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) - Get Report

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) - Get Report


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


, which has dropped 44% from its 52-week high to 2,290 yen, and

Sumitomo Realty & Development


, which is 60% lower than its high in the same period, at 2,155 yen.

Citigroup's Kimura recommends investors buy

Mitsui Fudosan


, 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


is 60% higher for the past year at HK$30.10, while rival

Sun Hung Kai Properties


has jumped 84% to HK$155.70.

Another property developer,

Cheung Kong


, trading 50% above its low, at HK$129.20, shows no sign of slowing, either. When a group of undisclosed traders placed an HK$4.71 billion ($604 million) sell order on the market last week, at a 3.8% discount, buyers snapped the shares up in 25 minutes.

However, investors should beware that property stocks in Hong Kong may depreciate a lot, despite the sector's health, warns Conita Hung, head of equities for Delta Asia Financial in Hong Kong.

"Gains have been quite substantial in that sector, and despite the recent selloff, they are still outperforming the Hang Seng. There may be continued selling pressure on major local property stocks," adds Hung.

One way that U.S. investors can gain exposure to the Hong Kong and Japanese property shares without having to buy the individual ADRs or the foreign-listed shares is to buy the closed-end ETF

RMR Asia Pacific Real Estate Fund

( RAP), which has 34.4% of its assets in Mitsubishi Estate, Sung Hung Kai, Hang Lung, Mitsui Fudosan and Sumitomo Realty. At $16.20 recently, the shares are at a 52-week low.

In China, Citigroup's top pick for real estate is

China Resources Land


, which the bank says is trading at a discount to net asset value of 30%. That company, which is listed in Hong Kong, has suffered from the mainland's expected growth rate in property prices this year of just 2%.

That figure is also highly variable though, depending on where you are in China -- real estate prices are expected to increase much more in Beijing and in Shanghai than in Shenzhen, for example.

While China Resources Land is up 50% this year, at HK$13.94, it's still 30% shy of a 52-week high due to the recent profit-taking in Hong Kong property companies.

In Thailand, Macquarie's Asian equities analyst Tim Rocks writes in a research report issued Wednesday that he expects economic growth, combined with recent political stability in the country, to push property prices skywards.

"We would recommend investors focus their exposure on financials (both banks and property) to capture the upside to the domestic economy," he writes. In particular, Rocks suggests buying

Siam Cement


to take advantage of a potential boom in the region's real estate prices this year.

Rocks also gives property companies his highest sector weighting for Asian investors, recommending they allocate 19.4% of their portfolios to these stocks.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at


. He lives in New York.