New Songdo City: Atlantis of the Far East

Take a man-made island, roughly twice the size of Hampstead Heath. Fill it with state-of-the-art schools, hospitals, apartments, office buildings and high-end cultural amenities. Import architectural features from around the world, including New York's Central Park and Venice's canals, make English the lingua franca, and hang a sign at the gates that says: "Welcome: we will change the face of business."

Attempting a mammoth project like that would be a risky venture at the best of times, let alone in the middle of Asia's worst business slump since the Second World War, and when tensions with a volatile neighbour are reaching fever pitch. Putting it mostly in the hands of a single, largely untested, US firm and financing it with recycled real-estate profits sounds like an act of lunacy. Yet this is what is happening in South Korea and strangely, it appears to be working.

Built on 1,500 acres of land reclaimed from the Yellow Sea off Incheon, about 35 miles from the South's capital Seoul, New Songdo City is billed as the largest private real estate development in history – Korea's answer to Shanghai and Dubai. Five years ago, it barely even existed on a map.

By its completion date in 2015, Korea says this speck of strategically placed foggy flatland will be the world's gateway to north-east Asia – a free economic zone with 80,000 apartments, 50 million square feet of office space and 10 million square feet of retail.

That only scratches the shiny surface of Songdo's ambition. The city aims to do nothing less than banish the problems created by modern urban life. The city's publicity blurbs claim Asian business capitals are "racked" by environmental damage, undereducated workforces and a lack of available space. "It would seem a city that enjoys clean air... and a superior quality of life just doesn't exist anymore." Sondgo solves that problem by building from the ground up, providing "everything one could possibly want, need and dream of in a world-class city."

So forget Asia's choking metropolises, 40 per cent of Songdo is officially designated "green," including the centrepiece 100-acre park. The city's main car depot has been buried in a sunken courtyard to keep heat and emissions down. A sleek new public transport system including underground trains linked to Seoul and a network of electric water taxis in the city's salt-water canals will help make this one of the cleanest urban areas on the planet.

It all sounds too good to be true, and perhaps it is. But for now, New York-based real estate company Gale International – fronted by multimillionaire developer John B. Hynes – in partnership with Korean steel-making giant, Posco, is having little trouble selling the dream. Last month, some 45,000 people visited model homes for five new apartment complexes in a single weekend. Songdo's first block of 2,600 apartments were over-subscribed by about 8-1 when they went up for grabs in 2006. Another 1,000 will come on to the market this year and despite the sour economic data pouring out of Asia, Gale sees little difficulty in offloading them. "Koreans believe in this project," says British-born David Moore of Gale's project management team, "they view this as an investment in the future".

Others apparently agree: Sheraton is due to open a new 319-bedroom hotel on 1 August, golfing legend Jack Nicklaus is overseeing the construction of an 18-hole 7,300-yard championship course; and in April this year, US tech multinational Cisco Systems signed a multibillion-dollar deal to provide network technologies to the new city.

Like most grandiose schemes, Songdo is suspended above a featherbed of confidence, and debt. Gale has gone billions into the red to build its state-of-the-art showcase. The 65-floor Northeast Asia Trade Tower, which will be Korea's tallest building when complete, has been re-financed, and main lender Shinhan Bank, in the words of one insider, "shuddered" when the global economic crisis hit Korea.

Rumours that the project could be in trouble, unable to secure loans from banks that have grown newly stingy, forced Incheon's famously gung-ho Mayor Ahn Sang-soo on the defensive last month. "The current global economic crisis won't deter us," he said.

With global investors becoming more selective, Mayor Ahn and Gale believe Songdo will shine even brighter among the charred wreckage of failed real estate ventures. "It's different from any other project because we've maintained real quality," says Mr Moore. "That's why people are still buying into it."

Few doubt the quality. Most components of the city, from the 470,000 square foot international school to Songdo's $155m (£94m) Convention Centre, which opened last October, are state of the art. The school, affiliated with the prestigious US-based Milton Academy, has facilities to rival most universities, including a 650-seat theatre, swimming pool and a TV studio in the basement connected to the internet so students will be able to broadcast around the planet. "They've spared nothing," says the school's head Jorge Nelson. "It is probably the most advanced school in the world."

Computers will be built into the houses, streets and offices as part of a "ubiquitous" network linking everyone in a sort of digital commune. Lead architect, US firm Kohn Pedersen Fox calls it "the project of a lifetime".

But many wonder if the mostly privately financed project, variously estimated at $20bn to $40bn, will continue to defy economic gravity. An earlier blueprint crashed and burned after the 1997-98 financial crisis before Incheon was reborn as a free economic zone in 2001. The venture has the crucial backing of the state, which is underwriting the city's infrastructure, including the high-speed rail system that will ferry people to and from Seoul and the new Incheon International Airport. A 12.3km (7.6 mile) bridge linking the airport to Songdo is almost complete. Incheon has sold off parcels of land at premium prices to Gale, Posco and other developers, attracting $9bn in foreign investment since the first brick was laid in 2004, and perhaps four times that amount in promises. The developers must keep shifting retail space and other real estate or the whole process grinds to a will halt. The first post-recession test comes this year when more apartments come up for sale.

Buying into the dream isn't cheap. An average apartment costs $500,000, with some going for twice or three times that. Fees at the International School start at $25,000 a year. Even shopping at the huge Taubaum Shopping Centre will be out of the range of many ordinary Koreans. And the history of purpose-built cities like Brasilia, Islamabad and Canberra, as opposed to those that have grown organically, is not encouraging. Songdo risks becoming a sterile urban theme park, warn some observers.

"If you live in Manhattan, why would you want to live in a new town in Long Island or somewhere like that?" wonders Jongryn Mo, a professor at Seoul's Yonsei University. But he believes Songdo will keep going despite the worsening economy.

"The government is in a big bind, and can't pull out of the project. Once you start something this big it is unstoppable. Billions have been invested. If you stop at one-third, the money is lost and the people who are already there will be angry. You have to go all the way."