THE stock prices of second-tier property developers could rebound 20 to 30 per cent, perhaps even more, in the short to medium-term, according to real estate guru Peter Churchouse, managing director of Morgan Stanley Asia. Mr Churchouse said the discounts to net asset value (NAV) of many developer and property investment stocks had been among the biggest seen, offering potentially great value. Kwong Sang Hong, for instance, was trading at a 86.6 per cent discount to NAV as of June 30 this year. Lai Sun Development was trading at a 81.3 per cent discount and Allied Properties at 69.4 per cent. Sun Hung Kai Properties was the only reasonably sized developer trading at a premium at the time. Since June, the property stocks of most of the major developers have rallied ahead of an expected upturn in property prices and sales during the coming year. International institutional investors have got a whiff of a likely recovery in the property sector next year and had begun strategically buying, and this was where other property analysts have been focusing their attention. Mr Churchouse argues that the stock prices of some smaller developers have been left behind. They are still trading at hefty discounts and he says now offer good value. He said the downside risk of investing in such stocks was quite minimal at present. 'There is a probability of about 80 per cent that prices in the residential market will be higher in a year's time than they are today,' Mr Churchouse said. The Morgan Stanley chief, who last May correctly tipped that average home prices would drop by more than 20 per cent, did not brave predicting how much mass market values were likely to rise next year in percentage terms. He said there may be only a modest upside for prices in the next six to nine months and sustained recovery was perhaps not likely until the end of the second quarter next year. Developers stock prices in Hong Kong traditionally tend to rise or fall four to six months ahead of any marked change in property prices, once investors get a whiff of a likely fundamental change in the market. With most sectors of the real estate market tipped to recover next year, Mr Churchouse said developers' share prices were starting to rebound to reflect this ahead of time. The Hang Seng Property Sub-Index has led a strong rally in the overall stock market over the past couple of months, with sentiments also boosted by news of potentially greater political stability on the back of improved Sino-British relations. The rally came temporarily unstuck this week when the Hang Seng Index felt the knock-on effects of a substantial fallout in technology stocks in the US. But most strategists expect the general upward trend for the HSI to continue. Mr Churchouse outlined several reasons for an imminent recovery in the housing market. He said demand was historically high. 'Property sales and purchase transactions of 6,000 to 7,000 per month do not suggest that buyers are wildly bearish, but they do suggest that the speculative euphoria of recent years has dissipated,' he said. On the demand front, he also said disposable income was still healthily high and falls in home prices had improved affordability. 'Affordability of housing, although not great, is not hugely out of line with historical trends,' he said. On the supply front, the Government has forecast 27,000 new flats were likely to come on stream in 1995 and 1996, which was about 20 per cent below historical averages. He said: 'This suggests that an over-supply situation is far from likely. 'We think the current downturn in mass residential prices is close to the bottom of the cycle, and that some modest upside is likely over the next six to nine months. 'The larger developer stocks have enjoyed a good rally recently, reflecting improved sentiment in the residential market. 'We think these stocks can probably continue to outperform the market on a one-year view, as it becomes clear that residential prices have bottomed. 'Near-term, we think some of the shares of the tier-two property developers can perform well, as these stocks have participated less in the recent rally of larger developers.' Mr Churchouse warned, however, that the performance of such stocks could be volatile, as sentiment changed with prevailing views on interest rates and in reaction to events in the pre-sales and land auction markets. A similar story can be said for property investment stocks, whose share prices tend to reflect future investor sentiments for office rents and prices half a year down the road. With office prices having already fallen 35 per cent from their peak last year - faster and more dramatic than most had expected - Mr Churchouse said the downside was now minimal. He said prices and rents were likely to correct perhaps another 10 to 15 per cent, and the market may not properly bottom out for another nine to 12 months, but the medium-term outlook for the sector was positive. He predicted a surge in demand for office space post-1997 from mainland companies locating to the territory. While office supply has been widely tipped to be high, Mr Churchouse said a number of large projects were likely to be late in completion leading to low vacancy rates spanning the transfer of sovereignty to China in 1997. As with the developers, the NAVs of small to medium sized property investment companies have been trading at enormous discounts, with the sector heavily underperforming the HSI over the past year. Other analysts tend to share Mr Churchouse' positive views about the positive future of the Hong Kong housing market over the next three years, but tend to be more negative about the office market due to the pending high supply. Walter Chang, property analyst with Kleinwort Benson, says: 'Hong Kong property prices are still expensive in a world-wide context. 'But the limited area for development, growing population, rising incomes and low home ownership will keep them high.'