КИЕВ, 29 янв - SV Development.  Gulf banks may have avoided most of the toxic assets polluting the global financial system but many are overexposed to a sector that rating agencies and analysts say may prove to be nearly as poisonous - property.

After years of growth, Dubai's real estate market is particularly exposed to the withdrawal of credit. Residential prices have dropped 23 per cent from their peak last September according to research by HSBC, the bank, and some experts are talking about a 50 per cent drop in property prices from top to bottom.

This has shocked speculators who have dominated the market in recent years, but may hearten longer-term property investors as already healthy rental yields may improve.

Rental yields are a function of the income that can be earned from a property compared to the price paid. They are also an important indicator of how expensive property is and how sustainable underlying prices are.

According to CB Richard Ellis, a commercial real estate services company, Dubai offered some of the highest rental yields on prime property in Europe, the Middle East and Africa. In the fourth quarter, industrial property yielded 11 per cent, office space yielded 7.75 per cent and retail property returned 8 per cent.

Yet rents are dropping along with property prices, say experts.

Half of Dubai's population is employed in construction, development and real estate, and mass redundancies in these industries will shrink the city-state's population by 8 per cent this year, according to UBS, the Swiss bank.

A further population decline next year will lead to a 27 per cent oversupply of residential units by the end of 2010 and at least a 30 per cent drop in average house prices, UBS believes. Experts say that, with business dominated by expatriates, commercial property is likely to fare little better.

Yet this will not necessarily send yields tumbling. While rent declines may accelerate due to Dubai's expected population fall, property prices are likely to drop faster and further, improving yields, says Ian Albert, regional director of Colliers International.

"Rents are coming down, but so are values," says Mr Albert. "In a depressed housing market both are affected - but rents reach their floor much quicker."

Rental yields were mostly unchanged in the fourth quarter, but have recently gone up a further 1-2 percentage points, according to Nick Maclean, regional managing director of CB Richard Ellis.

Dubai also offers several significant advantages to professional property investors. Chief among these is an absence of any capital gains tax once property prices start rising again. Low transaction and management costs also add to the allure.

So should investors start taking a fresh look at Dubai's property market? Yields may look attractive but experts advise caution.

"The market has fallen off a lot, but right now it's just wait and see," says Mr Maclean. Timing the property market bottom will be tricky, but given sentiment and a flood of new units coming to the market "we won't see a property price recovery until the end of 2009, most probably in the first quarter of 2010".

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