Dubai's Emaar Properties said a merger with real estate units of Dubai Holding, owned by the emirate's ruler, would shore it up financially but shares fell as investors feared they may lose out in the deal.

The proposed new entity combining Emaar with Dubai Properties, Sama Dubai and Tatweer, would have debt obligations equivalent to around 7 percent of total assets, compared with Emaar's 15 percent at the end of March, Emaar's chairman Mohammed Alabbar said in a statement on the bourse website.

But shares in Emaar, the largest listed Arab developer, lost nearly 10 percent as investors worried about asset valuations in the deal and risks in the Dubai real estate sector, which suffered a sharp correction in the global financial crisis.

'The merger is more a way of reducing cumulative costs and supply, which is good, but in doing so is taking up bigger execution challenges, potential for equity raises to finance debt repayments and being less diversified,' said Saud Masud, real estate and construction analyst for the Middle East and North Africa at UBS.

Property prices in the seaside emirate -- known for its artificial palm-shaped islands -- have slumped since last year when the global economic crisis and a drop in oil prices ended an economic boom in the Gulf region.

The new entity would have combined assets near 194 billion dirhams ($52.85 billion), Emaar said, while the developer's own total book value of assets at the end of March stood at 68 billion dirhams, with 10 billion dirhams of debt obligations.

Dubai Properties, Sama Dubai and Tatweer had combined total assets of 126 billion dirhams at the end of last year, with around 3.4 billion dirhams in external debt obligations, Emaar said.

'There is a question around what these assets constitute and to what extent the assets are actually liabilities,' Masud said.

'What is the true value associated with these assets? We're still early in the down-cycle so would these assets retain value or be written down significantly resulting in hits to earnings in the coming quarters?'    

Emaar posted a 74 percent drop in first-quarter profit as the property slump hit sales and deliveries.

While consolidation among Dubai's numerous real estate developers had been awaited for some time, the deal between Dubai Holding, wholly owned by the emirate's ruler, and Emaar, of which the government owns almost a third, raises questions about the impact on ordinary investors, analysts say.

'The key downside risk remains in our view the potential conflict of interest between Dubai government (majority shareholder of the four entities) and Emaar's minority shareholders,' Deutsche Bank said in a research note.

Alabbar reiterated that the consolidation process would take around four months to be completed. Tatweer said earlier this month the bankruptcy of its partner Six Flags, one of the largest theme park operators, would not delay a multi-billion dirham park project in Dubai.

Tatweer is building at least seven theme parks in the Gulf Arab emirate.

Dubai Holding said in February it would merge back-office operations at Dubai Properties, Sama Dubai and Mizin to cut costs. - Reuters