The Dubai government could be forced to hold a firesale of its international real estate if creditors to two of its flagship companies reject proposals to put near-term debt obligations on ice until May 2010.

International property advisers are bracing for a potential slew of instructions to revalue and sell trophy assets owned by Dubai World and its many property-owning units as the emirate struggles to shrink its $59 billion debt pile.

'We do expect the Dubai government to step up efforts to raise capital via real estate sales, and sales of their UK assets in particular,' James Lewis, a member of the Gulf capital markets team at property consultant Knight Frank told Reuters.

Lewis said Dubai had a better chance of denting its massive financial liabilities if it raided its group portfolio, which comprises international landmarks such as the Grand Buildings close to London's Trafalgar Square, the Mandarin Oriental hotel in New York and the Victoria & Albert Waterfront complex in Cape Town, South Africa.

'The simple supply and demand imbalance (in Dubai) is horrific, which begs the question of why you would want to buy commercial and residential property there if you couldn't be sure of letting it,' Lewis said.

'Some of their properties are interesting and in the fullness of time will look very clever. But they will have to sell their better stock, no one is in the market to buy the poorer grade kit. International assets on the other hand will move,' he added.

Average commercial real estate prices in the UK have risen 3.2 per cent in the three months to end-October as investors chase property bargains offering higher yields than bonds or cash deposits.

'With the capital flooding London right now, there's probably no better place to sell property if you had to raise some quick money,' Alistair Hilton, a partner at property consultant Cushman & Wakefield said.

A spokesman for Deloitte, the company appointed to lead restructuring of Dubai World, said it was too early to speculate on a possible sale of real estate assets and it could be some time before the best possible course of action was established.

No domestic firesale

One Dubai-based property analyst, who did not wish to be named, said the Dubai government was likely to hold onto domestic assets like Nakheel's world-famous palm-shaped islands to minimise further destabilisation of the local market.

Average Dubai property prices are already forecast to drop by another 20 percent as more developments complete, further driving down values, which have almost halved since last year, a report from researchers at Colliers International showed last month.

Favourable dollar-sterling exchange rates could also encourage the Dubai government to offload more UK property in deals like that struck by its Istithmar unit, lender Eurohypo and property firm Great Portland Estates.

Under terms of the November 11 deal, Great Portland and Eurohypo agreed to restructure Istithmar's debt on the London office redevelopment Marcol House in exchange for a share in the future profits.

'Bear in mind (Dubai) bought this stuff when the dollar was two-to-one, so net receipts back to them will look healthier as a result,' Lewis said. – Reuters