Nakheel’s decision to scale back work on Palm Deira, one of the most iconic projects planned for Dubai, is another heavy blow to the confidence of the emirate’s newly fragile real estate market.

After months of promoting itself as an economic safe haven amid the global financial turmoil, the emirate is now firmly caught up in the effects of the credit crunch.

The speed with which the financial malaise has hit the emirate has surprised many. In two short months, the market has descended from a position of impregnable self-assurance to one where confidence has almost disappeared.

And more bad news is on the horizon. Privately, contractors in the market say that Palm Deira is just the first of a series of projects that will be scaled back, postponed, delayed or even cancelled as developers face up to the difficulty of financing their projects.

In the past, development in Dubai has required little capital to be offered up-front. Instead of investing their own money, clients have been able to rely on cheap and easy finance from banks and off-plan sales to investors to fund their projects.

Today that model simply does not work. Banks are running scared of further exposure to real estate projects and sales are expected to dip as buyers become increasingly uncertain.

The obvious solution would be for the Dubai government to step in and prop up the market, but with its own entities already heavily indebted, its options are limited. If it becomes clear over the coming months that the -government is unable or unwilling to finance the projects itself, many of its dreams will fail to be realised.

The suspension of work until conditions settle down is a sensible alternative strategy. While doubts will inevitably be raised over how many delayed projects will be revived, the prospect of completed but empty mega-projects would harm confidence in Dubai’s market even further.