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Asia's Hot Property: Real Estate Stocks

HONG KONG -- As property prices in the U.S. and Europe hover on an uncertain edge in the midst of the subprime turmoil, many in Asia say real estate may be one of the best performing sectors in the region in 2008.

In 2007, U.S. real estate investment trusts, or REITs, a proxy for physical real estate, lost around 15.6%, and they've declined a further 7% in 2008. Many analysts now expect a pullback in prices by as much as 10% this year.

That's in stark to contrast to REITs in Japan, which could end up rising by as much as 50% in 2008, says Citigroup's Tokyo-based property analyst Yoshizumi Kimura.

"It is looking increasingly likely that the pace of industry realignment among private equity real estate funds and Japanese REITs will pick up," writes Kimura in a research note to clients earlier this month.

Kimura points out that M&A activity in the sector is already underway, since Goldman Sachs (GS) and Aetos Capital paid 154 billion yen, or $1.5 billion, for Simplex Investment Advisors last week, following a 22.8 billion yen ($215 million) share sale of Japanese realtor eAsset to Jones Lang LaSalle (JLL).

Gavin Parry, a Hong Kong-based traders of Japanese equities, also likes the real estate sector. He says the group is still seeing interest from a wide range of investors.

"Some of the names that have been hit hard are worth keeping on the radar screen. This sector is still seeing great interest from foreign and domestic investors alike," says Parry.

Among those that have suffered recently are Mitsubishi Estate (MITEY), which has dropped 44% from its 52-week high to 2,290 yen, and Sumitomo Realty & Development (SURDF), which is 60% lower than its high in the same period, at 2,155 yen.

Citigroup's Kimura recommends investors buy Mitsui Fudosan (MTSFF), which has lost half its value since May last year, and is selling for 2,005 yen. Kimura has a price target of 5,000 yen a share, which he points out will give the company a multiple of 20 times earnings.

In Hong Kong, investors are heavily bullish on property stocks, but for different reasons to those in Japan. Although property stocks are far from cheap on the island, trading around 17 times earnings, investors have been heavily speculating on an expected surge in prices due to a knock-on effect of growth from China and rate cutting in the U.S.

As China's economy has expanded, the inflow of mainland citizens to the island has pushed prices of real estate skyward.

Furthermore, internal population growth is also springing up, which means more families with a need for larger accommodations.

These effects pushed property prices in Hong Kong up 20% in 2007. In December, analysts were forecasting that they would continue to rise a further 25% this year.

Now, analysts are broadly expected to raise that estimate, if the Federal Reserve implements a deep interest rate-cutting strategy, since it was based on a 75-basis point reduction for the whole of 2008. Another factor that has kept Hong Kong property prices afloat is the island's apparent insulation from subprime mortgage exposure.

The bullish momentum has been passed on in the increases in Hong Kong property shares. Despite the selloff in the Hang Seng Wednesday, Hang Lung Properties (HLPPY) is 60% higher for the past year at HK$30.10, while rival Sun Hung Kai Properties (SUHJY) has jumped 84% to HK$155.70.

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