April 22 (Bloomberg) -- Dubai house prices may slump as much as 70 percent from their peak late last year as demand drops and banks fail to resume mortgage lending, prompting mergers, UBS AG said.

“We are still in relatively early stages of the property down-cycle in United Arab Emirates,” Saud Masud, a Dubai-based analyst at the Swiss bank, wrote in a report to clients dated yesterday. “We believe risk-reward profiles are not yet compelling for investors to consider market re-entry, hence continued price declines are expected.”

Economic growth in Dubai, the second-biggest of seven states that make up the U.A.E., slumped after the worst financial crisis since the 1930s hurt its property, financial- services and tourism industries. The economy may contract 2 percent to 4 percent this year, Standard & Poor’s Ratings Services said in a report last month.

UBS downgraded Emaar Properties PJSC, the U.A.E.’s biggest developer, and Union Properties PJSC to “sell” from “neutral” as first-quarter results “will be disappointing.”

House prices in Dubai have slumped at least 25 percent since their peak, and apartments have tumbled 39 percent, UBS said. Dubai’s majority expatriate population may drop 8 percent this year and a further 2 percent in 2010 as residents lose their jobs and leave within 30 days in accordance with the emirate’s visa laws, the Swiss bank said.

‘Consolidation’

Property prices in Dubai quadrupled in the five years to September 2008, helped by new laws allowing foreigners to own property and a growing expatriate workforce. Falling property prices now raise the prospect of rising loan defaults. Real estate loans of U.A.E. banks, including mortgages, stood at 172.74 billion dirhams ($47 billion) at the end of 2008, or 17.8 percent of gross domestic product, the central bank said.

Dubai may see “significant consolidation among its key developers in addition to smaller, less visible ones,” UBS said.

The analyst started Abu Dhabi-based Sorouh Real Estate Co. with a “sell” recommendation and downgraded Aldar Properties PJSC to “neutral” from “buy.”

Dubai and its state-owned companies borrowed $80 billion to finance its transformation into a regional financial and tourist hub as crude prices rose after 2002 and expatriates flocked to do business in the oil-rich Persian Gulf.

It has had to delay projects and seek funding as growth slows in the region, which pumps almost a quarter of the world’s oil, after crude prices tumbled about by $100 a barrel from their $147.27 record in July. Crude oil for June delivery traded at $48.55 a barrel at 12:07 p.m. London time.

Expat Exits

“As we move past the summer season and potential for expat exits picks up, there is a likelihood that rents begin to drop faster than home prices, thereby compressing rental yields to mid-single digits or below,” the report said.

Dubai is most vulnerable to lower oil prices as property prices and debt refinancing pose “real risks,” Citigroup Inc. said in a report last November.

The U.A.E. central bank stepped in to support Dubai by buying half of a $20 billion bond issue in February. Dubai plans to raise the remaining $10 billion this year, director general of Dubai’s Department of Finance Nasser Bin Hassan al-Shaikh said yesterday.

To contact the reporter on this story: Ayesha Daya in Dubai adaya1@bloomberg.net

Last Updated: April 22, 2009 07:46 EDT