The Mexican international is on loan at FC Porto this season.
Tiempo Real are claiming that Los Merengues are keen on the Mexican international to act as a back-up to Brazilian defender Marcelo from next season.
Layun would also add plenty of commercial opportunities for Real, as he is one of the most popular players in Mexico, an emerging football market for Spanish clubs.
He was only signed by Watford in January on a four-and-a-half-year deal.
He scored in the Premier League opener against Everton but was moved on at the end of August - joining Porto on loan for the rest of the season.
He has gone on to impress in Portugal, becoming a regular in the Porto first-team. As reported by ESPN, when Layun made the move to Porto a €6 million (£4.25 million) buy-out clause was agreed with Watford, which might make things difficult for Real Madrid if they did decide to make the move.
The one thing that appears certain, Layun will not be returning to Watford in the summer.