DUBAI: Growth in real estate demand in Dubai has been due to an improving economy, not speculation, the emirate’s Land Department said after the central bank warned that the property market might be overheating.

“Growth in demand from investors is a result of an improvement in fundamental economic factors, rather than down to speculation,” Dubai Land Department Director General Sultan Butti bin Mejren said in a statement.

He also said Dubai’s doubling of the fee it charges on property transactions to 4 percent last year was helping to stop speculators.

Mejren did not comment directly on whether his department, which oversees the real estate market, might take fresh steps to cool demand. But his remarks indicated he was broadly satisfied with the current situation.

He said the UAE’s success in attracting businesses to invest depended partly on having low costs.

“Dubai has become a global player and therefore fees for providing services have to be on a par with the city’s growth and development,” he said.

The UAE central bank warned earlier that low residential rental yields in Dubai and Abu Dhabi might indicate growing imbalances and overheating in the real estate sector. It was the first official warning about soaring property prices.

The International Monetary Fund warned recently that Dubai might need stronger tools, such as higher fees or taxes, to rein in real estate speculation.

Residential rental yields in Dubai and Abu Dhabi could indicate growing imbalances and overheating in the country’s real estate sector, the central bank said.

“Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances ñ overheating real estate market,” it said in an annual financial stability report.

“Monitoring development in the UAE real estate markets and the banks’ exposure to it remains a core financial stability priority,” it added.

House prices in Dubai, which suffered a property market crash in 2008, topped the global rankings in January-March for the fourth consecutive quarter, soaring 27.7 percent from a year ago, a report by Knight Frank property consultancy said.

At the same time, rents surged 30 percent on average but have doubled in some of the emirate’s popular residential areas, nearing record highs.

In contrast to the months preceding the UAE’s 2008 property crisis, the current property market recovery is not marked by rapid credit growth, the central bank also said, adding that banks’ exposure to the sector totaled 287 billion dirhams ($78.1 billion), or less than 23 percent of overall loans.

Real estate-related lending accelerated slightly in 2013, with the growth rate above 10 percent or one percentage point higher than overall loan book growth, the report said.

Bank finance for the purchase of residential property increased 12 percent in 2013 or by 12.7 billion dirhams, the central bank said, adding that bank lending was not a significant driver of real estate prices.

“While this indicates that banks were increasingly participating in financing the real estate recovery, the funds provided by the banking sector were only enough to finance the purchase of less than 30 percent of the residential properties that were completed in 2013,” the central bank said.

“Analyzes of banking data support the hypothesis that the current market recovery is mostly driven by equity buyers and/or reliance on external funding sources.”

The central bank also said it planned to introduce new rules on liquidity and begin consulting with banks on a new capital regime in line with the Basel III framework in the second half of 2014. Basel III global banking standards will be introduced around the world over the next several years.

The UAE’s new rules on capital would include requirements for enhanced capital, the application of a new leverage ratio and a shift in definition of capital which places greater emphasis on paid-up capital, retained earnings and disclosed reserves.

The report also said the UAE’s financial system could grow faster without creating major imbalances in the system and that there was currently no build-up of vulnerabilities in the banking system.