What's the immediate outlook for Dubai real estate?

If you want to buy a property in Dubai these days you have two choices: try to snap up a new apartment in a development that has just been released, such as the latest Emaar Residences, or Damac's Residences at the DIFC; or you can buy a re-sale by paying a premium to the original buyer who may not have even finished paying the installments yet.

The supply of property is clearly falling behind demand, and prices are starting to rise to compensate. This appears to be a deliberate policy by the developers who are concerned to see that buyers actually complete their sales before moving on to new projects.

This is a legitimate fear. Dubai does not want to become a speculative market dominated by trading in housing options - which is what deposit-paid reservations amount to. Dubai wants to become a solid real estate market where money can be safely invested for the long-term.

Ironically the best way to achieve this is to allow speculators and re-sale purchasers to bid up the value of Dubai real estate. This is the only way to bring supply and demand into equilibrium.

Another corrective mechanism that will become apparent this autumn is a rise in interest rates. UAE mortgage rates are linked to US rates, so when they increase so will local dirham-denominated mortgages. That said dirham-mortgages carry a hefty margin at the moment, and there is room for spreads to shrink, absorbing some of the interest rate rise.

Moreover, the Dubai property market is mainly a cash-driven one, so the impact of rising interest rates will be mainly by way of increasing the attractiveness of alternative homes for cash, rather than directly by hitting home owners.

Thus the stage is set for an orderly increase in house prices in Dubai to something more in line with the international average. At present the rental yields on Dubai property are roughly twice those found in Singapore, for instance, a comparable trading hub, which is not a differential that can be expected to last for long.

But the Dubai Government will have to play its cards carefully and limit the supply of new property coming on to the market to avoid a speculative bubble in the real estate market, with too much speculation in part-paid property before the actual completion of homes. All the signs are that the authorities have matters under control.