Hi-tech city near Ramallah boasts cinemas, malls and homes for 40,000. But developers and investors face wrangles over water supplies as well as criticism project legitimises Israeli occupation

In the unlikely setting of the West Bank's biblical landscape, amid stony hills and valleys where sheep and goats bleat under ancient olive trees, an urban planner's dream is taking shape.

A gleaming hi-tech city, with homes for 40,000 residents, cinemas, shopping malls, schools, landscaped walkways, office blocks, a conference centre, restaurants and cafes, is rising on a crest within sight – on a clear day – of the Tel Aviv skyline.

It looks a little like a new Israeli settlement. But the billion-dollar city of Rawabi is the first planned urban centre to be built for Palestinians. And phase one of the development – 600 near-completed apartments – has just sold out, with around 8,000 potential buyers registered for homes yet to be constructed.

The level of interest reflects social and financial shifts in Palestinian society and symbolises the economic potential of a future state of Palestine. More than half of those who have signed contracts have taken out long-term mortgages and a high proportion are nuclear families in which the mother works outside the home. A small number are single women who plan to live alone, unusual in Palestinian society.

The untouched site a few miles north of Ramallah, West Bank, before the ground was broken in 2011.

A third of the $1bn (£640m) investment in Rawabi has come from the private Palestinian conglomerate Massar International, and the rest from Qatar. "The risks are extremely high," said Bashar Masri, the chief executive of Massar and the driving force behind Rawabi. "But I wanted to create an impact project, and I wanted to show we can build a great economy and create jobs."

The construction phase of the project has created 8,000-10,000 jobs – one in three workers are women – paying, at the bottom end, 30% above the Palestinian minimum wage. But the ambition is for up to 5,000 permanent jobs, mostly in the hi-tech and service industries, to be located in the offices and facilities of the new city when it is complete.

Planning for Rawabi – which means "Hills" – began five years ago, and the ground was broken in 2011. The target market was young middle-class Palestinian families living in chaotic and overcrowded West Bank cities, who would be attracted by modern, streamlined, hi-tech apartments, fabulous views and open spaces, almost every conceivable consumer and leisure facility on the doorstep – and at a price 15-20% lower than Ramallah, a few miles to the south.

Among the city's first residents will be the Khabi family, who have just made a $15,000 down payment on a three-bedroom apartment. The rest of the $102,000 total is coming from the Khabis' first mortgage.

An artist's impression of the finished Rawabi, which has created more than 8,000 construction jobs.

"It feels a bit scary," said Amal, 42, the mother of four children. She and her husband, Adel, 47, will both commute to insurance company jobs in Ramallah. "We are telling our friends to move here too," she said.

The Khabis fit the profile of the typical Rawabi homebuyer: in their early 40s, husband and wife working in the private sector, with a household income well above the average. Their parents' generation would have lived with or near members of a large extended family; these couples are opting for a more westernised, and atomised, lifestyle.

Seven percent of Rawabi homebuyers so far are single professional women; 11% are Christian (compared with 2% of the Palestinian population). A small proportion are buying as investment for rental or future resale; 4% of buyers are Palestinian expatriates. "Young, internet-savvy, educated English-speakers," was how Ramzi Jaber, Rawabi's commercial manager, described his clientele.

Around half have taken mortgages to finance their new home. The hilltop sales centre, which shows a slick 3D film of imaginary life in Rawabi and allows purchasers to choose from a range of options for bathroom and kitchen finishes, lighting and floor tiles, also houses representatives of Arab banks in glass booths offering long-term loans. "Islamic financing", in which interest payments – forbidden to Muslims – are replaced by service charges, is available.

Masri was disappointed that more would-be purchasers had not taken mortgages, saying this was the key to "the sense of security" that home-ownership gives to "all communities". A mortgage education programme was aimed at dispelling apprehension of long-term loans, especially among lower-income families.

Even so, attracting potential homebuyers for the planned 6,000 units has not been difficult; luring international companies to take office and retail space has been more problematic. Some potential takers withdrew following last November's war in Gaza, according to Masri. "We've not been successful yet," he admitted.

A major deterrent is that Rawabi is situated in territory under Israeli military occupation, a situation that has no clear prospect of changing despite the start of formal peace talks next week. Masri has sought co-operation from the Israeli authorities for the development but it took several years to get permission to build a road to the site that ran for half a kilometre through Area C, the 60% of the West Bank under total Israeli military control. Eventually a temporary permit – which requires annual renewal – was granted last year.

Water has been another huge challenge, both for construction and to service the finished buildings. Israel controls almost all water supplies; 600,000 Israeli settlers in the West Bank and East Jerusalem consume almost six times as much water as 2.7 million Palestinians.

Construction in Rawabi halts for a day or more each week because of water shortages. "I spend 70% of my time dealing with issues like these," said Masri.

He is also critical of the Palestinian Authority, which has failed to deliver on a pledge to supply Rawabi's infrastructure at a cost of $150m. Rawabi's investors have been forced to finance the provision of power, water, sewage, schools and roads, adding 10-12% to the cost of a home.

"I never envisioned that we would not have this funding with all the donor money that has come to Palestine in recent years," said Masri. "I'm disappointed that our government has not set this [project] as a priority."

Masri and the Rawabi project have not escaped criticism. The Boycott, Divestment and Sanctions campaign has accused the businessman of helping to "whitewash [Israel's] ongoing occupation, colonisation and apartheid against the Palestinian people" by maintaining links with Israeli industry and by consulting Israeli architects and engineers on Rawabi.

Israeli Jews from the nearby settlement of Ateret, which is illegal under international law and likely to be evacuated under any peace deal, complain that Palestinians are building tens of thousands of new homes when the expansion of their colony is constrained by political considerations. "It feels like unfair treatment of Jewish residents," said Orit Flint, 35, who described it as a "human rights" issue.

Undeterred by either radical boycotters or Israeli settlers, Masri is optimistic about the future, seeing Rawabi as part of the Palestinian nation-building effort. "I was born and grew up in Nablus at a time when carrying a Palestinian flag on the street was enough to be shot dead [by Israeli soldiers]," he said. "The reason I'm optimistic is that the Palestinian people aren't going anywhere, and eventually they'll give us a state."

From the terrace of the sales centre, he points to a skeletal building and the unfinished penthouse apartment that will eventually become his family's home. "We are still living under military occupation, but we have made this successful," he said. Rawabi will not be complete for another seven years, but creating the next modern Palestinian city, Rawabi 2, "will not be as difficult".