Nov. 18 (Bloomberg) -- Dubai, the second largest of the seven sheikhdoms in the United Arab Emirates, is the most vulnerable place in the Gulf to lower oil prices as real estate prices and debt refinancing pose ``real risks,'' Citigroup Inc. said.

The emirate ``has been booming on the oil surpluses'' from neighboring Gulf states and Russia, Citigroup's Mushtaq Khan said in the report today. ``Dubai's two specific concerns are its real estate sector and how it will refinance the debt it has built up in recent years.''

Dubai has borrowed to fund real estate projects including Burj Dubai, the world's tallest tower, and to buy stakes in Deutsche Bank AG, European Aeronautic Defence and Space Co. and Standard Chartered Plc, as it seeks to diversify its economy.

Outstanding mortgage loans in the UAE almost doubled in the year through June as property prices soared to a record. Mortgage loans leaped 92 percent to 87.6 billion dirhams ($23.8 billion), compared with annual growth of 55 percent in March, the central bank said yesterday.

HSBC Holdings Plc indicated in a report last week that house prices in Dubai and Abu Dhabi have begun to fall. The U.A.E. central bank has held discussions with the finance ministry on measures to support real estate lending.

``We see a much needed correction in the property market,'' Khan said. ``Global conditions are likely to slow Dubai's economic growth, but not knock it out.''

Dubai controls its economy through state-owned companies that dominate each major industry. Dubai Holding LLC, which groups assets belonging to Dubai Ruler Sheikh Mohammed bin Rashid al- Maktoum, owns hotel chain Jumeirah Group and Dubai International Capital, which unsuccessfully bid for Liverpool Football Club earlier this year.

Gulf states will be able to maintain fiscal spending at current levels as oil remains above the break-even point for most governments, Fitch Ratings said in a report on Nov. 11. New York- traded crude has more than halved to about $55 a barrel since reaching a record $147.27 on July 11.

``If oil prices averaged $50 per barrel, only Kuwait would be able to show an external surplus in 2009,'' Khan said.

To contact the reporter on this story: Camilla Hall in London at chall24@bloomberg.net.

Last Updated: November 18, 2008 04:29 EST