Perspective - Blog

Madrid: Europe's secret tech hub

With cheaper office space, four major universities and a vibrant local culture, Spain's capital city is rapidly emerging as a new technology hub.

18/11/2019

Ben Forster

Ben Forster

Equity Analyst, Global Real Estate

Despite Spain’s reputation for bureaucracy, the country was home to 4,115 start-ups in 2018, a figure that is growing by more than 25% a year (source: Mobile World Capital, 2019). And while Madrid has come to the tech party late, it has learnt lessons from trailblazers such as London, Shenzhen and Denver. If Madrid can combine the best practice from these global tech hubs with its unique cost advantage and lifestyle, we think it could well become Europe’s next big innovation hub.

City focusing on entrepreneurship and real estate

Until recently, Madrid lacked a clear strategy for clustering innovative businesses, universities and capital providers, a formula pioneered by leading global cities such as London and San Francisco. However, following elections in June 2019, the city’s new deputy mayor plans to create a new innovation super-hub at ‘Mercado de Toledo’, promoting creative industries and establishing a public-private innovation agency. The hub will also promote initiatives around sustainability and the environment.

Madrid also now plans to build 10,500 new housing units as part of a €7.3 billion megaproject known as ‘Madrid Nuevo Norte’. The initiative, one of the biggest urban regeneration projects in Europe, will create more than 3.3 million square metres of commercial space and new green space in the city. The city believes it will create 240,000 new jobs over the next 25 years.  

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A more balanced economy

This bid to ignite growth may conjure up memories of Spain’s boom years before the global financial crisis. However, after trailing its neighbours in the post-crisis recovery, Spain now has more a more balanced economy and reduced levels of consumer debt. As neighbouring economies now reach full employment, Madrid has further to grow from its low base.

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So, what does the city have to offer?

Local commentators have said that with less bureaucracy, the city can now showcase its advantages as a tech hub to “set up shop in”.

Madrid is a centrally located capital city with easy access to markets in Europe, Latin America and North Africa. It is already home to one of largest telcos in the world, Telefónica, alongside rapidly growing companies such as Google, Amazon and Cabify. Venture funding currently trails London and Paris, but a number of incubators and entrepreneurial networks are springing up.

Madrid offers high growth businesses a wide array of flexible workspaces. As the city is home to four major universities, there is also a pool of talented graduates ready to take up new job opportunities.

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Footloose millennials will find Madrid’s cost of living 30% to 50% cheaper than London, Paris and Stockholm. With office rents and salaries at similar discounts, businesses also find it an appealing location.

Perhaps uniquely, Madrid’s lifestyle offers 290 days of sunshine a year, alongside an abundance of nightlife, culture and fine gastronomy, not to mention two leading football teams.

How will the city’s emerging status as a tech hub benefit investors in real estate?

New businesses will create new jobs. More people coming to work in the city means that there will be increased demand for office accommodation. This bodes well for Spanish office landlords who have waited patiently for the return of a more sustainable growth cycle, as the Global Cities team found on a recent visit to the city.

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Following the acquisition of its peer Axiare, Inmobiliaria Colonial has one of the largest central office portfolios in the city of Madrid. Office vacancy levels in the city are expected to fall to 7% by the end of the year. And supply of the highest grade office space in the central business district is set to become even more limited, creating pricing power.

As a result of its prime portfolio, Colonial achieved a 29% increase in rental income on leases renewed in Madrid during 2018. The company has also said it believes contracted rents could grow by another 50%. Against this favourable backdrop, the company is planning €1.3 billion of new developments to expand its portfolio.

No longer just a “blue sky scenario”

If Madrid’s political and business leaders can follow through on their promises to lower administrative barriers to innovation, the city’s future looks promising. Greater inflows of talent and capital should follow, as we have seen in other parts of the world.

And landlords with affordable, flexible office space in desirable locations should share in the economic value creation that will result.

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