When British banker Phil Sheridan decided to take the plunge and set up as an estate agent in Dubai back in 2003, his friends and former colleagues thought he’d had a touch too much sun.

As Sheridan, now group chief executive of High Society Properties, recalls: “People actually asked me if I was mad. They really didn’t think that the real estate market here was going to take off.”

The property boom can be traced back to May 2002, when Dubai became the first of the emirates to offer leasehold ownership of property to expatriates. And since last year foreigners have been permitted freehold ownership in certain areas, including prime Jumeirah Beach.

Residents may grumble about the heavy traffic and the constant noise of construction, but it is hard to argue with rising property prices: according to property consultants Colliers International, Dubai prices for villas surged 78% last year. The rental market continues to soar, with yields up to 10%.

But Dubai is not just hitting the headlines due to its astonishing price increases: the buildings themselves are pretty astonishing, too. The Burj Al Arab, the sail-shaped seven-star hotel tower built on a man-made island in Dubai harbour, instantly achieved iconic status when it was built, as will the Burj Dubai tower, still under construction, but set to be the tallest building in the world. Just down the road is are the Palm and World developments – manufactured islands stretching along the coast, built in the shape of palm trees and a map of the world.

The British architecture practice Foster & Partners, led by Norman Foster, worked on the 80-storey One Central Park in Dubai, which includes apartments and offices, and is also involved in several projects in Abu Dhabi.

One of the largest players on the Dubai real estate scene is Tatweer, a subsidiary of Dubai Holding and the name behind developments including Dubailand, the Middle East’s answer to Disneyland, set to span a colossal three billion square feet. It also boasts Bawadi, a five-mile-long line of hotels and leisure facilities, Dubai Healthcare City, Dubai Industrial City, and has attracted global brands such as DreamWorks and Universal Studios to its ventures.

Tatweer’s chief executive Khalid al-Malik, says: “There have been 30 different industries created here – either from scratch, or reengineered, from finance to healthcare, biotech to media, leisure and entertainment – and as they grow, so does the demand for real estate. The diversification of Dubai means that it is in a much better place than others to succeed. If you have 30 industries and five of them have a negative hit then the system will still survive. I’m not saying that nothing negative will happen because of course we are all part of the world, but it is all about mitigating the risk.”

Nobody could accuse Tatweer of not diversifying. Dubai Healthcare City, a specialised medical area, which aims to broaden the range of specialised healthcare for residents and to turn Dubai into a hub for medical tourism, is one of its projects, and it also has responsibility for developing an industrial base to diversify the economy from trade and tourism. It operates Dubai Mercantile Exchange, a joint venture with the New York Mercantile Exchange, as well as Dubai Industrial City, a manufacturing park near the busy Jebel Ali port.

Also contributing to the building of Dubai’s image is Emaar, one on the largest real estates companies in the world. Back in 1998, Emaar began construction of the 500-acre Downtown Burj Dubai development, which includes, alongside the Burj Dubai, the Dubai Mall and Burj Dubai Business Hub. Branching out into other key sectors, including healthcare, education, shopping malls, financial services and hospitality and leisure, Emaar is also behind the Dubai Marina. “Property is regarded as a secure investment option in Dubai with easy finance options as well as high rental yields,” claims an Emaar spokesperson. “The returns on investment from Dubai property are still higher than markets such as Singapore and UK.”

Dubai, more perhaps than any other city, he adds, is expanding both horizontally and vertically. “At Emaar, we created new hubs for the city. For example, Dubai Marina, Emirates Hills and Arabian Ranches when originally conceived were far removed from what was the centre. Since then, the city has come closer to these communities.”

In a place where brand names are everything, the tie-ups between top global brands and real estate is only going to increase. A growing number of global celebrities are putting their names on property developments in the area. The latest teaming of real estate and designer labels comes courtesy of property developer Abyaar and designer Christian Lacroix, who recently announced a joint venture to build a residential tower in one of Dubai’s most exclusive beachside suburbs. The 38-unit Jumeirah-based tower will incorporate a Lacroix-designed facade, expansive lobby and luxurious interiors. Marzooq al-Rashdan, vice chairman and managing director of Abyaar, says: “This is the start of a partnership through which similar developments will be established around the region and beyond, placing Abyaar on the luxury development map.”

With some of the largest construction projects on the planet, Dubai is finally beginning to incorporate an eco-friendly element to the proceedings. Says al-Malik: “Ten years ago, being green was rarely thought about. However, Dubai is now taking the lead in corporate responsibility, focusing on the environment and sustainability.”

Indeed, part of Dubai’s Vision for 2015 strategic plan is for sustainable growth. All new construction projects in the city are forced by legislation to ensure that they are as energy-efficient and nonpolluting as possible.

In Abu Dhabi, the example of Dubai is being closely observed, not least by Mahmood Ibrahim al-Mahood, chief executive of Al Qudra Holding. Established in 2005 with £81m in capital, Al Qudra is the leading private investment company in the UAE, operating in sectors including real estate, industry, transport and utilities. the company has a market capitalisation of more than £410m, with turnover for the first half of 2008 of around £208m.

“Our market is still at a discount to other well-established markets,” says Mahmood. “The developments planned are keeping pace with the predicted demand and the infrastructure: we’re not building towers where demand and the surrounding needs are not met.”

However, there are fears that an increasing number of speculators looking for fast profits in the property sectors in both Dubai and Abu Dhabi could lead to prices being pushed artificially high. A recent report from the Department of Planning and Economy in Abu Dhabi warned that speculators were driving up the price of housing so quickly that they risk causing a sharp fall in property values.

Buyers were overpaying for properties bought off-plan, says the report, released in March, creating “a risky business which may result in a sharp drop in the value of new units, thus undermining the future of the sector”.

It also warns that the thousands of new homes due to come onto the market in the next few years could create a glut that would send the value of investments downward. Calling for tighter regulations, the department blames banks and financial institutions for making it too easy to borrow money in the short term for property speculation.

John Davis, the chief executive of Colliers International, recently pointed out that the trend mirrored buying patterns in Dubai. “Abu Dhabi is at the beginning of its cycle and the speculative buyer will always get in during the early days,” he said. “But I think we’ll see a transition over time from speculator to end user.”

A series of laws has recently been introduced to tighten up the property market in the UAE. Included among them is an escrow law, which states that all funds received by Dubai developers will be regulated through escrow accounts supervised by the Dubai Land Department.

Individual developers have also been introducing new ways to prevent speculative investors from buying and selling vacant plots for a profit. Nakheel, the development company behind Dubai’s Palm islands project, recently sold 23 plots of land in the Canal District of its Waterfront master project using a sealed bid auction. According to the company, conditions included in the sale process prevent successful bidders from reselling their plots without first building on the land.

High Society’s Sheridan claims that the days of being able to turn round a property straight away are gone: “It’s now more of a mid-term play now and there are plans to introduce a law saying that you have to pay 30% of the price for off-plan properties before you sell. There has been a noticeable shift towards investors looking to hold and to rent.”

GOING UP

Dubai’s biggest construction projects include:

— Burj Dubai: when the tower is completed in 2009, it will be the largest freestanding structure built on earth.

— The Dubai Waterfront: the largest waterfront development in the world, housing 1.5m people. It will be a mixture of canals and man-made islands, including the iconic Palm Islands.

— The World: more than 250 islands, representing the countries of the world, are being created by pumping sand onto the sea floor. The development stretches for 15 square miles.

— Dubailand: the largest theme park in the world. With a construction budget of almost $50 billion, it will house attractions including the Snowdome indoor skiing slope, Safari Kingdom theme park, Legoland, Universal Studios and the Tiger Woods Dubai golf course.

— Dubai Marina: the world’s biggest marina development will contain 200 high-rise buildings and skyscrapers, including Infinity Tower and Dubai Marina Towers.

— The Dynamic Tower: each of the 80 floors of this 420m tower will be able to rotate 360 degrees. There will be a hotel, offices and flats, and the top 10 floors will be “full-floor luxury villas”.

— Mall of Arabia: expected to overtake the Dubai Mall as the largest shopping mall in the world when completed, the Mall of Arabia will be have about 10,000sq ft of leasing space, 10,400 car park spaces and the largest Starbucks in the world.

PROPERTY PARTICULARS

— Freehold ownership of selected developments in Dubai was opened to all nationalities in 2006. Overseas investors can purchase property freehold on specific developments, and there is also a 99-year leasehold option, which has been available since 2002.

— Investors and expatriates can register their properties with the Land and Property Department in Dubai. Property owners will be entered in the register of the Land Department and receive a title deed.

— Buyers will usually pay a fee to register title with the Dubai Land Department, but there is no stamp duty and no tax on property transactions.

— Property ownership qualifies buyers to apply for a residency visa, which allows them to open a bank account and trade tax-free.

— Under Dubai law, most private developers allow resale of the property to take place at any point during construction, but will typically charge a transfer fee, usually around 2% of the original price. The developer will then issue a new purchase contract to the purchaser.

— The Dubai Real Estate Regulatory Authority is setting up a database of residents, tenants and landlords. It will record incidences of problems including nonpayment of rent and lack of proper maintenance, to help landlords and tenants steer clear of potentially troublesome tenancies.