There is a sizeable increase in the number of property owners in an urgent state to sell," Robert Macnair, sales director of Dubai-based Elysian Real Estate, told Reuters on Thursday.

Global Property Guide cut its long-term investment rating on Dubai residential property on Wednesday from neutral to negative due to the drop in gross rental yields from last year.

"Gross yields are now an average of 5.5 percent, significantly down from an average of 7.5 percent a year ago ... At these levels, Dubai is less attractive than it was previously as an investment property," it said in a research note.

Global Property Guide said Dubai has "an enormous" amount of new supply and expects prices to fall over the next 2-3 years.

To compound matters, Dubai Islamic mortgage lender Amlak AMLK.DU said on Wednesday it suspended new loans.

Reuters Analysis:

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

The economic concerns come as the world’s biggest man-made island, which is created in the shape of a date palm, prepares to throw a $20m extravaganza for today’s launch of the £1bn Atlantis hotel on the Palm.

More than 2,000 world celebrities are due to attend the event tonight including Oprah Winfrey and actors Robert De Niro and Denzel Washington. Sol Kerzner, the South African billionnaire owner of the Atlantis is organizing the launch party.

A four-bedroom villa on the Palm, which is run by the state-owned developers Nakheel, is now selling for 10 million UAE dirhams (£1.8m), down from 15 million dirhams in September, Dubai-based property consultants Engel & Volkers told Reuters.

When work started on the Palm in 2001, the villas were snapped up for as much as £5m each and sold to buyers including footballer David Beckham and racing driver Michael Schumacher. In the following hype surrounding the island, nearly a quarter of the villas were sold to British buyers.

Nakheel said earlier this week it has witnessed a slowdown in the rate of real estate sales. Last month the developer announced it had scaled back dredging work on its massive Palm Deira project, the largest of three palm archipelagos that is planned to house more than 1 million people.

Meanwhile buyers are struggling to get mortgage loans in the region. Dubai Islamic mortgage lender Amlak told Reuters today it had suspended new mortgage loans as Dubai’s real estate sector shows further signs of stress.

Dubai-based Elysian Real Estate this week sent out a text message to up to 40,000 mobile phones advertising distressed property sales, offering a luxury six bedroom, six bathroom villa in Dubailand, a multi-billion-dollar luxury theme park.

The Palm is the flagship part of Dubai’s ambitious ‘Universe’ development. The Universe will extend Dubai’s coastline to around 625 miles (calculated by measuring the coastal circumferences of the various manmade archipelagos), around 15 times its natural 43 miles.