Dubai’s booming real estate market is starting to cool down but project delays are likely to push a much anticipated price correction back until 2009, new research says.

The supply of new apartments and villas has been delayed by materials and labour shortages, failing to meet demand of about 50,000 housing units a year from the steady flow of migrant workers arriving in this boom town, which has positioned itself as a business hub for the Gulf region that is benefiting from record crude oil prices.

EFG-Hermes, a regional investment bank, forecasts that prices will rise 10-15 per cent this year and 5-10 per cent next year, before peaking in the second half of 2008 and declining by 15-20 per cent by 2011 as the supply-demand balance flips.

EFG-Hermes had in late 2006 predicted that prices would start to ease in 2008, dropping 25-30 per cent by 2010.

“As a result of the immensity of this boom, and supply coming on slower than expected, we won’t have the same correction as forecast,” said Philip Khoury, EFG-Hermes’ head of research. “The correction will come later and be shallower.”

Strong demand is anticipated over the next few years as Dubai’s 1.4m population is projected to grow at 8 per cent a year, the research says.

“With another 300,000 people expected to arrive this year we are on track for 2m by 2010, which means even more demand for residential stock,” said Nicholas Maclean, Dubai-based managing director of CB Richard Ellis, commercial real estate agency.

A slowing in rental increases points to the overall softening of the real estate market. After increases of 40 per cent in 2005 and 30 per cent last year, rents have risen 16 per cent so far this year, thanks partly to the government cap on rent increases. As more housing hits the market next year, rents across the city could decrease for the first time in a decade.

Commercial rents, for now, are not showing signs of a slowdown, rising 40 per cent this year.

Dubai is one of the most expensive cities in the world for office space. But with supply doubling from current levels by the end of the decade, rents should begin to ease, says Mr Maclean. “This is good, because Dubai is now losing its competitive advantage,” he said.

EFG-Hermes estimates that fewer than half of the expected 57,000 residential units will come on to the market this year because of project delays, problems connecting new developments to the utilities network and defects on handover.

Any price correction will affect different parts of the city in different ways: luxury developments will be hit first and hardest, while properties in central Dubai, such as the Dubai International Financial Centre and Burj Dubai, the world’s tallest tower, are more likely to hold value.

Villas, which account for only 10 per cent of new units coming to market, are unlikely to be affected.

But according to Mike Williams, head of research in the Middle East for estate agency Cluttons, Dubai’s chronic land shortages and the rising cost of construction will not end any time soon, allowing prices to “rise in a slowing but relatively stable fashion for the foreseeable future”.