LONDON/DUBAI -- As cranes speckle the Dubai skyline and ultra-luxury homes change hands at record prices, signs that the city-state's property boom is fizzling out are coming into view.

Developers, investors and brokers are privately asking how quickly one of last year's hottest real estate markets could turn and whether a painful correction akin to the slump that rocked the emirate in 2008 can be ruled out.

Since then Dubai has pursued an economic reboot anchored on what it hopes is sustainable growth, including a 10-year plan known as D33, to double output and become one of the world's top four financial centres.

Still, the real-estate industry remains a key barometer of its success, accounting for 8.9% of the economy.

"Dubai's vulnerability to correction lies in its dependence on foreign capital, particularly from China and Russia," Ronan Hannan, principal at consultancy Proven Partners, told Reuters.

Massive infrastructure spending, generous income tax policies and an 'open-door' approach to immigration reinforced after the pandemic have attracted thousands of foreigners.

Russians were the top non-resident buyers of homes in the first quarter of 2023 but dropped to third place by the end of the year, according to Betterhomes research, with buyers from India and the UK accounting for most of the transactions during the twelve months.

There was also a notable rise in buyers from Egypt, Lebanon, Pakistan and Turkey, the firm said, underlining the city's dual role as a safe haven as well as a magnet for the ultra-rich.

Although Russian and Chinese inflows are slowly tapering off, increased interest from Indian investors could keep any downturn swift and shallow, said Hakim Abdeljaouad, Managing Director in Kroll's Valuation Advisory Services practice.

Cooling prices

A record 431 Dubai homes were sold for more than $10 million in 2023, nearly doubling the previous year's tally and making it the largest such market in the world, according to research from property agency Knight Frank shared with Reuters.

House prices in Dubai's three 'prime' residential areas - Palm Jumeirah, Emirates Hills and Jumeirah Bay Island - are however forecast to increase at a more modest 5% in 2024 after adding 15.9% in the year to September 2023, according to Knight Frank.

House prices outside those luxury areas leapt 19% over the year to September and are forecast to grow 3.5% in 2024.

"My worry is the state of the global economy," Dubai's former finance chief Nasser al-Shaikh told Reuters. "We're open to the world and whatever happens in other places affects us."

But he added that so long as both national and local governments deliver on broader development plans, future housing supply should be absorbed by new residents.

Others sounded less optimistic with a senior source at a major Dubai developer saying house prices could tumble by 10-15% over the next few years.

Another source close to the situation said at least one large local landlord is seeking to sell multiple hotel properties, including one on luxury hotspot Palm Jumeirah to de-risk their portfolio.

"Supply is going to outpace demand to a certain extent within the next two to three years especially in the luxury segments, so this is naturally going to cause a form of slowdown," Mireille Azzam, JLL's head of strategic consulting for the Middle East and Africa, told Reuters, adding some residents were waiting to see if prices became more affordable before moving.

New-found resilience?

Memories of Dubai's 2008 property crash which ultimately led to a $20 billion bailout by the emirate's oil-rich neighbour Abu Dhabi still loom large, but analysts say lessons have been learnt and the risk of contagion from any downturn appears lower.

"The financial institutions and major developers in the region have learned from past crises and are well-prepared," Kroll's Abdeljaouad said. "The market focus is shifting more towards mainstream housing and infrastructure."

Economic indicators remain strong, with an S&P Global December purchasing manager survey recording its highest reading in 16 months, reflecting Dubai's non-oil businesses firmly in expansion mode.

Meanwhile, Dubai is forecast to deliver just 13,000 homes annually over the next six years, well below the 30,000 run-rate over the last 15 years, suggesting a shortfall that could underpin demand, said Knight Frank partner and head of research for the Middle East and North Africa Faisal Durrani.

The exposure of the 10 biggest UAE banks to real estate, which analysts put at more than 30% during the 2008-9 financial crisis, has decreased for nine straight quarters, according to consultancy Alvarez & Marsal, falling to 16.2% in the third quarter of 2023 from as high as 22.3% at the end of 2020.

Although banks and developers have reduced their risks, industry sources warn thousands of other industry players are more vulnerable to an extended slowdown.

Those include Dubai's brokerages, the number of which has ballooned to about 4,000 from 1,200 in 2020, noted Betterhomes chief executive Richard Waind.

The biggest threats to Dubai's real-estate sector come from unexpected spikes in inflation, unpredictable global interest rate policy and regional contagion from the Israel-Hamas war, eight sources told Reuters. The potential impact of disruption to key shipping routes in the Red Sea is so far unclear.

But geopolitical turmoil such as Russia's military campaign in Ukraine has boosted the emirate in recent years, and some speculate this could continue.

"Dubai will always benefit whenever there is chaos," the developer source said.