Hi All - Happy Wednesday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

I’m writing this note to you from Barcelona, Spain. My wife is from here and she’s still on maternity leave so we decided to spend a couple of months on the other side of the pond.

As dry heat from the Sahara crawls across the Iberian Peninsula, a late summer stillness has quieted the otherwise bustling seaside city. Locals are decamping for the islands, the coast, or the mountains until September.

As an American, I’ll never fully understand the extended August vacation. But the calmness has allowed me to reflect on some recent developments in the city, and how there might be an opportunity for a few intrepid investors.

The thesis is simple: it might be a good time to buy hotels in Barcelona. I’ll explain why below and would love to hear if you agree with me or not. Let’s dive in.

Macro Tailwinds

A) Spain Projected to Become Most Visited Country By 2040

Europe is the global leader in international tourism, accounting for roughly 60% of international tourism arrivals.

A report from GlobalData estimates that France will be the most visited country in the world by 2025… but that title will be short-lived.

According to a study jointly conducted by Google and Deloitte, Spain will take the crown, becoming the most-visited tourist destination in the world in 2040. Forecasts call for 110 million annual arrivals, marking a staggering ~30% increase compared to 2023.

Now, that’s Spain as a whole. But what about Barcelona?

Well, it’s the second-most populous municipality of Spain, and in 2023, it received 26 million tourists. In other words, Barcelona was the destination for over 30% of the 85.1 million tourists who made their way to Spain last year.

Not everyone is happy about this. Thousands of locals have been demonstrating against “mass tourism” in Barcelona, using water guns to squirt some visitors.

Despite this, tourists still say they feel welcome in the city. And whether these protestors like it or not, 13% of Spain’s GDP comes from the tourism sector.

With the country’s unemployment rate hovering around 12% — and the youth unemployment rate sitting at 26% — you can’t exactly get rid of what’s become a major job driver.

Long story short, despite some pushback, tourism is here to stay, and according to the forecast above, poised to grow.

B) Billions of People Will Become Middle Class & Therefore Want to Travel

Barry Sternlicht, the Chairman and CEO of Starwood Capital, is also monitoring the industry.

Sternlicht believes that hospitality is a massive growth sector, and China and India sit at the center of his claim. The two countries have populations of approximately 1.4 billion people and burgeoning middle classes.

Once these populations become sufficiently affluent to travel the world, Sternlicht believes Europe will be their primary destination.

And that shouldn’t take too long — if India’s economy stays on its current growth trajectory, its middle class will grow from 91 million households in 2020 to 165 million households in 2030.

The tourism growth spurt is coming fast, and, by all estimates, Barcelona will continue to be a top destination.

C) Barcelona Plans to Ban Short-Term Rentals

When it comes to doing business in Europe, keeping overzealous regulators in mind is key.

In April, Amsterdam enacted a moratorium on the construction of new hotels under its “Tourism in Balance” policy. The policy also seeks to limit overnight stays in hotels by tourists to 20 million a year.

Barcelona made a similar but, importantly, different move recently. The city’s mayor, Jaume Collboni, announced plans to end short-term rentals by 2029 to address the city’s housing crisis.

This is bad news for the 10,000 Barcelona apartments registered as tourist rentals, many of which are through Airbnb. It also won’t do much to alleviate the city’s housing crisis, considering tourist apartments represent just 0.77% of Barcelona’s housing stock — but that’s not relevant to this discussion; it's just an observation.

However, the ban on tourist apartment rentals is good news for hotel owners and prospective hotel owners.

Not to state the obvious, but by taking 10,000 tourist rentals off the market and banning new ones, visitors to the city will have nowhere to go but hotels.

For what it’s worth, I’ve heard from numerous people that they don’t think the short-term rental ban will actually be enacted fully. It may never pass, and if it does, it might be based on local voting. Either way, it’s another potential tailwind.

So What's the Play?

Let's Start With the Physical Property

Well, when it comes to getting exposure to hotels in the city, you can either buy or build. My gut feeling tells me that building would be an absolute nightmare.

In 2017 the city council, led by leftist mayor Ada Colau, "passed a controversial bill banning all new hospitality establishments in the center and imposing strict limits on new hotels and similar businesses in the whole city," according to POLITICO.

So if your goal is to buy, what does the target look like? I think a $3-8m sub-institutional asset might make sense. Something that's a little bit to expensive for one or two individuals to purchase, but not big enough for large players like KKR, Blackstone, etc.

Ideally, you find a property that, while outdated, has good bones—perhaps a charming historic building in a prime location. Renovating a hotel like this allows you to not only update the aesthetics but also improve its functionality and energy efficiency.

Remember our edition about the European Union's stringent “Green Homes” Directive? Hit the link below if you missed it.

If you're buying and holding this asset to benefit from the macro tailwinds above, it makes sense to keep the sustainability aspect in mind as well. Going green with any renovation plans could command a premium in the next decade.

The combination of a well-located, renovated hotel that meets EU green standards will not only attract a growing number of tourists but also position your investment to thrive in a competitive market where sustainability is increasingly important.

I Also Think Investing in the “Digital Property” Is Crucial

Once the physical property is revitalized, the next crucial step is to focus on the digital transformation of the hotel. In today's hyper-connected world, a strong online presence is as important as the quality of the physical accommodations. Not only is this a real estate play. It's a marketing play as well.

Start by redesigning the hotel’s website to make it visually appealing, intuitive, and mobile-friendly. Incorporate features like virtual tours, high-quality images, and user-generated content to give potential guests a real sense of what your hotel offers.

To truly differentiate your hotel, consider creating content and marketing strategies that resonate with Chinese and Indian travelers. This could include offering website translations, dedicated customer service in multiple languages, and promoting travel packages that appeal to these specific markets, such as tailored culinary experiences or guided city tours. Utilizing popular social media platforms like WeChat, Weibo, and TikTok in China, and Instagram, Facebook, and WhatsApp in India, can also help you reach a broader audience and build brand loyalty.

Finally, implementing a robust SEO strategy to ensure your hotel ranks highly in search engines is essential. Focus on keywords that align with the travel interests of your target demographics, such as "sustainable hotels in Barcelona" or "luxury stays for Chinese travelers."

So There You Have It

I’ve been seeing a bunch of semi-related headlines pop up during my time in Barcelona and I’ve been dying to connect the dots. I’d love to hear your take. You can reply directly to this email to let me know what you think.

If I don’t hear from you, have a wonderful August. We’ll see you at the end of the month.

As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks