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
Coefficients
Estimate Hotel
Capital Stock
Regional
Multipliers
Investment Model:
Regional Rates
of Return
Estimate
Government
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
Eq (1):
i
X=CAX+CY
(I-CA)X=CY
X=(I-CA)-1*CY
mn
i
Eq (2):
mn

26*6
T0
1
26
n
26
Regional Output
Coefficients (Sh)
=
6*26
Value of
Branch
Invest.
(Sh)
T0 = P*X
j
1
1
Branch
Output
(Sh)
CA
=
1
1
Final Uses
Internal:
Private
consump.
External:
Exports
26*6
Branch
Output
(Sh)
P26
+
X
1
26
Regional Investment
Coefficients
26
CY
6*26
P
P1
X

Branch
Output
(Sh)
6*26
6
Forecasting Model – cont.
Td
1
T1
1
New
(Extra)
Investment
Total
Investment
Year 1
To
1
Eq (3):
Td = T1-T0
6*26
=
6*26
-
Total
Investment
Base Year
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
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
1,302 1,888
6,621
9,252
355
669
0
2,007 2,243
7,290
9,252
Main Centers
5,695
Outside Centers
2225
Overall Total
7,920
705
9,200
12,646 37,404
1753
5,707
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)
Investment
Category
Depreciation (yrs)
Discount
Rate (7%)
Capital Returns
Hotels
VI
III
Total
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
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
173.27
297.30
574.18
530.85
1575.58
Annual Return
62.3
13
Revenues, Profits and Occupancy Rates:
Hotels by Selected Locations
Jerusalem
Tel Aviv
Haifa
Eilat
Herzliya
Tiberias
Netanya
Dead
Sea
Total
142
218
85
72
138
128
Revenue per room
(Th. Shekels)
140
178
Room Occupancy
Rates (%)
63.9
66.5 49.6 70.3
63.7
60.9
62.6
70.4 61.8
58.3
64.4 56.6 50.8
55.8
55.8
48.4
49.5 55.3
Labor Costs
42.1
36.4 45.8 41.2
42.8
42.8
39.0
44.3 40.4
Profits and Capital
Returns
14.2
18.6
9.7
9.7
5.2
4.8 11.3
126
As Percent of
Total Revenue
Hotel Product
7.7
9.5
14
Capital Returns for Hotels in Select Locations (%)
by (a) % annual room occupancy rates and (b) size of hotel
Location
Total
(a) Annual Room Occupancy Rates (%)
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
Tel Aviv
18.6%
Eilat
9.5%
Dead Sea
4.8%
40-79
80-149
150-299
300-399
400+
34.9%
12.3%
22.6%
17.2%
14.1%
0.0%
13.6%
7.4%
14.3%
5.6%
7.1%
2.6%
15
Hotel Profitability 1999 (m.Sh)
Capital Stock
16.97
Output
5.57
Actual Capital
Returns
0.63 (11.3%)
Rooms
43,000
Expected Capital
Returns
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
Total Output
Direct,
Direct Indirect Indirect + Induced Indirect
+
Demand
Direct
Induced
GDP in Direct
Output
Output and
Multipliers
Unit
GDP in Indirect
Output
GDP from indirect
hotel demand
M SH
2,648
1,286
3,934
3,788
7,721
GDP from output of
other indicators
M SH
5,596
5,214
10,810
10,774
21,583
GDP from total output
M SH
8,234
6,501
14,744
14,561
29,305
Hotel output
multipliers
Ratio
3:11
Other industries output
Ratio
multiplier
Total output multiplier
Ratio
1
3.75
3.8
0.49
1.49
1.43
2.92
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
Indicator
1999
Total
I
II
III
IV
Visitors (Avg)
169
172
182
155
159
Nights (Avg)
446
441
454
406
489
87,974
91,412
Revenues (Sh)
132,978
229,690 130,142
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
Region
North
Haifa
Center
Tel Aviv
Jerusalem
South
Total
151
125
155
132
152
202
I
127
137
87
132
163
225
Grade of Hotel
II
III
Visitors (Nat. Avg. = 169)
139
174
153
94
210
192
148
117
153
150
223
149
IV
139
113
80
119
119
194
Visitors – Nights (Nat. Avg. = 446)
North
Haifa
Center
Tel Aviv
Jerusalem
South
399
328
405
345
393
541
326
352
217
338
418
576
347
382
524
369
382
555
451
242
497
304
388
384
427
347
245
366
365
594
19
Hotel Revenues and Capital Stock per Room
by Region and Grade of Hotel
Region
North
Haifa
Center
Tel Aviv
Jerusalem
South
Total
0.099
0.094
0.100
0.122
0.134
0.155
Grade of Hotel
I
II
III
Revenue per Room (M. Sh.)
Nat. Avg = 0.132
0.166
0.099
0.098
0.178
0.109
0.054
0.117
0.150
0.107
0.184
0.105
0.064
0.228
0.109
0.082
0.282
0.160
0.086
IV
0.078
0.066
0.040
0.075
0.078
0.108
Capital Stock per Room (M. Sh.)
Nat. Avg = 0.405
North
Haifa
Center
Tel Aviv
Jerusalem
South
0.343
0.362
0.332
0.476
0.423
0.375
0.626
0.592
0.616
0.704
0.603
0.626
0.418
0.418
0.418
0.446
0.430
0.418
0.289
0.289
0.289
0.297
0.297
0.289
0.207
0.207
0.207
0.212
0.213
0.207
20
Number of Hotel Rooms by Grade of Hotel
and Region in Response to Demand Increase
of 100,000 extra Tourists*
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
Region
*
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)*
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
Region
*
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
659,395
437,691
300,940
214,570
405,482
Invest per
Room (M. Sh.)
25