Dubai stocks saw their sharpest drop in six months yesterday, as Abu Dhabi-based property developers slumped by up to seven per cent and foreign investors dumped portfolios across the region. Falling oil prices, rising borrowing costs and fears of a drop in house prices contributed to the sense of gloom in the Emirates. "The real estate still seems to scare people," said Deepak Tolani, an analyst at Al Mal Capital. "But I think it's a temporary thing, I think people will come back and start looking at the low values." The Dubai Financial Market Index fell nearly three per cent, its biggest one-day drop in six months, to close at 5,094.56 points. It has lost 14 per cent of its value since the start of the year. Abu Dhabi's benchmark index fell 2.55 per cent to 4,652.42 points, a level last seen at the end of January. The index is up two per cent this year. Morgan Stanley published a report last week saying that Dubai's booming property market could experience a 10 per cent drop in value by 2010. Abu Dhabi property developers, as well as banks such as First Gulf Bank, which are significantly exposed in that market, saw heavy selling. Dubai Islamic Bank and National Bank of Abu Dhabi were marked down by 3.64 per cent and 1.97 per cent, respectively. Some analysts believe that fear and caution is spreading to the Gulf in the wake of the financial crisis emanating from the US housing collapse. Oil prices, which form the backbone of the economy but have limited direct impact on most listed company earnings, have fallen nearly 20 per cent in a month. Udo Schaeberle, a director at the Abu Dhabi branch of BHF Bank, a German wealth management company, said the company recently pulled out 20 per cent of its US$650 million (Dh2.3 billion) investments in GCC markets because investors in Europe and elsewhere were jittery about the Gulf. "[Investors] see a correlation between the boom year and oil prices, and if they run through their global portfolio seeing oil prices going down, they go position by position," Mr Schaeberle said. "Plus the sophisticated investor knows that during the summer months usually nothing moves up - if they see opportunities elsewhere they'll go elsewhere and they might be back as soon as the market is back up again, which they believe to be the case in Ramadan, or after Ramadan." Investors in Europe, he said, had been asking about the soundness of construction companies since the Morgan Stanley report, and some had simply pulled out of the sector. Arabtec Holding, the only listed builder in Abu Dhabi, dropped 9.91 per cent to Dh15.45. The company's stock has tripled in the past year and half and its sell-off indicated investors' desire to take profits. Aldar Properties fell by 7.39 per cent to Dh10.65 and Sorouh Real Estate declined 6.42 per cent to Dh7.87. First Gulf Bank fell 8.47 per cent to Dh23.25. In Dubai, Emaar Properties and Emirates NBD led the decline, falling 3.83 per cent and 3.36 per cent, respectively. @Email:mjalili@thenational.ae