DUBAI -- Cracks are starting to show in Dubai's well-crafted and glitzy property-marketing machine.

Flipping properties has reached such a feverish pace, driving up prices, that Dubai's Real Estate Regulatory Authority, or RERA, is looking at measures to crack down on the practice, which involves quickly reselling property at a profit.

Meantime, a series of legal tussles and property-related scandals have rocked investor confidence, and analysts are forecasting that property prices, which have risen sharply in a matter of months, could tumble by as much as 10%, hurt by oversupply.

"Many challenges have begun to surface, mainly the prospect of oversupply," said Bahsar Al Natoor, a Dubai-based analyst at ratings company Fitch Ratings told Zawya Dow Jones.

Fitch says speculative real-estate investment, fueled by fast price rises, adds to the risks of the bubble inflating. Similar bubbles popped in the U.S., Spain and the U.K. after rampant flipping and other trends similar to those in Dubai.

Lacking the huge oil reserves of neighbor Abu Dhabi, Dubai has worked hard to turn itself into the region's tourist, business and transport hub. Real-estate development has been at the heart of this effort.

But the global economic slowdown has all kinds of markets teetering on an edge -- and while the cash-rich Emirates are considered havens for investors, they too may be vulnerable to slowing global growth.

The emirate, in 2002, was the first of the Arab Gulf states to allow foreign-property ownership. The Dubai Land Department estimates that the value of real-estate transactions in Dubai rose to 462 billion dirhams ($125.8 billion) in 2007 from 38.7 billion dirhams in 2002. The department estimates that transactions will reach 717 billion dirhams this year.

This has led to a flurry of sales and rental activity, with sales growth in the U.A.E. touching 65% last year. Property prices, meanwhile, have risen on average by 79% since 2007 and 25% in the first six months of 2008, according to New York-based investment bank Morgan Stanley.

Home prices on Nakheel's Palm Jumeirah -- one of three separate man-made-island clusters in the shape of palm trees off the coast of Dubai -- have risen more than 600% since sales started in 2002, with some villas that were sold for $700,000 five years ago now attracting offers of more than $3.5 million, according to Dubai-based property agent Betterhomes.

"There is a general consensus that certain sectors of the real-estate market in Dubai are currently being driven by speculation rather than market fundamentals," said Craig Plumb, head of research at property and investment-management company Jones Lang LaSalle in Dubai.

While RERA is looking at measures to restrict flipping, developers themselves are also imposing tougher resale rules. Homeowners at Nakheel's Trump International Hotel & Tower have to wait a year before they can sell their units on the secondary market, and Emaar Properties is restricting secondary sales of its properties until buyers have paid 30% of the total cost.

"Real estate isn't like the stock market. Only in Dubai you see people flipping apartments to make fast money," says RERA Chief Executive Marwan Bin Ghalita.

Morgan Stanley last week predicted that prices will start to fall in the second half of next year and could drop as much as 10% by 2010. In 2007, there were 245,000 condos, according to property consultant Colliers International. It expects annual additions of 61,000 units every year until 2010, reaching 429,000 units.

Fitch warns that the commercial sector also could "start experiencing a price correction" as massive new supply comes onto the market over the next two years. A further 5.6 million square meters of office space is due to come online by 2009, according to Colliers.

In the worst-case scenario, Morgan Stanley says, property prices could follow those of Singapore in the late 1990s, when real-estate prices plunged 80% in 18 months.

The market also has recently been rocked by a series of scandals involving some of the emirate's biggest real-estate players. So far, a robust economy and favorable regional economic conditions have deferred any slowdown and extended the period of rising prices. But the number of real-estate projects facing delays or cancellations is rising as developers face soaring construction costs and rampant inflation.

Write to Stefania Bianchi at stefania.bianchi@dowjones.com

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