Agreed prices in the UAE rose 4 percent month-on-month in April and 5 percent in May, but were still 23 down from a peak hit in September 2008, the report said.

The once-booming real estate market in Dubai, one of the UAE's seven emirates, has been hit particularly hard by the global financial crisis, as prices tumble, developers cancel projects and jobs are slashed.

Any recovery in the country's property market would go some way to easing investors' concerns about the health of the second-largest economy in the Gulf Arab region. But the extreme boom-bust characteristics of Dubai's property market, in particular, may keep some investors at bay until at least 2011.

"The distressed stock is gradually clearing due to renewed interest as well as some sellers re-pricing, pulling their properties off the market, or putting them up for lease," HSBC said.

"Sentiment seems to be improving and sellers are now less willing to negotiate."

Advertised prices in Dubai rose 3 percent month-on-month in April and fell 1 percent in May, while prices in Abu Dhabi were up 2 percent and 7 percent for both months respectively.

Liquidity was starting to return to the market as mortgage providers raised their loan-to-value ratios and eased credit conditions, the report said.

In addition, mortgage rates were coming down as EIBOR (Emirates Interbank Offered Rate) continued to edge lower, while deposit rates were also declining. Rental yields were also still attractive, the bank said, adding that volumes were "robust".

"Foreign investors also seem to be back in the market and the majority of transactions are being conducted in cash," it said.

But the bank warned volumes could fall with the approaching summer, and, with the school year coming to an end in June and more supply coming on the market, there could be renewed price weakness.

Slumping demand would drag residential real estate prices in Dubai down between 50 and 60 percent this year from their 2008 peaks, Egyptian bank EFG-Hermes said earlier this month. The market is unlikely to recover before some time in 2011, it said.

HSBC said that while the long-term prospects for Abu Dhabi's Aldar Properties ALDR.AD remained "favourable", its preferred exposure was now Dubai's Emaar Properties EMAR.DU.

"Considering liquidity concerns are now subdued, improving property market fundamentals, and solid Q1 performance, we feel that Emaar's performance should be more in line with that of Aldar," the report said.

Average prices for apartments in Abu Dhabi have fallen by as much as 10 percent since the end of the first quarter, while villa prices have remained stable, property consultancy Landmark Advisory said in a separate report on Sunday.

Source: Reuters