Spain has always been one of the most popular destinations in the world for foreign buyers, thanks to its affordable holiday homes, sunny beaches and relaxed lifestyle. As the market continues to recover from the financial crisis, though, a new type of British buyer is heading to its shores: buy-to-let investors.

The UK buy-to-let market is facing multiple headwinds, as the government has introduced a stamp duty surcharge for second home purchases in the last year, as well as started to reduce mortgage interest tax relief for landlords, requiring them to pay tax on turnover rather than profit. With UK house prices rising, due to a lack of supply, the yield on renting a property out is potentially much smaller than during buy-to-let’s boom years. Landlords are expected to raise rents to help cover costs, but so far, appear reluctant to hike rates to avoid void periods. Buy-to-let as it once was, some fear, may soon be dead.

In Spain, though, the country’s rental market is living la vida buena. According to Idealista, rents are now higher than they were at the market’s peak in six of its regional capital cities. The average rent for new tenancies has grown 20.9 per cent in the last year, with Barcelona (20 per cent above peak), Las Palmas (16 per cent), Palma (14 per cent), Madrid (7 per cent), San Sebastian (6 per cent) and Girona (3 per cent) all recording record high rental values. Indeed, according to the National Statistics Institute (INE), rents in 48 provinces are now higher than in May 2007.

Rental growth, like many aspects of the country’s real estate recovery, is uneven, with Malaga seeing rents remain just below their peak, while Alicante’s rents remain 7 per cent lower. With house prices still more than 30 per cent below the market’s peak, however, the returns are favourable, particularly for British investors.

Spanish property prices, nonetheless, are on the up: the national average property price rose 2.7 per cent in Q2 2017 year-on-year, according to Tinsa. The appeal of buy-to-let, then, might sound unlikely: while capital growth is good for long-term returns, landlords seeking strong yields in the medium-term would typically be deterred by rising values.

“We have definitely seen a huge surge in interest from UK investors…”

Spain’s price climb, though, is part of the market’s recovery and is creating a tighter private rented sector: homeowners who had previously been renting out homes are now listing them for sale again instead, as they can fetch a fairer price. According to economics professor Gonzalo Bernardos, six of every 10 rental leases that expired last year are now being put up for sale. As a result, the supply of rental homes is falling, which, combined with strong demand, is pushing up rental rates – good news for investors seeking a steady, or even increasing, profit.

The rental market is particularly strong in cities such as Barcelona, Madrid and Valencia, where demand is high from tourists, workers and locals alike. According to figures from financial publication Expansión, landlords accounted for one-third of all purchases across the three cities last year.

“We have definitely seen a huge surge in interest from UK investors to invest in Spain in the first quarters of 2017,” says Kormakur Arthursson, Marketing & Business Development Manager at Spanish property specialists Golden Properties.

Many UK investors told the agency they were looking for opportunities elsewhere due to the recent tax changes at home.

“The Spanish property market is in a very interesting place at the moment,” continues Arthursson. “The market has bottomed out in the last few years and is now starting to see healthy growth, driven in part by increased demand for rentals in key areas and micro climates, such as the coastal regions of Costa Blanca and the Costa del Sol, along with the major international cities, such as Madrid and Barcelona.”

“Due to a steady 10 per cent year-on-year increase in visitors to the country, rental demand has skyrocketed and this has created a fantastic rental income/property price ratio which savvy investors are capitalising on,” he explains. “Low prices combined with high rental income growth makes Spain one of the top opportunities in 2017 for buy-to-let investors.”

Landlords accounted for 1 in 3 purchases in Barcelona, Madrid and Valencia in 2016

Demand has been steady on in the last year, despite the impact of the Brexit vote upon both certainty surrounding healthcare and other expat rights in Spain and the pound’s exchange rate with the euro. Spain was the second most popular destination on TheMoveChannelcom in June 2017. In Q2 2017, Spain accounted for the 31 of the 50 most searched-for hotspots on the portal, the second quarter in a row that it led’s Hotspots Index.

The presence of Benidorm at number eight in Q2’s top 10, and Almeria at number one, highlights the number of buyers seeking holiday homes on a budget, but Barcelona ranking in the Top 10 hotspots for the second consecutive quarter confirms the wider interest in Spanish real estate from investors. According to figures from Spain’s Registrars, foreign demand in 2016 accounted for 13.25 per cent of property transactions, a record high and significantly above the 8.97 per cent recorded in the heyday of 2006.

As poorer exchange rates weigh on British lifestyle purchases, Spain’s booming buy-to-let market is helping to drive the country’s ongoing recovery. One study by the University of Barcelona predicts that rents in Spain will continue to climb at 8 per cent in Barcelona and 13 per cent in Madrid. For UK investors, buy-to-let isn’t dead: it’s merely taken a holiday.