Feb. 17 (Bloomberg) -- Investors and home buyers in the United Arab Emirates may default on payments for properties that have yet to be completed, creating a liability for developers of as much as $25 billion over the next two years, UBS AG said.

“We believe delinquencies on payment terms will be a growing concern over the next few years,” Dubai-based UBS real estate and construction analyst Saud Masud said in an interview. “In our view investors are and will continue to default as per individual risk profile.”

Dubai property prices have dropped 25 percent from their September peak as banks reduced lending and speculators left the market because of the global financial crisis, Morgan Stanley said. Dubai opened its property market to foreign investors in 2002, and Abu Dhabi followed three years later, fueling a boom that was boosted by low interest rates.

“Our assessment of leverage in Dubai’s residential property market is based on the cost to developers to finish properties should investors default on the upcoming supply of 140,000 units,” Masud said in a Feb. 15 interview. “We estimate this liability to be roughly $20-$25 billion over the next two years.”

Based on conservative estimates, 30 percent of Dubai’s residential properties may be vacant by the end of next year as the population falls and the risk of oversupply increases, Masud said. The strengthening of the dollar against the pound, euro, ruble and the Indian and Pakistani rupee will make property less attractive to buyers using those currencies, Masud said.

Emaar Loss

Emaar Properties PJSC, the largest real-estate developer in the U.A.E., on Feb. 12 reported an unexpected loss for the fourth quarter because of writedowns at its U.S. unit and falling prices at home. The net loss was 1.77 billion dirhams ($481 million) compared with a profit of 1.74 billion dirhams a year earlier. Emaar’s results missed UBS estimates by 20 percent, Saud said.

Moody’s Investors Service said Feb. 12 it may downgrade banks and government-owned companies in Dubai, the second-largest sheikhdom in the United Arab Emirates, if oil-rich Abu Dhabi limits support to its own institutions. The emirate may have to refinance $15 billion in debt due this year from its total debt obligations of $70 billion, according to Moody’s.

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

Last Updated: February 17, 2009 02:15 EST