HONG KONG property sector forecasting has seen a complete breakdown in consensus among practitioners in the sector and in the securities business. Until 18 months ago, analysts from all sectors linked to property were trotting out consensus-view stuff predicting how high capital and rental values would go. The fracture in market perception towards property was triggered by the rise in interest rates last February and the long, slow crash in bond and equity values, here and elsewhere. What we now have by way of forecasts of property capital values and rentals is several outspoken bears predicting catastrophe and a number of loud bulls suggesting that the dour market perception towards the sector is misplaced. As a potential investor, an individual cannot ignore the sector's historically low price earnings ratio valuations, in which dividend yield sometimes exceeds valuation. Back in December, a number of brokerages took this to read that the market was signalling disaster and saw capital values falling by 35 per cent in the residential property market and by 55 per cent in the office market. Since then, bulls have countered this view and even Financial Secretary Sir Hamish Macleod has railed at those who described these forecasts in terms of a coming crash for property in Hong Kong. Normally, those who take neutral views on things are passed over by the market place when their learned pieces arrive on desks. But in a sector where the diversity of views is as widespread as the numbers of people queuing up for car-parking spaces in the territory, a neutral view is worth reporting. So, analysts David Mackey and Ricky Shum at S G Warburg Securities have come up with a neutral view on equity stocks, along with a few recommendations on stocks they view as undervalued in terms of the sector. Their theme is 'property market fears dissipation'. They argue that there is mileage in property stocks, even though the growth prospects for the Hang Seng index overall is only modest, because there is so much ground to be made up. They argue that fears of a property collapse are totally overdone. There could be a downside of five per cent yet, but this does not mean the curtains should be drawn on these stocks. Company fundamentals remain intact with project deferral, deposit default, and therefore, profit risk, staying low. Sector fundamentals appear to have remained intact with supply remaining stable over the next two or three years. 'Removal of speculators dictates that end-user-led demand based on marginal improvements in affordability is now the major pricing determinant,' the analysts say. Although interest rate rises have hurt the sector from one side, there are counter-cyclical factors which will offset this, linked to the easing of bank policy towards lending in the sector, continued restricted supply and pent-up demand. Within the sector, there are stocks overdue for a re-rating, performers which include Cheung Kong and Henderson Land. With the overall scare towards the market, Warburg says that there has been a flight to quality, hence, on a price earnings relative basis, Sun Hung Kai Properties is ahead of its counterparts. Given brokers' views on the sector and the equity valuations prevalent, this state of affairs can only be temporary and a re-rating is due soon in some of the extremely undervalued stocks, such as Cheung Kong, Henderson Land and Hang Lung. Warburg is looking at each stock in the sector and its valuation from the point of view of relative implied long-term growth rates and price earnings ratios around the sector average. What the trigger will be for the re-rating is unclear, but the brokerage is sure it will happen. Now is the time to get in because when the change in market perception takes place, it will strike like lightning - far too quick for many overseas investors to react to in time. The analysts point out: 'Major developers thrive on high turnover levels, and depending on their position in the cycle, are able to manipulate their own earnings margins by choice of different developments in that they can overcome a fall in prices by using older land.' Should turnover drop, the counter-cycle factors mentioned above will come into play and developers will have a whole battery of incentive schemes available to support sales.