Granada – the city in the south of Nicaragua, not its namesake on the other side of the Atlantic – is, in spite of its relative obscurity, one of the gems of Central America, with its fine churches and elegantly proportioned porticoes, a volcano rising raggedly above it and Lake Nicaragua shimmering at its feet.

It is also one of the first cities Spain founded in the New World in 1524. So it was apt that when the Spanish government’s Agency for International Co-operation, or AECI, launched a variety of projects in Latin America in 1992 (commemorating the 500th anniversary of Christopher Columbus’s discovery of the Americas), it included a plan for Granada’s historic centre.

This initially focused on restoring public areas. But as preservation issues mounted, AECI felt the need to establish the Office for the Historic Centre, for the long-term protection of the city’s architectural heritage.

Auxiliadora Reyes, professor of architecture at Nicaragua’s University of Engineering and head of the Granada office from its opening in 1997 until 2006 (she continues to work for it as a consultant), began by conducting the first inventory of Granada’s 1,749 historic buildings. “It was a work of ants,” she says. “We found large houses that had been subdivided ten times. We looked at the buildings floor by floor.”

Next, her office drew up rules on what modifications would be allowed and which would not. One set, to preserve the area’s overall integrity, covers issues such as the height of buildings, the use of tiles on roofs and the use of the buildings’ interior open spaces, or patios. But an additional set applies to the churches, civic buildings and houses that are of the greatest architectural value – including 51 of the area’s largest and most elegant houses – which are listed in a catalogue. “For most of these houses, the interiors cannot be modified either,” Reyes says.

At about the same time as these rules were being drawn up, expatriates were also starting to take an interest in the city.

Claudia Gonella, part-owner of estate agency Coldwell Banker Nicaragua, says: “US expatriates who had been buying and selling property in Costa Rica felt the market there had matured and started moving north to Nicaragua. They found they could pick up cheaper properties in Granada. That started the buzz.”

By 2000 the demand from expatriates had spread to Europeans and caused a surge in prices for houses in the historic centre.

Prices for 2,000-3,000 sq ft houses and 5,000-10,000 sq ft mansions (before rehabilitation and conversions) ranged from 960,000 cordobas ($50,000) to 2.8m cordobas respectively between 2000 and 2002, and increased to 2.8m cordobas and 8.6m cordobas respectively between 2002 and 2005, the Office for the Historic Centre says. (Coldwell Banker Nicaragua says sales to Americans have slowed due to the US banking crisis; but, conversely, demand has been increasing from Canada and Europe because of the weaker dollar).

According to Gonella: “It is less of a speculative market now. Buyers are in it for the long-term and looking for a home that they can live in. These buyer also include retirement and pre-retirement buyers.”

But Reyes says that expatriate property interest in Granada has been a mixed blessing. While the investment has rehabilitated dilapidated houses in the historic centre and saved a few from ruin, some of the building reforms and conversions carried out by expatriates have not benefited the city’s historic architecture.

One positive example is the changes that Gillian and Joseph Brown, a retired British-American couple, have made – and more importantly have refrained from making – in their airy, 12,000 sq ft single-storey residence on Caimito Street (a block and a half from the central square), which retains key features of the city’s traditional Spanish colonial style. For example, the building has superb 9-12ins thick adobe walls and graceful inner courtyards surrounded by covered walkways.

The Browns paid 3.8m cordobas five years ago, but have spent double that amount, or 7.2m cordobas, on, for example, re-roofing and re-wiring, renovations and adding a “concealed” second-storey between the front and back courtyards.

Importantly, they have enhanced the building’s historic design by not adding plasterwork or ornaments to the walls, so that it is possible to see the structure’s clear, simple lines.

They have also added a fountain and cultivated a tropical garden in the front courtyard, such as might have existed traditionally, with large palms, banana plants and crimson-coloured ginger plants.

Patricia Buren, a Colombian former art student, recently moved into a palatial 14,600 sq ft, two-storey mansion on Granada’s desirable, central Consulado Street, with Pontus, her Swedish husband, and their two young children. She appears equally determined to improve their second home’s European-inspired, neoclassical style and design.

“It is rare to keep a house of this size as a private family home, which is our intention,” she says. “Generally, it would almost certainly be used for commercial purposes [as a hotel or restaurant], or be subdivided.”

But rehabilitating such a house is an immense undertaking and not without its drawbacks. It is a catalogue-listed building, so strict rules govern alterations.

Fernando Lopez, a conservation architect and member of the city council, says a particular issue is that the traditional colours of historic buildings have not been enforced or respected. “Colonial houses were mainly white and could be almost austere,” he says. “They resembled the houses of southern Spain. But many US buyers, from Louisiana, New Mexico and Texas, have introduced the aesthetics of Mexico. They have been ‘Mexicanising’ the houses, using primary colours, adding tiles and making them ‘Diego Rivera-style’ in appearance.”

Nevertheless, according to Auxiliadora Reyes, most of the outlook of the historic centre – the grid design of its streets, the height of the buildings, its tiled roofs, squares, churches and fine municipal buildings – has been preserved.

Coldwell Banker Nicaragua, tel: +505-552 2908, www.cbnicaragua.com