In Madrid, hotel investment leaning toward luxury

The Four Seasons Madrid will be housed in a series of historic buildings comprising the Canalejas complex. Photo credit: PRNewsFoto/Four Seasons (Four Seasons Madrid)

Madrid’s growing reputation as a leisure and business destination is bringing in more international visitors. Those visitors, in turn, are the impetus for more hotels. 

Hotel transactions in the city doubled over the past year, and the arrival of the Four Seasons and Mandarin Oriental are expected bring balance to a city that has seen a dearth of global brands. 

Big Business

Horwath HTL reported that hotel deals reached €703 million in the first three quarters of last year, compared to the €310 million recorded in 2016. The main players in 2017 were Baraka Group, which purchased the future RIU Palace Plaza de España from Dalian Wanda and resold it to RIU Hotels & Resorts; and the French hotel investment group Foncière des Murs, which acquired seven hotels in Madrid that were part of a portfolio deal of 19 hotels being sold by Metrovacesa/Merlin.

But the biggest deal of the year was the Four Seasons hotel. Mohari, managed and owned by the entrepreneur Mark Scheinberg (founder of PokerStars), acquired a 50-percent stake of the hotel project from developer Villar Mir Group, one of the largest construction and infrastructure companies in Spain, for €63.2 million.

“Once some of the big transactions were confirmed, people sought a share of the upside growth that Madrid has been waiting for,” Philip Bacon, director of valuations, planning & development at Horwath HTL, said. “Madrid is a strange market. It’s imbalanced. There’s no Hilton here, there’s no Hyatt, the brand landscape is distorted…It had no reputation as a leisure destination. All the local players were producing what the customers wanted, but they were not very inspiring.

“It’s now changing at the top end, with a true flagship hotel. When you’ve got your rate leaders established, it sets the standard. With the Mandarin Oriental being established and the Four Seasons coming on stream, the story is that that Madrid is becoming more balanced. Now, this needs to be consolidated. Will it expand horizontally into different types of product? It’s much more difficult to get hold of property nowadays. The truth about Madrid is that the center of town is quite small and you can easily have your hotel in the wrong place.”

Branded & Independent

Horwath HTL reported that more than 77 percent of the hotel rooms in the city were managed by hotel chains, with the rest being independently managed. International hotel chains managed only 26 percent of the total room supply in the region. NH Hotel Group lead the segment with 28 hotels, followed by Marriott International with 19 properties.

“Along the branded story is the growth of the independent hotel,” Bacon said. “There are some properties that have recently transacted where you might have expected a brand player, but they have decided to go it alone. To what extent do you need a brand?”

The city is set to add 1,050 guestrooms to its stock before mid-2019. Supply increases have not yet affected demand, with performance moving back to the peak levels seen in 2008. The city’s five-star hotels surpassed this in 2015 and have now stabilized, while four-star properties are nearing the peak. Only three-star properties have yet to fully recover, but have seen a long and gradual increase since 2014.

From January to October 2017, Horwath HTL reported that tourist arrivals were up by 3 percent to 9.3 million, with tourist expenditure rising by 16 percent to €8.2 billion over the same period. During 2017, Spanish tourist arrivals to the city fell by 2.5 percent. However, international arrivals have been boosted by 8.5 percent over 2016; as a result, the current international mix represents 53.5 percent.

How far can Madrid go? “You would never want a mature market to say ‘OK, we’re finished,’" Bacon said. “You’re never finished.”

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.