DUBAI/LONDON - Dubai's debt relief request has shattered faith in its once-booming property market and Abu Dhabi's $10 billion bailout will do little to tempt overseas buyers back to the emirate until late 2011 and beyond.

Dubai's ailing property market had already soured thanks to the global economic crisis, long before the Dubai World DBWLD.UL empire sought a standstill on $26 billion of debt. Now its woes have turned hopes of a recovery into fears of second collapse in capital values.

It (the debt standstill request) will definitely delay the recovery of the property market by 18 months to the second half of 2011, said Patrick Rahal, a Doha-based senior asset management analyst at bank The First Investor.

Fellow United Arab Emirates member Abu Dhabi has dug deep to rescue Dubai from a possible default on a $4.1 billion Islamic bond owed by government-linked developer Nakheel NAKHD.UL, but the injury to investor confidence will take much longer to heal.

I wouldn't like to even guess when this market might return to the good times, said Jonathan Thompson, global head of real estate at KPMG KPMG.UL in London, discounting the possibility of Dubai becoming a major mainstream commercial marketplace.

Prices are down some 50 percent from their peaks in late 2008, while billions of dollars worth of office, hotel and mall projects have been put on hold or canceled.

The handling of the situation has eroded confidence and we will see how that is revised, said Saud Masud, head of research and senior real estate analyst for the Middle East and North Africa at UBS (UBSN.VX)(UBS.N).

The psychological impact (of the bailout) is positive but fundamentally the market is still weak. The main problem is still oversupply and so we are just going back to pre November 25, Masud said, adding property prices are still expected to slide a further 20-30 percent by the second half of 2011.

A specter of fresh fire sales continues to haunt the market, some analysts said, diluting the impact of the Abu Dhabi's generous bailout package.

Investors shocked by the government's decision not to guarantee the debts of related entities like Nakheel will encourage some nervous investors to cash out early, putting new downward pressure on prices, said Sana Kapadia, vice president of equity research at EFG-Hermes in Dubai.

Rental demand is likely to remain weak until Dubai, famous for its seven-star hotels and palm tree-shaped islands, manages to convince western corporations it can preserve its status as the most important financial center in the Gulf region.

This will be easier said than done, Thompson said.

Dubai has done itself a lot of damage as an international financial center, he told Reuters. The best Dubai can hope for is that it stays as an important retail center ... But will this become a global business hub? I suspect not. People will not feel safe about putting huge sums of money there, he said.

OVERSEAS

News of the Abu Dhabi rescue has done little to restore Dubai's badly dented reputation in the eyes of overseas property investors who had already relegated the supply drenched emirate to the bottom of their property investment wish lists.

Even opportunistic property investors like London's Enstar Capital are retreating from Dubai, citing concerns a painful debt restructuring in the emirate is just the beginning.

One of our biggest fears is that Dubai's reported debts of $75 billion are actually in fact much larger, said Enstar co-founder Farid Alizadeh.

Alizadeh's concerns are seen in recent credit default swap pricing for Dubai Holding Commercial Operations, the personal investment vehicle of the Sheikh Mohammed, which many market watchers see as a bellwether for Dubai's creditworthiness.

End-of-day pricing from Markit on Friday showed the buyer of protection against a possible default by Dubai Holding paid the equivalent of $1.86 million a year to cover $10 million of debt for a five-year period, up from about $650,000 on November 24.

Having seen what has happened in Iceland and others, investors in such times go to what are deemed safe havens and if Abu Dhabi is bailing Dubai out then it will be Abu Dhabi which will be deemed a safe haven and not Dubai, Enstar co-founder Simon Lyons added.

(Additional reporting by John Irish; Editing by Andy Macdonald)

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)

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