Dredging work on Palm Deira has stopped as local developer Nakheel scales back its work on the world’s largest man-made island amid growing concerns over the impact the credit crunch will have on Dubai.

The order to stop work is the clearest sign yet that the global financial crisis is having a major impact on Dubai’s real estate sector.

Contractors for Nakheel are thought to have been instructed to stop dredging and reclamation work on the outer sections of the island immediately, as uncertainty over the project’s economic viability grows.

“Dredging contractors working on Palm Deira have been told to stop work,” one source close to the project tells MEED.

“They are now looking for work on other projects in the area.”

Instead of working on new sections of the island, Nakheel is concentrating on completing the sections of the development closest to the shore that can be completed and sold in the near future.

“We are directing work to complete reclamation in areas closest to the shore, so that once these areas are complete we can undertake progressive land sales and development,” says a Nakheel spokesman.

“This is in keeping with Nakheel’s business model, and is a very responsible approach in line with current global economic conditions.”

According to sources close to the project, the dredging and reclamation works are being executed as two packages.

One involves the Deira Corniche, which includes Deira island and several other islands close to shore.

The other involves the reclamation of Palm Deira further out to sea. It is understood that work has stopped on the second package.

Van Oord of the Netherlands was awarded the dredging and reclamation contract for both sections, winning the Deira Corniche contract in 2003, followed by the Palm Deira contract in November 2005.

The project called for the dredging of 1 billion cubic metres of sand and the placing of 40 million tonnes of rock over an eight-year period.

At the time, it was estimated that the project was worth $2.9bn and would require about half of the world’s dredging fleet to complete the works.

Van Oord declined to comment on the status of work on Palm Deira.

Launched in late 2004, the Palm Deira project is the largest of the three palm island archipelagoes planned for Dubai.

It involves the creation of a series of islands that, when completed, were expected to house more than 1 million people.

“Palm Deira will be the largest man-made island in the world, covering 4,250 hectares and adding 226 kilometres to the coastline of Dubai,” says the Nakheel spokesman.

“It is a project that is vast in both ambition and scale. More than 800 workers are currently on site reclaiming 200,000 cubic metres of sand, 45,000 tonnes of rock by sea and 20,000 tonnes of rock by land a day.”

In 2007, Nakheel radically changed the design of Palm Deira to increase the island’s land area and reduce costs.

The savings were made by shortening the length of the island from more than 14 kilometres to 12.5km.

The order to stop work demonstrates how volatile Dubai’s project market has become as confidence in the real estate sector diminishes.

At the Cityscape trade show in Dubai in early October, Dubai government-controlled developers remained optimistic that projects would not be affected by the global economic turmoil and launched two major projects with a total value of more than $133bn.

One of these was the $38bn Nakheel Harbour & Tower, which the developer launched on 5 October and was previously known as Al-Burj.

One of its most ambitious projects to date, the centrepiece of the development will be a 1.4km-high tower, which, when completed, will be the tallest building in the world.

The current tallest building is the Burj Dubai, which is due to be completed in 2009, with an expected final height of about 815 metres.

Despite developer optimism, there are growing concerns that Dubai will not be able to fund all the projects it has planned.

Credit ratings agency Moody’s Investors Service says Dubai’s government has $47bn in liabilities through government-related companies, more than its entire annual gross domestic product, and its liabilities are expected to grow faster than its economy over the coming five years.

In that time, the emirate will be most vulnerable to a slowdown in economic growth or other shocks, such as a collapse of the real estate market.

Dubai’s economy is dominated by government-owned companies and groups such as Dubai Holding, Investment Corporation of Dubai and Dubai World - the parent company of Palm Deira developer Nakheel.

Moody’s says it expects Abu Dhabi to assist its neighbour in the event of any difficulties at Dubai government firms.

The UAE economy is heavily dependent on the real estate sector. According to Gulf projects tracker MEED Projects, more than $1 trillion worth of construction projects are planned or under way in the UAE.

The majority of these are in Dubai and are real estate-related. Nakheel alone has more than $100bn worth of projects under development in the emirate.