The 26-year-old has been strongly linked with a move to the La Liga champions this summer, following Spurs' failure to secure Champions League football next term.
And former Liverpool full-back Arbeloa gave his backing to the potential addition of the Croatian playmaker to Los Blancos' squad.
He told reporters: "Modric is a great player. I'm happy he could join Real Madrid. We have many good midfielders, so they have to compete for a spot."
|NO MODRIC, NO PROBLEM|
|7/4||Tottenham are 7/4 with William Hill to finish in the Premier League's top four|
As Goal.com exclusively revealed on Friday, Modric is expected to be the subject of a £35 million move to the Santiago Bernabeu this summer.
However, he will face stiff competition in Jose Mourinho's squad, with the likes of Xabi Alonso, Mesut Ozil, Sami Khedira and Lassana Diarra currently occupying midfield berths.
The Croatia international has made 159 appearances for the north London club since joining from Dinamo Zagreb in 2008.