependent

process –needs to be addressed explicitly

• Regional investment coefficients- need to account

for regional variations in land prices

24
 Hotel Investment (Capital Stock)
by Grade (M. SH, 1999 prices)

Region I II III IV Total

North 344 1,210 838 328 2,720
Haifa 176 291 176 84 727
Center 142 234 240 129 745
Tel Aviv 1,865 972 388 245 3,470
Jerusalem 1,678 1,237 811 185 3,911
South 1,684 2,167 695 855 5,401
Total 5,891 6,111 3,147 1,826 16,975

Invest per
659,395 437,691 300,940 214,570 405,482
Room (M. Sh.)
25