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Cathy Holcombe

Merrill Lynch says Hong Kong property prices have reached their nadir and is recommending investors to buy Cheung Kong (Holdings) and Sun Hung Kai Properties as the best stocks to ride the rebound.

 The United States brokerage estimated that residential prices would increase at least 30 per cent in the next 12 to 18 months as liquidity improved and buying momentum improved.

 'Easier credits from the banks, together with a host of loan subsidies furnished by the Government, are likely to stimulate buying interest in apartments,' the brokerage said yesterday.

 'Meanwhile, the latest good reception to new project launches may help restore the confidence of buyers.'  Residential prices had sunk more than 50 per cent from their peak in the third quarter of last year, Merrill said.

  The US house's call is one of the more optimistic in the market.

 Earlier this week, SG Securities predicted a further 50 per cent decrease in prices, pointing to excess supply, declining wages and favourable rental costs against mortgage costs.

 Salomon Smith Barney recently said prices would fall 20 to 25 per cent as strong supply would combine with rising unemployment to dampen demand.

 Merrill analysts Y.K. Yu, Clifford Lam and William Leung said the income-insecurity factor - people shying away from purchases because they may lose their jobs - had been exaggerated, particularly now that the unemployment rate 'appears to have slackened'.

 Data showed rising unemployment did not foreshadow a decline in property prices, they said, pointing out that because prices had halved, the net of potential buyers was wider.

 Merrill also challenged the view that positive real interest rates - nominal rates minus inflation - would dampen demand for new homes.

 'Contrary to the general belief, the influence of real interest rates on residential prices is less than significant,' it said.

 The brokerage's principal reason for bullishness, however, were expectations that liquidity would return to the market now that nominal interest rates had settled, which it attributed to adjustments to the currency board system in September.

 Meanwhile, the Government was providing liquidity by emphasising housing loans in its programme to help sandwich class families buy homes.

 The Government recently announced it was suspending construction of the sandwich class schemes but would increase its loan quota.

 Unlike SG Securities and Salomon, Merrill does not believe supply is saturated.

 Rather, it expected a shortage in new housing units completed by 2000 because of delays in construction.

 Several developers have delayed construction schedules this year.

 The brokerage conceded that price-earnings valuations looked stretched on the back of recent gains - the property sub-index has advanced 64.31 per cent in the past month - but said ratings should improve on a price-to-book basis.

  Merrill put Cheung Kong's fair value at $62.24 a share, compared with yesterday's close of $54.50.

 Sun Hung Kai Properties' fair value was put at $43.70, compared with yesterday's close of $53.25, but Merrill still expected further upside based on past performance in market recoveries.

  Merrill also saw upside in Hang Lung Development, Amoy Properties, Henderson Land Development, Great Eagle Holdings and Wharf (Holdings).



Merrill offers stock picks as home prices rebound