Elsewhere: Asia's Property Markets Find Favor as Prices Begin Rebound

Sustainable economic growth across the region, lower levels of unemployment, strong lending plus changes in the supply-and-demand for land are creating conditions that could give a significant lift to property values and property company shares. In Hong Kong, the expected return of inflation -- after years of deflation, culminating with last year's outbreak of severe acute respiratory syndrome -- should also invigorate property prices, investors say.

Some Asian property markets "are at cyclical low points. The U.S. and United Kingdom markets are at or close to the top end of cycle," says Long Investment Management's Peter Churchouse, a longtime watcher of the Asian property market who in recent months started what appears to be the first Asian hedge fund invested solely in real estate.

Other investors share his optimism. Grosvenor Group, a property development and investment company whose portfolio totals US$8.6 billion, has doubled its capital allocation to Asia, although its current level of 8% still leaves plenty of room for growth, says Nick Loup, head of the firm's Grosvenor Asia unit. Properties in Asia, he estimates, account for between 20% and 30% of the total value of all global real-estate assets.

Investors and analysts expect the biggest and most sustained rebound to be in Hong Kong, where government policy has constricted land supply, and prices are rising for the first time in years.

Before the Asian financial crisis began in 1997, Hong Kong's property prices soared. The government, the sole provider of land for development in the city, loosened supply for building projects in a way that then created a land glut just as Asia's economies were collapsing. Property assets took another hit in 2003 due to the SARS outbreak, which worsened an already bad economic picture. "The last few years have been quite painful for many property owners in Hong Kong," says Douglas Sung, an analyst at J.P. Morgan.

Now, the government is aiding the turnaround by constricting supply. Hong Kong has adopted a policy that allows it to withhold land from auction by rejecting the lowest bid. In places such as the New Territories where agricultural land is available, developers must pay higher prices to build apartment blocks rather than keep it for growing crops. Mr. Sung says the government's land sales program so far this year is much smaller than in the past, as only three tracts have been sold.

The supply-demand equation bodes well for future values, even if Hong Kong interest rates rise as a result of U.S. increases. "Affordability for housing is as good as it's ever been in Hong Kong," Mr. Churchouse contends. In the U.K., he says, housing has become less affordable. Median home prices tend to be about seven times average annual household income, whereas in the past they hovered at around three times.

In Hong Kong's commercial market, where real-estate investors suffered as rental rates plunged last year, some relief is coming because demand is increasing, although slowly, while the rate of new supply has dropped sharply.

"Already vacancy rates are coming down sharply," Mr. Churchouse says. In the city's pivotal Central district, rates have zoomed to close to 40 Hong Kong dollars, or US$5, per square foot, roughly doubling from the end of last year in some cases. Office rents in other areas haven't increased that sharply, but over time rate rises will spread across the city, he says.

Property companies naturally will reap the benefits of this trend. The companies are already benefiting from improvements in the Hong Kong economy since the end of the SARS outbreak in mid-2003. To some analysts, in fact, share-price gains since then have been so big that there's little room for further rises for several of the biggest property companies, including Sun Hung Kai Properties, Henderson Land Development and Cheung Kong.

Despite a 67% gain in its share-price in the past 12 months, Hongkong Land remains a favorite with Mr. Churchouse and some analysts. In trading Thursday in Singapore, shares of Hongkong Land -- which also trades in London -- closed at US$2.05, down five U.S. cents. John Saunders, property analyst at CLSA Asia-Pacific Markets, has a 12-month price-target of US$2.34.

Savvy real-estate investors add that valuation models sometimes offer a skewed picture of whether a stock is richly priced, or a bargain. Some Hong Kong-based companies trade at seemingly high price-to-earnings multiples, but in general, these firms renew only one-third of their leases annually. For this reason, earnings tend to lag behind real value creation, Mr. Churchouse says, giving an impression property company shares are expensive. For a more accurate gauge, analysts often focus on a comparison of market capitalization to net asset value (assets minus debt).

Shares of Hongkong Land trades at about 24 times 2004 forecast earnings, which sounds steep. But on an NAV basis, the current price represents a 16% discount to net asset value. Similarly, Hysan shares trade at more than 21 times 2004 earnings forecasts but at a 27% discount to NAV.

While the government's restraint in selling off land is aiding the rebound of property companies, some analysts are concerned if too little land is sold, it will become difficult for developers to sustain growth in the coming years. Sun Hung Kai, for example, maintains a so-called landbank of three and a half years, meaning that if the company doesn't make any new purchases, it will run out of land to develop after that time period. In previous years, the company carried bigger amounts of undeveloped land reserve.

If developers find it hard to get hold of new land, they won't be able to fully cash in on rebounding property prices. "The danger is that Mr. and Mrs. Hong Kong will profit but not developers," says CLSA's Mr. Saunders.