"The maze of narrow alleys and dingy, cobblestone streets that surrounds the red-light district in Hamburg, Germany, has been attracting revellers for years. Lined with dozens of sex shops, strip clubs and prostitutes preening behind windows, the gritty area known as the Reeperbahn is as popular as the Michelin-starred restaurants and upscale boutiques that encircle the Alster, the centuries-old lake at the centre of this affluent port city.

Despite its notorious reputation, however, the Reeperbahn is gaining some unexpected new residents. As property values have risen sharply in Hamburg during the past decade, smart residential buildings have increasingly crowded the area. The latest addition is the Bavaria, a 28,000-sq metre complex that includes dozens of luxury residences with panoramic views of the city, and a boutique hotel designed by architect David Chipperfield.

"There was a time when real estate developers would not have considered building in an area with this kind of reputation," says Nina Riedel, a managing partner at Engel & Voelkers, a Hamburg-based property firm. "Now we see more and more of them doing it and I really don't believe it will stop any time soon."

Hamburg is not alone. Across Europe and around the world, soaring land prices and increasing demand for luxury living are fuelling a building boom on skid row. Despite a global economic downturn that has pummelled many new condominium projects and erratic global financial markets that have spooked wealthy home buyers, developers' appetites for building in areas long associated with adult entertainment have not waned.

"It's not at all surprising to see developers targeting these areas," says Eric Damian Kelly, an American land-use attorney who has authored several studies on gentrifying adult entertainment zones and other low- income areas. "Particularly in older cities in Europe and Asia, [the red-light district] is where you often find many historic buildings and architectural landmarks and that's a very attractive selling point to builders and investors."

Amsterdam's infamous red-light district - a 700-year-old area packed with sex shops, prostitutes and legalised marijuana use - is in the midst of an ambitious city-funded gentrification plan that is calling for the sale of broad swathes of the area to developers. Last year one paid €25m for 18 low-rise buildings in the area and plans to convert them into residences, according to Amsterdam deputy mayor Lodewijk Asscher.

There are more than 140 brothels in Amsterdam's sexual services hub, with 500 display windows for prostitutes, according to city statistics. Sexual transactions yield about €100m per year, according to a spokeswoman at Amsterdam's mayor's office. City planners estimate the value of real estate in the area - which has seven medieval churches and hundreds of historic buildings - at tens of millions of euros.

The red-light district in Madrid is being revamped, too. Prostitutes and drug dealers have long prowled the city's Malasana neighborhood, a patchwork of narrow streets, plazas and old churches. Now several pro-business groups are pressurising the city to forge ahead with redevelopment plans. One group, AcTriball, has spent the past year buying up property in the district with plans to turn old brothels and abandoned terraced housing into apartments and trendy boutiques.

And rocketing land prices in Hong Kong are increasingly making that city's notorious Wan Chai neighbourhood attractive to property developers, say real estate observers there. Several have already begun pumping tens of millions of dollars into acquiring land, including Hopewell Holdings, which is led by Asian property tycoon Sir Gordon Wu. The firm has submitted plans to build two 60storey residential towers not far from where striptease establishments once held ground.

"Home prices in the district have risen about 40 per cent in just the past year and a half," says Tony Chan, executive director of Vigers Appraisal and Consulting in Hong Kong. He explains that the drive to convert portions of the city's red-light district into a residential hub began a few years ago but that the pace of investment is accelerating, prompting Centaline Property and Midland Realty, two of the biggest agencies in Hong Kong, to open six branches there. "When one or two well-regarded developers go into areas like this, buyers and brokers begin recognising its potential," Chan says.

Gentrifying gritty urban areas is nothing new, of course. Times Square in New York City, and Las Vegas, Nevada, spent decades infested by high crime, drugs, and prostitution until ambitious redevelopment plans took hold. London's Notting Hill was a poor, troubled city district with racial tensions some 20 years ago. Today it's one of London's - and Europe's - priciest areas for real estate. And the city's King's Cross area is also shaking off its down-at-heel, seedy image as a large regeneration initiative progresses.

What is different today, property experts say, is that in spite of a push in many places for affordable housing, almost all of the new residential projects crowding these shady districts target high-end property shoppers. "In years past you had a much wider distribution of property prices when developers ventured into undesirable areas," says Michael Ball, a professor of real estate at Reading University in England, who advises the UK government. He says an unprecedented rise in land prices throughout the past decade has left developers struggling to find buildable plots in many expensive world capitals. "Property developers see financial opportunity in these areas so they invest with the idea of actually getting a better than expected return on their money."

In Hamburg, a group of investors led by German property magnet Wilhelm Bartels paid more than €350m for the land rights to build the Bavaria complex. The price - once unthinkable for that area - is thought to be one of the highest ever paid for land in the port city.

The project is attracting other expensive new investment to the area. Not far from the Bavaria is the Atlantic Haus, a 21-storey tower that will house residences, office and retail space when it is completed next year. The development group - Quantum Immobilien AG and HSH Nordbank Real Estate - paid more than €100m for the 34,000-sq metre site two years ago. The recently completed -Bergedorf-Bille building nearby, designed by noted Hamburg architects Jan Strömer and Jörg Friedrich, has 130 apartments. And "Wohnen in der Hopfenstrasse", another development project, has a capital investment volume of €35m.

"The aggressive escalation of investment in these areas is a considerable shift for developers," says Ketan Mistry, a London-based analyst in European real estate for Deutsche Asset Management at Deutsche Bank. "They are beginning to see an opportunity and trying hard to exploit it."

But rising investment in red-light districts is leading to protests, and in some cases lawsuits, by long-time residents and citizens' groups. They complain that new schemes are driving up real estate values and rents. Critics also charge that some developers have little regard for preserving the neighborhood's architectural integrity.

In Amsterdam, neighbours and landlordsare forming action groups to fend off construction companies. Part of their campaign calls for putting posters that read "Hands Off" in cafe and shop windows.

In Hong Kong, Wan Chai district councillor Steve Chan is backing residents in a fight against several projects, which he says are too ambitious. Chan petitioned the city to limit the scope of new construction in the district, ultimately forcing Hopewell Holdings to alter its original twin-tower design.

Some of those who live in Frankfurt's red- light district are attempting to file legal action in German courts to try and halt the flood of new development there. "We are being pushed from our homes," says Walter Shoenfeld, a 58-year-old attorney and long-time resident of the Bahnhofsviertel district, a blighted block of streets near the city's main railway station. "[The developers] don't care about the integrity of the area or its people," says Schoenfeld.

In Hamburg, Lilian Ronn, a prostitute and veteran of 15 years working the streets, bemoans the arrival of new property projects, too. She says new hotels and luxury residences will only serve to alter the cultural fabric of the area, pushing rents higher and chasing her most loyal customers away. "Clients who come to us don't come here for expensive hotels and houses," she says. "There are very few brothels here that attract wealthy men so these new buildings will be out of place and probably hurt our business."

But acrimonious protests in some places have done little to deter buyers. Marion Serverias says she has watched property prices escalate in the past two years in Madrid's Malasana district. The area has traditionally been unattractive to developers, who have focused gentrification efforts on trendier parts of the city, but Serverias says she ecently purchased a two-bedroom apartment in a renovated 18th-century town house after watching numerous apartment projects spring up in the district. "Just a few years ago the place I bought was abandoned," she says. "The area is changing fast and I really felt that if I waited longer to buy something I'd probably be priced out of the area."

Despite attempts to gentrify red-light districts, real estate professionals also warn that buying in untested areas could leave homeowners struggling to unload their property when it's time to sell. "A red-light district may seem trendy now but what happens in a few years when home prices don't appreciate?" asks Shinjuku Ward, an independent analyst and former estate agent in Tokyo.

Ward says that a few years ago several developers stormed Tokyo's Kabukicho adult entertainment district. City officials at the time boasted of completely changing the district's gritty image along the lines of New York's success with Times Square. But property values in Kabukicho have stagnated amid sluggish demand and oversupply, says Ward. "Buyers wanted to get in on the ground floor of these projects but today I think some of them are worried about their investments."" (Troy McMullen, Financial Times, August 9, 2008)