Hong Kong could see another property boom beginning in 2001 as construction of new units fails to keep pace with demand, securities company Salomon Smith Barney says. According to the firm's recent property report, developers had cut production to reduce debt exposure and minimise the cost of borrowing. 'This has resulted in a sharp downturn in residential construction activity,' the report said. 'We expect there will be a large shortage of private-sector residential units from 2001.' However, this time the boom would be different, the report said. While it would provide developers with the usual high profit margins and large sales volumes, prices were expected to increase only moderately. According to the report, developers had cut back on construction simply to trim debt levels. 'Sales are slow and developers are highly unlikely to spend faster than the rate of cash inflow, which has slowed,' it said. Salomon Smith Barney said the net result of the slowdown in construction would be an increasing shortage of residential units. This shortage would become apparent in 2001. The report forecast a slight increase in bank liquidity, with prices likely to begin a sustained upward trend towards the end of 2001 into 2002, 2003 and 2004. However, price increases would not be as large as those witnessed during the past three property booms in the SAR. The report said the 20-month lead time, during which developers could sell their flats through pre-sale prior to completion, should prevent residential prices from climbing too rapidly. 'The long lead time should absorb a large amount of liquidity before stock shortages develop sufficiently for this to result in a price squeeze as in 1993-94 and 1996-97,' the report said. However, the report forecast that developers' margins would increase. This was because they would have to pay lower premiums in securing the land as a result of the regional economic downturn. According to the report, residential prices are close to bottoming out. Overall, residential prices had fallen by 33 per cent to the end of June from the market's peak in mid-1997. The securities firm expected the decline in prices to reach about 40 per cent by the end of the month. It said any signs of the market stabilising would depend on the economic situation in Japan as well as fears of higher unemployment in Hong Kong. In future, developers would stick to a conservative plan of introducing new units to the market, the report said. 'Developers probably realise that the market cannot support larger sales volumes for the time being,' it said. 'They are, therefore, likely to undertake few primary launches to build liquidity and demand for a few months, followed by a few large launches.' This strategy had worked for developers in the past, but this time the selling cycle would range from two to three months as opposed to three to six weeks, the report said. Prices were beginning to stabilise as developers began to resist further price cuts. 'We believe that price-cutting is likely to cease when developers are satisfied with their cash positions and have reduced their exposure to floating rates sufficiently to be comfortable that they can ride out any storms with recurrent income,' the report said. It said this was likely to happen when developers' gearing was between 10 and 20 per cent.