Developers relied on bank lending and advance sales of unbuilt properties before 2008, when Dubai had the world's fastest-growing real-estate market. This time, they will need to tap bond markets or find investors from private equity, pension funds and hospitality companies to fund construction.

Very Creative

"Dubai is going to have to be very creative on how it finances these projects," said Ghassan Chehayeb, research director for the Middle East and North Africa at Exotix Ltd. "The traditional debt-fueled building boom is not going to work this time and the financing capacity and appetite is just not there."

Dubai government officials were unavailable for comment, a spokeswoman said yesterday.

The property crash pushed Nakheel PJSC, the developer of Dubai's palm-shaped islands, to the brink of bankruptcy and led former parent Dubai World Ltd. to clash with about 80 banks as it pushed to renegotiate terms on $25 billion of debt. Concern over Dubai World in late 2009 caused equity markets including the New York Stock Exchange to drop and hurt crude oil prices.

Dubai racked up about $113 billion in debt on its transformation. About $7 billion matures next year and another $56 billion from 2014 to 2016, Bank of America Merrill Lynch said in an October 2011 report.

'Remain Wary'

"Banks remain wary about lending to real estate developments at a time when they still have to make major provisions against nonperforming real estate loans from the last development boom," Alan Robertson, chief executive officer for the Middle East and North Africa at broker Jones Lang LaSalle Inc., said by e-mail.

Moody's Investors Service downgraded Dubai's biggest banks on Dec. 7, saying they hadn't done enough to address the bad loans that piled up in the crash. Banks in the city have set aside 30 percent to 45 percent of the value of the non- performing loans, compared with 72 percent to 96 percent for similarly-rated lenders globally, Moody's said. As the lenders catch up with provisioning, profits will be pressured and some may need to raise new capital, it said.

Loans and advances from banks in the United Arab Emirates, which includes Dubai, grew 2.7 percent in the first eight months of the year, down from an average of 3 percent in 2011, according to central bank data. That's a fifth of the pace in Saudi Arabia and lower than Kuwait's 3.5 percent growth.

Regulation Delay

The U.A.E.'s central bank yesterday said it's postponing new regulations that cap bank lending to governments and their related companies for further review by the lenders. The rules barring banks from lending more than 100 percent of their capital to local governments and state-related entities is part of plan to reduce the risk of over-concentration.

The postponements came after Emirates NBD PJSC, the U.A.E.'s biggest bank by assets, and second-ranked National Bank of Abu Dhabi PJSC did not meet the September deadline to comply with the new lending rule.

Asian banks, meanwhile, "have been burned very badly and many don't want to have anything to do with Dubai real estate developments anymore," Chehayeb said. "European banks have been treated poorly throughout the debt restructurings and are having significant problems back home."

Tussle Continues

Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World while HSBC Holdings Plc has the most at risk in the United Arab Emirates, JPMorgan Chase & Co. said in a 2009 report. RBS, which had to be rescued by the U.K. government, Commerzbank AG and Standard Bank Group Ltd. in July walked away from talks to restructure $6 billion of debt with Dubai Group LLC.

Dubai Group is controlled by Dubai Holding LLC, a company owned by the emirate's ruler Sheikh Mohammad Bin Rashid Al Maktoum. Dubai Holding is one of the two companies responsible for developing the new district, which will be named after the sheikh.

Bond markets, where "too much money" is chasing diminishing returns, offer the best option for funding projects, according to Religare's Mostaque. For that to happen, the government may have to back sales with guarantees, he said.

"There is immense demand for any hard currency bonds and Gulf bonds in particular because they are pegged to the U.S. dollar," he said. "Since the crisis, the U.A.E. has tried to do away with sovereign guarantees, but they would have to start deploying them in one form or another," he said.

Bond Surge

Holders of Nakheel's Islamic bonds got a 48 percent return in 2012, four times higher than its global peers, as an increase in investors sent Dubai yields to record lows. The company in January announced plans to build The Pointe at Palm Jumeirah, a 300 million-dirham ($82 million) retail development on the artificial island.

The project, Nakheel's first major development since receiving a government bailout in 2009, is under final design review and financing will progress once the development goes out to tender, a company spokeswoman said by e-mail.

Advance sales of properties, a key source of development funding before the collapse, dried up after the practice fueled speculation that hurt buyers, developers and lenders.

Dubai first allowed foreigners to own property in 2002, drawing investors from Iran, India, Pakistan and Russia. Many made quick profits by paying a developer 10 percent of a planned property upfront and then reselling the contract as values rose at the fastest pace in the world. Most of the emirate's developers became paralyzed when buyers failed to make further payments towards completing the properties in the aftermath of the global credit crisis.

Bubble Risk

Lenders in the six-member Gulf Cooperation Council region risk creating a new bubble if they continue to finance real estate projects, according to a study by AlixPartners LLP. The U.A.E., which includes Dubai, is part of the GCC group.

"Banks shouldn't be caught out again," AlixPartners Managing Director Claudio Scardovi told reporters in Dubai on Dec. 11. "Certain banks remain crippled by a real estate overhang, asset quality concerns and a post-credit bubble legacy."

Mohammad Bin Rashid City is the biggest of the new and revived mega-projects. Located on 5.1 square kilometers (2 square miles) directly east of the world's tallest skyscraper, the development will include 100 hotels, residential areas and the biggest cluster of art galleries in the Middle East and North Africa region. Its "Mall of the World" would cater to 80 million shoppers a year.

Luxury Villas

The district, known as MBR City, will be developed by Emaar Properties PJSC as well as Dubai Holding. An Emaar spokesman didn't respond to e-mailed questions about the construction timeframe, cost and financing plans. The first project in MBR City will include luxury villas set around an 18-hole golf course, the companies said in a Dec. 9 statement. A spokeswoman for Dubai Holding said the company isn't providing details on financing plans, costs and construction timeframes.

Financing of MBR City rests with the developers, said Sheikh Ahmed bin Saeed Al Maktoum, who heads Dubai's supreme fiscal committee. His comments contradicted statements by Hani Al Hamli, secretary general of Dubai Economic Council, who was quoted in Arabian Business as saying the emirate won't be relying on the global markets to fund the new projects because it has its "own resources."

Private Equity

If Dubai avoids backing bonds with guarantees, developers may have to search for regional or international investors such as hedge funds and hotel companies, Exotix's Chehayeb said. The emirates' surging tourism market may encourage that type of investor. The industry grew 13 percent in 2011 and international traffic at Dubai's airport climbed by 13.5 percent to 47.5 million passengers in the year through October.

Hotel occupancy rates averaged 75 percent this year, among the highest in the world, as conflicts elsewhere in the Middle East and North Africa drove more Gulf tourists into Dubai, according to Philip Wooller, Middle East and Africa director at STR Global.

Dubai's economy is headed for the biggest expansion in five years as its hotel and restaurant industries expanded by 16 percent. Gross domestic product increased by 4.1 percent in the first half, putting the emirate on track to reach the government's forecast of 5 percent for the year, the Dubai Statistics Center said in November.

Sparse Recovery

Still, the projects are being announced even as Dubai is barely recovering from a drop that wiped 65 percent off residential values. Two months before the plan for MBR City was unveiled, state owned Meydan City Corp. said it would revive a stalled development with low-rise buildings and lagoons and another for a tower with "sky gardens" and nine swimming pools. At about the same time, the emirate's government re- approved construction of a mile-long canal from the Business Bay commercial area to the ocean.

"They are looking for investors who are willing to take another gamble on Dubai," Krane said. "Nobody who has detailed understanding of the financial situation in the city is going to risk their money on Dubai," he said.

The cost of the planned projects may be mitigated by long development periods. Construction will probably stretch out 15 years, during which time the lending market is likely to improve, said Ian Albert, regional director at property broker Colliers International.

Emaar Reversal

Taking part in MBR City represents a reversal for developer Emaar, builder of the world's tallest tower and biggest mall by area in Dubai. The company has outperformed its peers since the crash by moving away from mega-projects in the city and focusing on developments abroad and local properties that generate recurring income.

The scarcity of new funding may turn out to be a blessing in disguise as it tempers the pace of development, Jones Lang's Robertson said.

"The level of available finance is likely to act as a natural brake, limiting the number and timing of the announced projects that proceed," Robertson wrote.

Central bank rules that cap real estate lending to 20 percent of a lender's deposits and restrictions on lending to state entities will be "a healthy constraining factor," Khalid Howladar, a Dubai-based vice-president at Moody's Investors Service wrote.

"There is a risk of increasing leverage, but hopefully the experience of the last crash will bring some discipline to the debt raising process," he added.

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