House prices in Dubai and Abu Dhabi are set to fall a further 10 per cent and 13 per cent in 2010 respectively, as residential supply expands in both markets, a Reuters poll showed on Thursday.

Dubai's once-booming property market has been hit hard as a result of the financial downturn and the Gulf state's debt crisis, while Abu Dhabi, the capital of the United Arab Emirates and home to most of the country's oil, has fared better.

Residential property prices in Dubai, which boasts the world's tallest building and man-made islands in the shape of palms, have plunged 55 per cent from their peaks in the third quarter of 2008, according to the median estimate of 14 banks, investment firms and research institutions.

Prices in Abu Dhabi have fallen 40 per cent, the median of 12 estimates showed.

'Conditions in the UAE property market will remain weak in 2010 because of unfavourable demographics, property oversupply and risks associated with cancelled and delayed projects,' said Patrick Rahal, an analyst at bank The First Investor in Doha.

Real estate services company CB Richard Ellis (CBRE) expects 31,194 news homes this year in Dubai and in excess of 10,000 in Abu Dhabi. Prices in Dubai are likely to remain flat in 2011 before edging two per cent higher in 2012, the median showed. Abu Dhabi house prices are expected to drop a further 5 per cent next year and then flatline in 2012.

Only one respondent in the poll said house prices in Dubai had already reached a bottom. Two said they expected prices to reach a trough in the second half of 2010, five said in the first half of 2011, four said in the second half of 2011 and three said they would in the first half of 2012 or later.

Vacancy rates and default levels in Dubai are set to increase, some analysts in the poll said.

Meanwhile a wait-and-see approach by sellers would push back inevitable declines and delay a recovery as liquidity is likely to remain constrained until 2012, said Jesse Downs, director of research and advisory services at Landmark Advisory.

'Prices are still expensive compared to income levels and I expect to see defaults to increase and project delays,' said Aberjeen Jiwani, research analyst at Securities and Investment Company (SICO) in Bahrain.

'The negative sentiment relating to developers will remain in the next six months to a year with the impending restructuring of Dubai Holding,' she said.

Credit rating agency Moody's last week downgraded Dubai Holding's loss-making main operating arm, Dubai Holding Commercial Operations Group (DHCOG), to B2 in its highly speculative category of ratings, taking account of weakness in Dubai's real estate market and uncertainty over the company's debt restructuring.

DHCOG's restructuring troubles are the latest blow to the finances of the emirate since its flagship state conglomerate Dubai World delayed debt payments last year.

Residential rents in Dubai are seen falling 10 percent for the rest of 2010, remaining stable in 2011 and rising 4 percent in 2012, according to the median forecasts in the poll.

Rents in the capital Abu Dhabi are expected to fall 15 percent more in 2010, a further 5 percent in 2011 before rising 4 percent the year after.

As the competition to attract tenants in Dubai increases, landlords are offering incentives, including increased cheque options and rent-free periods, to assist tenants with days lost during the moving process, Landmark's Downs said in a report in June.-Reuters