Dubai is likely to see a surplus of 31,000 residential units mainly due to the decline in the expatriate population, while the shortage of units in Abu Dhabi will rise to 28,000 by year-end, according to JP Morgan.

"In the short term, we expect the non-residential sector in the UAE to remain under pressure given the global financial crisis. However, the historical shortage of both retail and commercial space in Abu Dhabi has kept falls in leasing rates well below Dubai," the investment bank said in a report on Mena real estate.

A mixture of genuine demand and speculative activity led by high rental returns and easy liquidity led to peak transaction volumes for Dubai property in 2008. Transactions peaked in May 2008 but it took two more quarters to sink into the market fundamentals. As the financial crisis deepened by the end of the third quarter of 2008, sharp decline in oil prices, liquidity squeeze and reduced investors' risk appetite towards risky asset classes such as real estate overturned the supply shortage story in Dubai.