Dubai's real estate market prices are likely to face a double-double-digit fall in the second half of the year and in 2026, ratings agency Fitch said in a report on Thursday, marking a sharp turn after years of a post-pandemic boom.

A spike in deliveries in 2025 and 2026 to a planned 210,000 units, doubling from the previous three years, is likely to cause a record increase in supply and push prices down by no more than 15%, the agency said.

The possible drop would follow a rise of around 60% in residential units prices between 2022 and the first quarter of this year in Dubai, where massive infrastructure spending, generous income tax policies and relaxed social and visa rules lured thousands of foreigners after the COVID-19 pandemic, including Russians amid war in Ukraine.

Real estate plays a vital role for the economy of the emirate, the Gulf's hub for business and tourism, with sector transactions worth 761 billion dirhams ($207.22 billion) last year, rising 36% in volume, according to Dubai government data.

In the past, Dubai suffered painful corrections akin to the property crash in 2009 which required a $20 billion Abu Dhabi-led bailout.

The government has since taken measures to deleverage and strengthen the sector, and consolidated major state-owned real estate developers.

It has also pursued an economic reboot anchored in what it hopes is sustainable growth, including a 10-year plan known as D33, to double output and become one of the world's top four financial centres.

Fitch said on Thursday that banks and homebuilders can tolerate a decrease in prices.

It noted that while real estate remains the largest component in UAE banks' lending books, banking sector exposure to firms operating in real estate had dropped to 14% of total gross loans at end of last year from 20% three years earlier.

The attractiveness of properties in prime locations, which include palm tree-shaped artificial island Palm Jumeirah, together with delays in project completion would also help mitigate pricing pressure.

($1 = 3.6724 UAE dirham)

(Reporting by Federico Maccioni, editing by Chizu Nomiyama )