1

Forecasting Regional Investment in the Hotel Industry:

An Input-Output Approach

Daniel FreemanCEM Computerized Economic Models, Rehovot, Israel

Daniel FelsensteinDepartment of Geography, Hebrew University of Jerusalem, Israel

Research funded by the Ministry of Tourism, Israel

2

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

3

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?

4

Schematic Representation of the Analytic Process

Multi-Regional Input Output Model (MRI0)

Data Collection

Estimate Government

Subsidy

Investment Model: Regional Rates

of Return

Regional Multipliers

Estimate Hotel Capital Stock

Estimate Capacity

Coefficients

New Regional Hotel Investment in Response to Increased Demand

5

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

6

Matrix Structure – Forecasting Model

Eq (1):

X=CAX+CY

(I-CA)X=CY

X=(I-CA)-1*CY

XCAXCYjn

i112611

Branch Output

(Sh)=Regional Output

Coefficients (Sh) Branch Output

(Sh)+

Final UsesInternal:Private

consump.External:Exports

mn26*66*2626*66*26

26*6P262626mn

Branch Output

(Sh)

Regional Investment Coefficients=

Value of Branch Invest. (Sh)

126P11i

Eq (2):

T0 = P*X

XPT0

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Eq (3):

Td = T1-T0

TdT1To

111

New (Extra)

Investment=

Total Investment

Year 1-

Total Investment Base Year

26*626*626*6

Forecasting Model – cont.

8

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

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RegionIIIIIIIVTotal

North91287285124787

Haifa53763327189

Center27848925225

Tel Aviv4882298487888

Jerusalem63331124681238

South760826206472239

Total2052 1815821 7785566

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

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

TourismHotels

DomesticForeignTotal

Direct8,07514,73922,8155,566

Total14,32026,06540,3855,589

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Hotel Rooms by Grade of Hotel and Region

Grade of HotelNorth Haifa Center Tel Aviv Jerusalem South Total

I5492982302,6492,7822,6919,200

II2,6016045132,0902,8744,94913,630

III1,6822226369432,7271,4477,657

IV8631785099398693,5596,916

Main Centers5,6951,3021,8886,6219,25212,64637,404

Outside Centers2225705355669017535,707

Overall Total7,9202,0072,2437,2909,25214,39943,111

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Grade of HotelNorth Haifa Center Tel Aviv Jerusalem South Total

I343.9176.5141.718661,6781684.45,891

II1210291.2234.1971.71,23721676,111

III837.5175.5240388811695.123,147

IV328.184.14129.3244.8185854.821,826

Total2,7207277453,4703,9115,40116,975

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

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

Investment Category

Deprecia-

tion (yrs) Discount

Rate (7%)

Capital Returns

Total HotelsVIIIIIII

Plans 300.081

7.2212.3923.9322.1265.67

Licenses300.081

6.1710.5820.44183.9056.09

Structure300.081

66.65114.35220.85204.19606.03

Systems200.094

46.1679.21152.98141.44419.80

Elevators200.094

2.644.538.768.1024.03

Land Develop.300.081

3.766.4512.4611.5234.20

Equip., Furniture100.142

36.1562.3119.79110.75328.72

Management300.081

3.464.9411.4710.6031.46

Miscellaneous300.081

1.051.813.493.239.58

Annual Return 173.27297.30574.18530.851575.58

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Revenues, Profits and Occupancy Rates: Hotels by Selected Locations

Jerusalem Tel Aviv Haifa Eilat Herzliya Tiberias Netanya Dead

Sea Total

Revenue per room (Th. Shekels)

1401781261422188572138128

Room Occupancy Rates (%)63.966.549.670.363.760.962.670.461.

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 As Percent of Total Revenue

Hotel Product58.364.4

56.650.855.855.848.449.5

55.3

Labor Costs42.136.445.8

41.242.842.839.044.340.4

Profits and Capital Returns

14.218.67.7

9.59.79.75.24.811.3

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Capital Returns for Hotels in Select Locations (%) by (a) % annual room occupancy rates and (b) size of hotel

(a) Annual Room Occupancy Rates (%)

LocationTotal1-5455-6465-7475+

Tel Aviv18.6%21.0%21.0%14.1%25.0%

Eilat9.5%11.1%7.0%7.4%13.0%

Dead Sea4.8%0.0%12.0%-

4.3%14.1%

(b) Size of Hotel (Number of Rooms)

LocationTotal40-7980-149

150-299

300-399

400+

Tel Aviv18.6%

34.9%12.3%22.6%

17.2%14.1%

Eilat9.5%

0.0%13.6%7.4%

14.3%5.6%

Dead Sea4.8%

  7.1%2.6%

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Hotel Profitability 1999 (m.Sh)

Rooms

43,000Capital Stock

16.97Output

5.57

Expected Capital Returns

1.57 (28.1%)

Actual Capital Returns

0.63( 11.3%)

Gov. Subsidy1.14 (27.5%)

Actual Capital Return

0.63

Difference0.51

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GDP in Direct Output

GDP in Indirect Output

GDP in Total Output

Output and Multipliers

UnitDirect

DemandIndirect Indirect + Direct Induced

Direct, Indirect +

Induced

GDP from indirect hotel demand

M SH2,6481,2863,9343,7887,721

GDP from output of other indicators

M SH5,5965,21410,81010,77421,583

GDP from total outputM SH8,2346,50114,74414,56129,305

Hotel output multipliers

Ratio3:11 3.75 3.8

Other industries output multiplier

Ratio 0.491.491.432.92

Total output multiplierRatio10.791.791.773.56

GDP Multipliers in the Tourism and Hotel Sectors

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National Per-Room Occupancy Coefficients by Grade of Hotel, 1999 prices

  1999 Average by Grade of Hotel

Per-Room Indicator

1999 Total

IIIIIIIV

Visitors (Avg)169172182155159

Nights (Avg)446441454406489

Revenues (Sh)132,978229,690130,14287,97491,412

Investment (Sh)405,482659,395437,691300,940214,570

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Total Grade of Hotel

Region IIIIIIIV  Visitors (Nat. Avg. = 169)

North151127139174139

Haifa12513715394113

Center1558721019280

Tel Aviv132132148117119

Jerusalem152163153150119

South202225223149194      

  Visitors – Nights (Nat. Avg. = 446) North399326347451427

Haifa328352382242347

Center405217524497245

Tel Aviv345338369304366

Jerusalem393418382388365

South541576555384594

Hotel Visitors and Visitor-Nights Per Room, by Region and Grade of Hotel

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Hotel Revenues and Capital Stock per Roomby Region and Grade of Hotel

TotalGrade of Hotel RegionIIIIIIIV

  Revenue per Room (M. Sh.) Nat. Avg = 0.132

North0.0990.1660.0990.0980.078

Haifa0.0940.1780.1090.0540.066

Center0.1000.1170.1500.1070.040

Tel Aviv0.1220.1840.1050.0640.075

Jerusalem0.1340.2280.1090.0820.078

South0.1550.2820.1600.0860.108  Capital Stock per Room (M. Sh.)

Nat. Avg = 0.405 North0.3430.6260.4180.2890.207

Haifa0.3620.5920.4180.2890.207

Center0.3320.6160.4180.2890.207

Tel Aviv0.4760.7040.4460.2970.212

Jerusalem0.4230.6030.4300.2970.213

South0.3750.6260.4180.2890.207

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RegionTotalIIIIIIIV

North66146241242132

Haifa800119277242162

Center64666161239180

Tel Aviv757275226136120

Jerusalem65819820419462

South4949217882142

Number of Hotel Rooms by Grade of Hotel and Region in Response to Demand Increase

of 100,000 extra Tourists*

* National Avg. = 592.

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RegionTotalIIIIIIIV

North227.128.7101.169.927.4

Haifa289.970.4116.169.933.5

Center214.940.967.569.237.3

Tel Aviv360.719410140.325.4

Jerusalem277.8119.287.957.613.1

South185.457.874.423.929.3

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

* National Avg. = 240.

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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

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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

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RegionIIIIIIIVTotalNorth3441,2108383282,720

Haifa17629117684727

Center142234240129745

Tel Aviv1,8659723882453,470

Jerusalem1,6781,2378111853,911

South1,6842,1676958555,401

Total5,8916,1113,1471,82616,975

Invest per Room (M. Sh.)

659,395437,691300,940214,570405,482

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