The thermal treatment of nanostructured materials to improve their properties generally results in undesirable aggregation and sintering. Here, we report on a novel wrap-bake-peel process, which involves silica coating, heat treatment and finally the removal of the silica layer, to transform the phases and structures of nanostructured materials while preserving their nanostructural characteristics. We demonstrate, as a proof-of-concept, the fabrication of water-dispersible and biocompatible hollow iron oxide nanocapsules by applying this wrap-bake-peel process to spindle-shaped akagenite (beta-FeOOH) nanoparticles. Depending on the heat treatment conditions, hollow nanocapsules of either haematite or magnetite were produced. The synthesized water-dispersible magnetite nanocapsules were successfully used not only as a drug-delivery vehicle, but also as a T2 magnetic resonance imaging contrast agent. The current process is generally applicable, and was used to transform heterostructured FePt nanoparticles to high-temperature face-centred-tetragonal-phase FePt alloy nanocrystals.