Investors are prepared to pay more for properties that are yet to be built so they can benefit from payment plans that allow them put down a fraction of the final price, said the London-based bank in an e-mailed research note today. That is pushing up prices to unsustainable levels, the bank said.

Property prices in Dubai have soared since foreigners were given the right to own real estate in limited areas in 2002 and demand outstripped supply on record population growth. Residential property prices rose an annual 41 percent in June, up from 40 percent in May, according to Al Mal Capital PSC, a United Arab Emirates-based investment bank.

"Off-plan property prices cannot be fully justified by the positive fundamentals," said analysts, including Marios Maratheftis, Standard Chartered's head of research for the Middle East, in the note. "There are signs of excessive short- term speculative activity which is based on leverage and can prove to be destabilizing."

The Dubai government can penalize short-term speculators without affecting long-term investors by "changing the payment structures and taxing properties that are being bought and sold within a period of 12 months," said Maratheftis in the report.

Source: Bloomberg