DUBAI, Aug 5 (Reuters) - Dubai property prices, which have surged 79 percent since the start of 2007, are likely to fall 10 percent by 2010 as supply of real estate units outpaces demand in the Gulf emirate, Morgan Stanley said on Tuesday.
A sharper correction in Dubai's real estate sector could have a ripple effect on its neighbours in the Middle East, with shares of 12 regional property firms dropping an average 35 percent, Morgan Stanley said in a research note.
In a worst-case scenario, Dubai property prices would follow the pattern of Singapore in the late 1990s, when real estate prices plunged 80 percent in 18 months, Morgan Stanley said, calling this a "low probability event". "We expect oversupply to hit Dubai in 2009, leading to a period of price declines," Morgan Stanley said.
"While we expect these price declines to be limited to Dubai given the level of undersupply in surrounding markets, we cannot rule out a 'contagion' effect on Middle East, North Africa property shares prices, as investor confidence suffers."
The bank initiated coverage of 12 Middle East property firms, including the region's largest by market value, Emaar Properties EMAR.DU, whose shares trade more than 100 percent below Morgan Stanley's 21.4 dirham ($5.83) target price.
Home to man-made palm-shaped islands and an indoor ski slope in the desert, Dubai kicked off a regional property boom in 2002 when it first invited foreigners to invest in real estate.
Since then, regional economic growth supported by a six-fold rise in oil prices has attracted streams of investors.
Last month, Standard Chartered Bank said Dubai was overheating because speculators were inflating prices of real estate still under construction. It recommended the emirate introduce a capital gains tax to deter short-term investors. [ID:nL24706347]
According to Morgan Stanley's price index, Dubai property prices soared 25 percent in the first half of 2008, and are up 79 percent since the beginning of 2007.
"Prices have been driven by a combination of genuine demand, speculation and, most recently, escalating construction costs," it said.
"For 2009, we expect prices to start coming under pressure as oversupply becomes evident. We forecast a 10-percent decline between 2008 and 2010 in our base case."
Some developers in Dubai are trying to weed out short-term investors.
Palm island developer Nakheel is requiring buyers at its Trump International Hotel to wait a year before they can sell their units on the secondary market, UAE daily The National reported on Tuesday.
While Dubai is the "bellwether" for the Gulf property market, slight easing of prices in the emirate may not impact Abu Dhabi and Qatar, whose property sectors should remain undersupplied until at least 2012, Morgan Stanley added. (Reporting by Daliah Merzaban; Editing by Thomas Atkins, Paul Bolding)