According to a Spanish proverb, it is a bad idea to start building a house from the roof. But that is just what a Spanish firm is doing – and business is booming.

Faced with a lack of available land in big cities such as Madrid and Barcelona, construction firm La Casa por el Tejado is building new apartments on rooftops – a sign that Spanish property is bouncing back eight years after a brutal crash.

Home prices are nearing pre-crisis levels in downtown areas of major cities, rents and mortgages are surging, the prices of hotels and resorts are sky-rocketing and a round of mergers and acquisitions have broken out among major property investors.

Though the market overall is still a long way from its giddy peaks, before the global financial crisis, few would have predicted today’s recovery when a decade-long boom ended in 2008, destroying two million jobs and holing the economy.

“In Spain, we have identified more than 4,000 buildings which have available roof tops to build on,” said La Casa’s founder, Joan Artes, whose firm hoists prefabricated apartments by crane on to building roofs.

“At a time when we lack space to build, we’re talking of more than two million square metres.”

The revival has helped Spain to become one of Europe’s few economic success stories, with estimated growth of three per cent next year. Construction accounts for 10 per cent of gross domestic product.

But there are concerns that the market could slow if interest rates rise. Enrique Losantos, who heads the Spanish operations of real estate firm Jones Lang LaSalle, says the main risk would come from a change in monetary policy.

European Central Bank interest rates are still at rock bottom but it is due to start cutting its asset purchase programme next year. The US Federal Reserve has already raised interest rates and signalled a faster pace of increases in 2017.

“Some deals are made at very low yields and could suffer if there is some sort of shock on interest rates,” said Losantos.

At a time when we lack space to build, we’re talking of more than two million square metres

Yields in the residential market stand at 5.9 per cent or closer to three or four per cent in downtown Barcelona and Madrid or for premium homes, according to property website Idealista. It is 7.4 per cent and 8.4 per cent respectively for office and shopping space.

Those yields compare to just 1.4 per cent of Spain’s 10-year debt.

A new eldorado with yields of up to 11 per cent is now taking the centre stage: hotels and tourist resorts.

Leading the pack is Hispania, partly owned by billionaires George Soros and John Paulson, which has bought 16 hotels in Spain, mostly in the Canary Islands and in the Balearic Islands.

In a recent presentation to investors, the firm said its €1.1 billion investment in 10,532 hotel rooms was landing an average annual return of 10.1 per cent, compared to 6.5 per cent and 4.4 per cent for its office and residential assets.

Hispania has recently bought four more hotels in Ibiza and Lanzarote for a total investment of €113 million, from which it expects returns of between eight and 10.2 per cent.

Miguel Vazquez, managing partner at real estate consulting firm Irea, which recently advised German investment fund Aquila on the acquisition of a small boutique hotel in Madrid’s Letras neighbourhood, says around €1.8 billion is expected to be invested in hotels in 2016, or 20 per cent of the total investment in real estate, compared to just seven per cent in 2014.

However, he said a “mini-bubble” was forming around luxury hotels in Madrid where the lack of properties on offer and the high demand from institutional investors for those assets was driving prices up very rapidly.

The five-star Villamagna hotel and its 150 rooms was sold for a record €180 million earlier this year, or €1.2 million per room. The competing Ritz hotels, just a few hundred metres away on Paseo Castellana sold last year for €132 millions, or less than €1 million per room.

“At this price, you can’t have a high yield,” Vazquez said, adding that yields have now fallen to around five per cent in Madrid for those luxury assets.

Mergers and acquisitions are also heating up, with at least two dozen players, both property firms and investors, expected to disappear in a wave of consolidation driven by rising real estate prices rather than a desire to cut costs.

Premium real estate firm Colonial, one of the few big names that made it though the crisis, is rumoured to be considering a takeover of boutique investor Axiare.

Asset manager Pimco has raised its stake in mid-sized property investor Lar, while sources say that Neinor, a Madrid-based property developer partly owned by US private equity fund Lonestar, is considering an initial public share offer.

“It is fundamental to gain size. So there will be mergers and acquisitions and at the end of the day, just a dozen big groups will remain,” said Colonial chairman Juan José Brugera. He declined to comment on Axiare.

Neinor chairman Juan Velayos also declined to comment on specific plans for his company, including a potential listing, but said the rebound had just started, with new promotions expected to reach 200,000 a year, from 50,000 currently.