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Sitting in his ramallah office, Bashar Masri, the managing director of Bayti Real Estate Investment Co., watches the construction of the first planned city in Palestinian history — which is going on 9 km away — in real time on multiple split screens on his computer. On one screen, a water truck circles an area marked by rolling hills, while on another, bulldozers and other heavy equipment carve huge blocks out of the rocky slopes. Despite the political obstacles, quite a bit of progress is already visible on this massive site under excavation in the West Bank. Since January 2010, new roads have been opened and concrete foundations have been set. When construction is complete, this craggy stretch of land 32 km north of Jerusalem will be transformed into a modern, 40,000-person metropolis called Rawabi. "There is a lot of risk in a project like this," the man behind the ambitious undertaking says, in what can only be described as a huge understatement.

Indeed, Masri is navigating uncharted territory. At $850 million, Rawabi (which means hills in Arabic) is both the largest construction project and the largest private foreign investment ever made in the Palestinian territories. And given that it aims to do something rarely done in the Arab world — namely, provide affordable, desirable middle-class housing in a region where the wealth gap has led to conflict and revolution — it is being watched quite carefully at home and abroad.

Designed under a master plan by the global architecture, engineering and urban-planning firm AECOM in conjunction with experts from the Palestinian universities Birzeit and An-Najah, Rawabi represents a marked departure from the traffic-clogged, haphazard urban sprawl of most other West Bank cities. Spread across 23 neighborhoods, Rawabi is being constructed as a high-tech, environmentally sustainable city of gleaming mid-rise buildings, public parks, cafés and shopping areas, with designated residential and commercial zones. It will feature a business district as well as a cultural center, an amphitheater, schools, mosques, churches and hospitals.

Rawabi will be a sleek, wired city, something almost unheard of in the West Bank. But more important, Rawabi is geared specifically to a woefully underserved sector: college-educated, young professionals who have long been priced out of the housing market. By building large-scale, affordable housing, Masri believes he is creating an instrument to develop a fledgling middle class in a society that has traditionally straddled two economic tiers: rich and poor. Homes range from million-dollar mansions (mostly unattainable in an area with a per capita income of $1,554) to sometimes poorly made, albeit cheap flats, a situation that has long forced multiple generations and extended families to live under one crowded roof.

The units in Rawabi are expected to cost $65,000 to $100,000 — 25% to 40% less than homes in the surrounding area. "The Arab world has long catered to the rich," says Masri, who was born in the northern West Bank city of Nablus and lived for a time in Egypt. "It has ignored the majority, which is poor or middle income. This isn't rocket science. Homeownership is one of the most important issues for a young family to feel stable and secure."

Clearly, Masri is onto something. Although the first 1,000 units in Rawabi are not set to be finished for another two years, more than 7,000 applicants have registered on the development's website to purchase apartments.

Eight months ago, Salah Abu Ein, 24, the manager of a retail store in Ramallah, registered for an apartment in Rawabi. Engaged to be married and studying for his M.B.A. at al-Quds University, Abu Ein is typical of the growing ranks of educated workers who have had few options when it came to purchasing power. He is also emblematic of the cultural shift of his generation of Palestinians, who no longer want to live in the traditional extended-family setup, preferring to raise nuclear families on their own. "When I get married, I want my own place," he says. "Rawabi is a safe place for me and my future children."

It's notable that homeownership is becoming such a priority in the Arab world at the very time that it's coming under fire in the U.S. and other rich countries, where it is often seen as the prime driver behind the financial crisis. While this may seem like a contradiction, it's not. In the past few years, homeownership rates in parts of the U.S. and Europe surpassed historical highs (many economists would like to see them lower in the coming years), while in the Arab world, they have plenty of room to grow. Currently, housing shortages are at a critical point; the World Bank estimates that unmet demand in the West Bank and Gaza will hit 400,000 to 450,000 units in the next 10 years. The situation is similar in many other parts of the Middle East. This month Saudi Arabia's King Abdullah pledged to spend $15 billion on housing in the kingdom to help satisfy pent-up demand (and mitigate one point of strife that has fired up the region). If successful, Rawabi offers a broader template for other cities in the West Bank and Gaza and eventually the rest of the Arab world.

Unlike his target customers, Masri grew up in comfort. His family is one of the largest, most prominent and wealthiest in the West Bank, with far-flung interests in real estate, communications and finance. Masri's father was a doctor; one of his cousins, the billionaire entrepreneur Munib al-Masri, is often referred to as the Palestinian Rothschild.

It was while living in Washington, after earning a degree in chemical engineering at Virginia Tech, that Masri says he came to understand how homeownership can be a path to asset building. "The first thing I did when I saved $5,000 was to buy a house for $99,000. I was able to do that because the system allowed you to do that if you had a job," he says. "In Palestine, the system has not allowed you to do that. That is changing. We want young working people to be able to have that opportunity. One year after I bought my house, it was worth $140,000, and after five years, $250,000."

When Masri returned to the West Bank (he still owns a home in Falls Church, Va.) in 1995, he tapped into the family's business and launched Massar International, a real-estate-development, financial-services and consulting firm with subsidiaries across the Middle East (Masri, through Massar, is investing some $25 million in Rawabi). He says the idea for the city clicked when he considered his employees. While his workers earned an average of $1,900 a month, just 10% owned their home. Traditionally, those wishing to buy a house in the West Bank generally had to pay a large sum of cash up front or take out a short-term, adjustable, high-interest-rate personal loan — a situation that along with high property values has priced out an estimated 85% of the population.

Rawabi will circumvent those issues by linking to the recently established $500 million affordable long-term home-mortgage program known by the acronym AMAL. Something like a Fannie Mae program, AMAL was launched last June by the Palestinian Authority in tandem with a group of partners, including the U.S.-backed nonprofit Middle East Investment Initiative (MEII) and the Overseas Private Investment Corp. (OPIC). "With the housing sector, you get a real bang for your [development] buck," says MEII's Washington-based president, James Pickup. "When people can afford homes and they have jobs, that leads to stability. Look at what happened in Tunisia and Egypt. The driving force behind all that is that people wanted an economic future, and these efforts combined help to deliver that."

Indeed, the development is expected to create up to 10,000 jobs related to construction and produce an additional 3,000 to 5,000 in banking, communications and IT — a not inconsiderable boon given that the West Bank (pop. about 2.5 million) currently has a 16% unemployment rate. "The housing sector plays a big role in economies," says Rami Khoury, a banking specialist with CHF International in Ramallah. "I do see that if all the pieces come together, this will probably be an important contributor to economic development in the Palestinian territories."

Rawabi fits in well with the Palestinian Authority's recent strategy of institution building: attracting foreign investment as a cornerstone of a future state while weaning the Palestinian economy from its foreign-donor dependency. Qatari Diar, the real estate arm of the Qatari government, is financing Rawabi. It is hoped this will open the door to more outside investors. "Qatari Diar's investment represents a true development milestone for the West Bank specifically and for the Palestinian economy as a whole," says Ghanim bin Saad al Saad, CEO of Qatari Diar.

While Rawabi has been enthusiastically received among Palestinians and the international community, the project has not been without hurdles. About 8% of Rawabi exists in what is known as Area C, a portion of the West Bank that remains under Israeli military and civil control. Requests to build an access road and apply for water rights remain in political-bureaucratic limbo. Initial plans to create a similar development in Gaza were scrapped after the split between Hamas, which took control of Gaza in 2006, and Fatah, which rules the West Bank, and the subsequent Gaza closure. Earlier this year, Israeli settlers in the West Bank made things difficult for Rawabi, protesting Israeli companies, including vendors and suppliers, that have contracted to work on the development and threatening them with boycott. (For his part, Masri has required Israeli suppliers to sign an agreement to follow the Palestinian Authority's boycott of goods from the Jewish settlements.)

But a number of other Israelis, including Prime Minister Benjamin Netanyahu, have publicly supported the kind of progressive development that Rawabi represents, with Netanyahu praising what he has called "an economic peace" with the Palestinians. Writing in the newspaper Haaretz, Israeli commentator Ari Shavit said of Rawabi, "There is now a real opportunity in the West Bank. We must not miss it."

As the bulldozers cut across the empty hilltops, Masri says he remains optimistic. "To live in this part of the world, you have to keep on moving. I am putting facts on the ground, and that pushes the politicians to do more." As Masri works to remove any remaining roadblocks, his team is sifting through the financials of Rawabi's applicants. There are thousands of people pinning their hopes on Rawabi. "I know this is the right thing to do," says Masri. "Look at the demand. If I began selling units right now, I'd already be sold out." With any luck, his boon will also become the West Bank's.

• Stacy Perman / Ramallah
• Can the West Bank's first planned community help build a new middle class in the Middle East?