A bright future – inside the Iberian market

In 2014, Spain welcomed 65 million holidaymakers to its shores, roughly equivalent to the population of the UK or France and a matter of routine for a country that has been reliant on the foreign currency brought in by such visitors since the 1970s. What has kept Spain as the third-most-visited country in the world is not just affordability, but adaptability in the face of a changing international market for mass tourism.

As one of the first countries to realise the benefits of mass tourism, the Spanish Government invested heavily in resort development. When this model eventually exhausted itself in the 1990s, the market adapted to include more urban destinations. However, this diversification didn't alter the fact that foreign tourists accounted for the vast majority of the industry's customers. When the 'great recession' upended global markets in 2008, unemployment across Western Europe rose and the number of foreign visitors plunged. However, the legacy of the model adopted the previous decade allowed the hospitality industry to emerge without significant damage. As of this year, tourism accounted for 10.9% of national GDP, and supports one in nine jobs.

Today, the narrative is very much one of an industry successfully fighting its way back to parity with the pre-crash market landscape.

"Values are still below the peak of 2007 in the main cities and a lot of opportunities lie in leisure destinations, while economic improvement in the main feeding countries is improving," says Ezio Poinelli, senior director for southern Europe at HVS Global Hospitality Services.

Unsurprisingly, the recovery in the more mature Mediterranean resorts has been particularly strong.

"Catalonia, the Canary Islands and the Balearic Islands have recorded the highest RevPAR," he says. "Both island groups also remain the country's most popular tourism destinations, attracting 21 and 18% of the total overnights in Spain, respectively."

Capital growth

Meanwhile in Madrid and Barcelona, growth has mainly been registered in ADR and occupancy. "Madrid recorded one of the highest fluctuations in hotel values from 2005 to 2014 compared with Rome and Milan," adds Poinelli. "Overall gains have been achieved in occupancy rather than rate, which are in line with a general rise in visits. Barcelona in particular has a long history of solid performance due to a well-balanced demand base that has its fair share of leisure, MICE and corporate clients."

These patterns have presented dual options for hotel groups seeking to expand in Spain, embodied as it were by the choices made by international operators IHG and Meliá. The former has largely concentrated on expansion in the major cities, while the latter has chosen to divide its attention between urban and resort offerings.

"There is a bright, though incipient, future for the Spanish resort segment," says Alfonso del Poyo, Mélia's vice-president for Spain and Portugal. "That is as long as hotel supply is increasingly being renovated and innovation is brought into this segment, too."

This market landscape has directly influenced Mélia's aversion towards owning its hotels in Spain outright.

"Our growth is hardly compatible with investment in bricks and mortar, so our vocation is best supported by an asset-light strategy," says del Poyo. "Currently, our managed, leased and franchised hotels portfolio versus owned hotels is 78 to 22%. Almost all of the hotels we currently have in the pipeline, signed and in the pre-ordering process, are under leased or management formulas."

While this might have been expected - as the world economy slowly recovers, tourists have flocked back to popular destinations - it nonetheless appears that a renaissance in urban offerings in the major cities is beginning to take place. It is a market environment that IHG has benefitted from considerably.

"Generally, we grow in the main cities where we can really afford system-deliverable care," explains Hylko Versteeg, IHG's director for development in southern Europe. "We've actually done extremely well with our development during the crisis years in Spain. We've developed more hotels probably between 2007 and 2013 than ever before, as well as initiated a lot of rebrands.

"It's an extremely fragmented hotel market. A big majority of hotels are 'mom and pop' types and fun-branded. There is still a very low presence comparatively from the big markets."

It is also an environment that native international hotel operator Meliá has seen as ripe for exploitation. "In 2015, Spain will report another consecutive record summer season and our current and future challenge is to boost our premium segments," adds del Poyo. "Upscale and luxury brands have a great improvement path in cities like Madrid, Barcelona, Valencia, Bilbao and Seville."

The seeds for such growth were sown before the financial crisis, but it is only now, amid a boom in budget air travel, that they have begun to flourish. "Those cities have recovered tremendously and are going to keep growing," says Versteeg. "We're talking more than double-digit growth in July for example in Madrid on the RevPAR, and there are several reasons for that."

First among them is the cachet the capital has amassed as an alternative urban holiday destination.

"International travel has grown exponentially, because cities like Madrid are great destinations to go and they are relatively cheap compared with London, Milan or Paris," explains Versteeg. "Market segmentation in Madrid is also changing. For example, hotels there are getting a lot more MICE as a cheaper alternative hub with good communications."

In recent months, this phenomenon has been compounded by political events. "The Catalonian independence movement has had some impact on corporate headquarters," Versteeg says. "Some have moved already. In fact, there have been a considerable number of companies that are looking to invest in Spain, or have been doing so, and have consciously chosen to headquarter their operations in Madrid and not Barcelona for this reason."

Return of the native

However, while hospitality is flourishing in Barcelona and Madrid, demand in secondary cities continues to lag. Much of this can be ascribed to the state of the national economy. Even though Spain has now fought itself out of recession, the domestic hospitality sector continues to be dragged down by national unemployment of 22%. Only now are signs emerging of a concerted and sustainable recovery in this area.
It has led operators like Meliá to reconsider the benefits of catering to a renewed Spanish middle class.

"Domestic demand decayed in Spain during the economic crisis, but now it accounts for 30% of our total visitors," says del Poyo. "Spaniards are quite an interesting market for the hotel industry. Among them there is a good component of families, and a slightly longer than average stay than that of foreign tourists."

Nevertheless, these patterns predict a future for the hospitality sector that portends expansion into relatively untouched areas of Spain. In addition to the rise of budget airline travel, this accessibility will be facilitated by the ease of service offered by internet booking. Meliá in particular has seized the chance to shift much of their booking apparatus online, earning $22.3 million in the first half of the year thanks in part to a steep climb in online sales.

This has taken place amid an emerging threat from market disruptors like Airbnb and HomeAway. In June, it emerged that over 2.7 million beds were being offered by privatively rented holiday homes, overtaking the number offered by conventional hotels. Online rental platforms have rushed to exploit a regulatory vacuum the sector has found itself in. Despite claims that the central government might be missing out on €432 million of undeclared income from these rooms, only Catalonia has taken steps to place online rental platforms under a strong regulatory framework.

Such competition does not overly worry del Poyo. "As far as Spain's urban hotels are concerned, I foresee that by 2025 the market be hosting a higher proportion of up-scale and premium-scale hotels as mid-scale and low-cost offers will be phagocytised by residential lease offers," he says. "This huge transformation in this segment will come, to a great extent, from the digital world. Resort bookings will increasingly be made online, and we see already that the classic distribution channels are preparing their business models to evolve for that scenario."

Certainly, at the moment, there seems little sign that confidence in the Spanish hotel market is disappearing from the international investment community. Investment in the sector alone was predicted by the CBRE to pass €1.6 billion this year, with a surge in demand in Madrid and Barcelona. "Some of the biggest investments made in Barcelona and Madrid are from China and the Middle East," says Versteeg. "They are coming to run their businesses here, because Spain and Portugal have been extremely cheap from an investment perspective."

In short, the belief is widespread among hoteliers and investors that the current wave of expansion is yet to p willeak. "Obviously there's still risk, but now that's diminishing, as growth rates reach above that across the rest of the European Union," Versteeg says. "In short, the market is opening up tremendously."