Why Madrid is the best European city for Airbnb investment

Airbnb is huge- keep reading this article to understand how truly massive it has become. Like any smart property investor, you want to find a way to capitalize on this opportunity. But like any opportunity, you want to be careful because some of the markets are already over saturated. In this article, we will explain the Airbnb phenomenon, criteria a city should meet for Airbnb investment and why Madrid is the best European city for Airbnb investment.

This is the Plaza Mayor during the holidays, Madrid’s main square. Madrid is currently the best European city for Airbnb investment.

The Airbnb play

You’ve heard of Airbnb, just like everyone else. But do you realize how truly massive the company has become? To put things in perspective: After it received its latest $1 billion injection of capital in spring, 2017, Airbnb is now profitable and valued at $31 billion. This is more than the market capitalization* of the two largest hotel chains, Hilton International (market cap of $20.4 billion) and Hyatt (market cap of $7.5 billion) combined. Add in the market cap of the prestigious Mandarin Oriental chain ($2.6 billion) and the three combined equals $30.5 billion- still half a billion dollars less than Airbnb. Get the idea?

Do you know what Airbnb’s biggest market is?

Airbnb operates in more than 65,000 cities across 191 countries. Its biggest market? Europe. Airbnb not only knows this, but is actively working to build this market. Last June it launched a new “Community Tourism Program” with the aim of investing in projects “to help preserve and boost the best of local customs, traditions and landmarks that make communities unique”. Airbnb estimates this will create €340 billion of economic output by 2020 and that it will support an estimated 1 million jobs across the region by that year.

Does this mean every European city is good for Airbnb investment?

No- the Airbnb play is not a new opportunity. In many cities it is very developed and is even becoming regulated. Take Paris, for example:

Paris was early to the game and Airbnb listing have grown sharply since 2011. (Data source: Toulouse School of Economics, 2016)

Currently, Paris has the largest Airbnb capacity of any city in the world. This, combined with falling levels of tourism and increasingly high property prices, means that Paris has become one of the worst cities for Airbnb investment.

International property investment requires on the ground expertise. If you want to avoid investment pitfalls like the pricey Parisian market, contact M2M for a free consult.

What are criteria for a good city for Airbnb investment?

According to Forbes and Airdna,

“There is a direct correlation between the number of Airbnb rentals in a city and the profitability of the average rental.   [Moreover], Airbnb rentals are most profitable in highly regulated cities.  The lack of lodging supply allows Airbnb hosts to charge rates equal to or even above hotels.”

We would argue that two other factors are also of utmost importance: financial criteria and a city’s existing hotel stock.

Low Airbnb capacity

This is probably the most important factor. However, it must be looked at in relation to a city’s tourism numbers. The key is to look at a city’s existing Airbnb capacity vs. its number of overnight visitors. The lower this ratio, the less Airbnb capacity the city has.

For example, the city of Copenhagen has almost twice the number of registered Airbnb’s as Madrid. However, its number of yearly overnight visitors is less than a third of Madrid’s, meaning the city has relatively ample capacity.

Madrid is one of the major European cities that lack Airbnb capacity, meaning it is a good place to consider investing. As you can see in the above chart, Amsterdam, London and Milan also lack capacity.

Keep reading to learn why these cities should be ruled out. Plus, you will learn the secret play that makes Madrid the best European city for Airbnb investment . . .

The quantity and quality of a city’s existing hotel stock

Airbnb customers have other options. The most compelling is to stay in a traditional hotel room.

When Airbnb started, it initially found traction in the lower end of the market. People with expensive apartments in cities like New York and Paris would rent spare rooms, or their entire apartments when they went on vacation, to people that couldn’t afford to pay $500-$1200 per night for a hotel room.

This has evolved in recent years. People are now staying in Airbnb’s so they can get a more local experience, or a more personalized experience. They may also prefer to stay in a private residence when the city’s hotel capacity lacks amenities and/or charm. Remember:

“The lack of lodging supply allows Airbnb hosts to charge rates equal to or even above hotels.”

Madrid has a decent number of hotel rooms, but it has a strikingly low capacity of boutique and high end hotels, especially when compared with cities like London and Frankfurt. Many major players, such as Mandarin Oriental, Four Seasons, St. Regis, The Peninsula and W Hotels do not have a presence in the city. In fact, of all major European capital cities, only Milan has a lower supply of boutique and luxury hotels. Higher end visitors, that are used to these luxury brands, are increasingly seeking out luxury Airbnb properties when the local hotel stock is wanting.

Strong financial criteria

Yes, capacity is important. But you still need to make money, ideally in both the short and long terms. The key is to buy low, sell high, and maximize rental returns in the process.

Buy low, sell high

Cheap property prices allow for long term capital appreciation on your rental property. They also allow for investors with more modest budgets to invest.

There are two ways to make money on your Airbnb investment property. Long term capital appreciation and rental income. Madrid has the lowest entry point of any major European city for real estate investment. This, coupled with the fact that prices are expected to increase 19% over the next four years, gives it excellent potential for long term capital appreciation. This criteria is why we rule out London- although it does have a relatively low capacity of Airbnb’s, it is extremely expensive and prices are forecast to depreciate over the next few years due to Brexit. Amsterdam is cheaper than London or Paris, but still much more expensive than other cities.

Maximize rental returns

On average, rental yields in Madrid are the highest among major European cities, and some of the highest in the world. This is a compelling reason to buy any investment property in the city and let it out. Not only will you make money from capital appreciation, but you will earn a materially higher return in Madrid on your rental income. Neither London, Milan nor Amsterdam can come close to this return and they all have higher entry points.

Numbers don’t lie. Low capacity, a cheap entry-point and high rental yields make Madrid the perfect city for European property investment.

Impending regulation

Most investors are initially scared of regulation, and we initially were too. In the Airbnb world, regulation is turning out to be a good thing. Remember:

“Airbnb rentals are most profitable in highly regulated cities.”

Some cities, such as Barcelona and Berlin, have started regulating Airbnb properties. This has restricted Airbnb capacity in these cities, which has led to increased returns for participants that get in early and/or adhere to the cities’ requirements. Proposed new laws in Berlin took a shocking 40% off Airbnb listings in the city last year. Click here to learn more about proposed Airbnb regulation across Europe.

The Barcelona property market initially shared many of the features of Madrid (low entry prices, suboptimal hotels and high numbers of international visitors).  Because of this, Airbnb capacity skyrocketed. At one point, 8% of all properties in the center of Barcelona were listed on Airbnb. When this happened, the city decided to stop granting new licenses for holiday rentals in the city center. Now, if you want to rent your property for more than a month in the city of Barcelona you must now have an operating license. People that don’t respect this are fined.

After reviewing the data, we estimate that after the regulation, apartments in Barcelona with proper licenses have gained 80k-100k€ in value.

We believe Madrid is poised for regulation similar to that experienced in Barcelona. This is a unique Airbnb investment opportunity. To learn more about how to take advantage of this, read How to capitalize on the future of Airbnb investment in Madid. Or book an appointment to speak with a M2M representative about leveraging this unique opportunity.

In the Airbnb world, regulation is turning out to be a good thing because Airbnb rentals are most profitable in highly regulated cities. Madrid is poised for more regulation, which will lead to increased returns for all legitimate Airbnb’s.

Conclusion

There are a number of criteria that should be considered when choosing a city for your Airbnb investment. First, find one with low Airbnb capacity. Then ask the following questions:

  1. Does the city have good hotel capacity? Meaning, are there a lot of hotels and are they of good quality? You want to choose cities with low existing hotel capacity and/or cities with low quality hotels.
  2. Is there room for capital appreciation? You want a city with low property prices, poised to increase strongly.
  3. Are rental returns high? You want a city with high rental returns.

Madrid meets all of the above criteria better than any other major European city, making it the best European city for Airbnb investment.

The icing on the cake? The City of Madrid will very likely regulate Airbnb’s. This will limit the capacity and further increase returns for those that own and operate legal Airbnb’s. The key it to take advantage of this opportunity sooner rather than later- there is definitely a first mover advantage in this situation. CALL US TODAY to learn how to take advantage of it!

 

 

 

 

*All market valuations as of September 13, 2017

Posted on 14 September, 2017 by Pierre-Alban Waters in Invest - How to invest, New ? Start Here

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